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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the fiscal year ended
Or
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 incorporation or organization) | (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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| Name of each exchange on which registered |
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes No
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 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 emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company,” and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.:
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Accelerated filer ¨ | |
Non-accelerated filer ¨ | Small 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30,2021: $
The number of shares outstanding of the registrants common stock as of February 15, 2022:
DOCUMENTS INCORPORATED BY REFERENCE
(1)
TABLE OF CONTENTS
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Part I
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Page | |||
Item 1. | 2 | ||
Item 1A. | 18 | ||
Item 1B. | 37 | ||
Item 2. | 37 | ||
Item 3. | 37 | ||
Item 4. | 38 | ||
Part II
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Item 5. | 38 | ||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 40 | |
Item 7A | 63 | ||
Item 8. | 64 | ||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 114 | |
Item 9A. | 114 | ||
Item 9B. | 114 | ||
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 114 | |
Part III
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Item 10. | 114 | ||
Item 11. | 114 | ||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 114 | |
Item 13 | Certain Relationships and Related Transactions, and Director Independence | 114 | |
Item 14. | 114 | ||
Part IV
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Item 15. | 114 | ||
Item 16. | 114 | ||
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| 114 | ||
| 114 | ||
| 114 | ||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, or this Annual Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are made based upon, among other things, our current assumptions, expectations, plans, and beliefs concerning future events and their potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you can identify forward-looking statements 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. Please refer to the Summary in Item 1A – Risk Factors in this Annual Report for a description of the types of Forward-looking statements in this Annual Report. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results.
Given these risks and uncertainties, you should not place undue reliance on any forward-looking statements. You should read this Annual Report completely and with the understanding that our actual future results, performance and achievements may be materially different from what we expect. These forward-looking statements represent assumptions, expectations, plans, and beliefs only as of the date of this Annual Report. Except for our ongoing obligations to disclose certain information under the federal securities laws, we are not obligated, and assume no obligation, to update these forward-looking statements, even though our situation may change in the future. For further information or other factors which could affect our financial results and such forward-looking statements, see Item 1A – Risk Factors. We qualify all of our forward-looking statements by these cautionary statements.
PART I
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Item 1. | Business |
The Company
Essential Utilities, Inc. (referred to as Essential Utilities, Essential, the Company, we, us, or our), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or natural gas services to an estimated five 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) accounted for approximately 55% of operating revenues and approximately 68% of income for our Regulated Water segment in 2021. As of December 31, 2021, Aqua Pennsylvania provided water or wastewater services to approximately one-half of the total number of water and wastewater customers we serve. Aqua Pennsylvania’s service territory is 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, pursuant to the Company’ growth strategy, 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. Lastly, the Company’s market-based activities are conducted through Aqua Infrastructure, LLC and Aqua Resources Inc., and certain other non-regulated subsidiaries of Peoples. Prior to our October 30, 2020 sale of our investment in a joint venture, Aqua Infrastructure provided non-utility raw water supply services for firms in the natural gas drilling industry. Following the October 30, 2020 closing, Aqua Infrastructure does not provide any services to the natural gas drilling industry. Aqua Resources offers, through a third-party, water and sewer line protection solutions and repair services to households. Other non-regulated subsidiaries of Peoples provide utility service line protection services to households and operate gas marketing and production businesses.
Essential Utilities, which prior to its name change on February 3, 2020 was known as Aqua America, Inc., was formed in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania, formerly known as Philadelphia Suburban Water Company. In the early 1990s, we embarked on a growth through acquisition strategy. Our most significant transactions to date have been the merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, the acquisition of American Water Works Company, Inc.’s regulated water and wastewater operations in Ohio in 2012, and the Peoples Gas Acquisition in 2020. 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 our acquisition of a natural gas distribution company consisting of Peoples Natural Gas Company LLC, Peoples Gas Company LLC, Peoples Gas WV LLC, Peoples Gas KY LLC, PNG Gathering LLC, and Delta Natural Gas Company Inc., expanding the Company’s regulated utility business to include natural gas distribution. This acquisition is referred to as the “Peoples Gas Acquisition,” and collectively these businesses are referred to as “Peoples.” Peoples serves approximately 750,000 gas utility customers in western Pennsylvania, West Virginia, and Kentucky. During 2010 through 2013, we sold our utility operations in six states, pursuant to a portfolio rationalization strategy, to focus our operations in areas where we have critical mass and economic growth potential. Currently, the Company seeks to acquire businesses in the U.S. regulated sector, which includes water and wastewater utilities and other regulated utilities, and to pursue growth ventures in market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated utility businesses.
The descriptions of our business and operations, financial results, and operational data included in this Annual Report do not include historical results for Peoples prior to the acquisition date of March 16, 2020.
The following table reports our operating revenues, by principal state, for our Regulated Water segment, which includes both water and wastewater utility services, and Regulated Natural Gas segment, and Other and eliminations for the year ended December 31, 2021:
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| Operating Revenues (000s) |
| Operating Revenues (%) | |
Pennsylvania | $ | 537,402 |
| 28.6% |
Ohio |
| 114,221 |
| 6.1% |
Texas |
| 77,427 |
| 4.1% |
Illinois |
| 84,378 |
| 4.5% |
North Carolina |
| 64,370 |
| 3.4% |
Other states (1) |
| 102,405 |
| 5.5% |
Regulated Water segment total |
| 980,203 |
| 52.2% |
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Pennsylvania |
| 803,897 |
| 42.8% |
Other states (2) |
| 56,005 |
| 3.0% |
Regulated Natural Gas segment total |
| 859,902 |
| 45.8% |
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Other and eliminations |
| 38,039 |
| 2.0% |
Consolidated | $ | 1,878,144 |
| 100.0% |
(1)Includes our water operating subsidiaries in the following states: New Jersey, Indiana, and Virginia.
(2)Includes our natural gas operating subsidiaries in West Virginia and Kentucky.
The Company has identified twelve operating segments and has two reportable segments, the Regulated Water segment and the Regulated Natural Gas segment. The Regulated Water segment is comprised of eight operating segments for our water and wastewater regulated utility companies, aligned with the states where we provide these services. These operating segments are aggregated into one reportable segment since each of the Company’s operating segments has the following similarities: economic characteristics, nature of services, production processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment. The Regulated Natural Gas segment is comprised of one operating segment representing natural gas utility companies, acquired in the Peoples Gas Acquisition, for which the Company provides natural gas distribution services. In addition to the Company’s two reportable segments, the Company includes three of its operating segments in “Other”. These businesses represent our non-regulated natural gas operations, Aqua Resources, and Aqua Infrastructure, which are not quantitatively significant to be reportable and therefore are included as a component of “Other”. The non-regulated natural gas operations include People’s subsidiaries that provide utility service line protection services to households and operate gas marketing and production businesses. In addition, “Other” and eliminations include corporate costs that have not been allocated to the Regulated Water and Regulated Natural Gas segments, because they would not be recoverable as a cost of utility service, and intersegment eliminations. Information concerning revenues, net income, identifiable assets and related financial information for the Regulated Water and Regulated Natural Gas segments and Other and eliminations for 2021, 2020, and 2019, is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 18 – Segment Information in the Notes to Consolidated Financial Statements which is contained in Item 8 of this Annual Report.
The following table summarizes our operating revenues, by utility customer class, for the Regulated Water and Regulated Natural Gas segments and Other and eliminations for the year ended December 31, 2021:
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| Operating Revenues (000s) |
| Operating Revenues (%) | |
Residential water | $ | 561,996 |
| 29.9% |
Commercial water |
| 151,071 |
| 8.0% |
Fire protection |
| 35,984 |
| 1.9% |
Industrial water |
| 30,230 |
| 1.6% |
Other water |
| 53,488 |
| 2.8% |
Total water |
| 832,769 |
| 44.2% |
Wastewater |
| 132,580 |
| 7.1% |
Customer rate credits |
| - |
| 0.0% |
Other utility |
| 14,854 |
| 0.8% |
Regulated Water segment total |
| 980,203 |
| 52.1% |
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Residential gas |
| 530,338 |
| 28.3% |
Commercial gas |
| 99,596 |
| 5.3% |
Industrial gas |
| 3,427 |
| 0.2% |
Gas transportation |
| 198,195 |
| 10.6% |
Customer rate credits |
| (5,000) |
| -0.3% |
Other utility |
| 33,346 |
| 1.8% |
Regulated Natural Gas segment total |
| 859,902 |
| 45.9% |
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Other and eliminations |
| 38,039 |
| 2.0% |
Consolidated | $ | 1,878,144 |
| 100.0% |
Customers
Our water utility customer base is diversified among residential water, commercial water, fire protection, industrial water, other water, wastewater customers, and other utility customers (consisting of contracted services that are associated with the utility operations). Residential water and wastewater customers make up the largest component of our water utility customer base, with these customers representing approximately 69%, 71%, and 69%, of our water and wastewater revenues for 2021, 2020, and 2019, respectively. Substantially all of our water utility customers are metered, which allows us to measure and bill for our customers’ water consumption. Water consumption per customer is affected by local weather conditions during the year, especially during late spring, summer, and early fall. In general, during these seasons, an extended period of dry weather increases consumption, while above-average rainfall decreases consumption. Also, an increase in the average temperature generally causes an increase in water consumption. On occasion, abnormally dry weather in our service areas can result in governmental authorities declaring drought warnings and imposing water use restrictions in the affected areas, which could reduce water consumption. See “Business – Water Utility Supplies, and Facilities and Wastewater Utility Facilities” for a discussion of water use restrictions that may impact water consumption during abnormally dry weather. The geographic diversity of our water utility customer base reduces the effect of our exposure to extreme or unusual weather conditions in any one area of our service territories. Water usage is also affected by changing consumption patterns by our customers, resulting from such causes as increased water conservation and the installation of water saving devices and appliances that can result in decreased water usage. It is estimated that, in the event we experience a 0.50% decrease in residential water consumption, it would result in a decrease in annual residential water revenue of approximately $2,800,000, which would likely be partially offset by a reduction in incremental water production expenses such as chemicals and power.
Our natural gas utility customer base is diversified among residential gas, commercial gas, industrial gas, gas transportation, and other utility. Substantially all of our natural gas utility customers are metered, which allows us to measure and bill for our customers’ natural gas usage. Natural gas usage per customer is affected by local weather conditions during the year, especially during the fall, winter, and early spring. These patterns reflect the higher demand for natural gas for heating purposes during the colder months.
The Company’s growth in revenues over the past five years is primarily a result of the 2020 Peoples Gas Acquisition, increases in water and wastewater rates, and customer growth. See Economic Regulation for a discussion of water, wastewater, and natural gas rates. The increase in our utility customer base has been due to customers added through acquisitions, partnerships with developers, and organic growth (excluding dispositions) as shown below:
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Year |
| Utility Customer Growth Rate |
2021 |
| 1.2% |
2020 |
| 42.9% |
2019 |
| 2.1% |
2018 |
| 2.3% |
2017 |
| 1.1% |
In 2021, 2020, and 2019, our customer count increased by 21,246, 772,099, and 21,108 customers, respectively, primarily due to the water and wastewater utility systems that we acquired, organic growth, and in 2020, due to the Peoples Gas Acquisition that resulted to the addition of approximately 750,000 natural gas utility customers. Overall, for the five year period of 2017 through 2021, our utility customer base, adjusted to exclude customers associated with utility system dispositions, increased at an annual compound rate of 13.4%. During the five year period ended December 31, 2021, our utility customer base including customers associated with utility system acquisitions and dispositions increased from 972,265 at January 1, 2017 to 1,820,049 at December 31, 2021.
Acquisitions and Other Growth Ventures
We believe that acquisitions will continue to be an important source of customer growth for us. We intend to continue to pursue acquisitions of government-owned and regulated water and wastewater systems that provide services in areas near our existing service territories or in new service areas. We engage in continuing activities with respect to potential acquisitions, including calling on prospective sellers, performing analyses of and due diligence on acquisition candidates, making preliminary acquisition proposals, and negotiating the terms of potential acquisitions. Further, we are also seeking other potential business opportunities, including but not limited to, partnering with public and regulated utilities to invest in infrastructure projects, growing our market-based activities by acquiring businesses that provide water and wastewater or other utility-related services, and investing in infrastructure projects.
Based on the 2019 U.S. Census American Housing Survey, approximately 89% of the U.S. population obtains its water from public or private water utility systems, and 11% of the U.S. population obtains its water from individual wells. With approximately 50,000 public or private water systems in the U.S. (81% of which serve less than 3,300 customers), the water industry is the most fragmented of the major utility industries (telephone, natural gas, electric, water and wastewater). The majority of these community water systems are government-owned. The nation’s water systems range in size from large government-owned systems, such as the New York City water system, which serves approximately 8.8 million people, to small systems, where a few customers share a common well. In the states where we operate regulated water utilities, we believe there are approximately 14,000 public or private water utility systems of widely-varying size, with the majority of the population being served by government-owned water systems.
Although not as fragmented as the water industry, the wastewater industry in the U.S. also presents opportunities for consolidation. Based on the 2019 U.S. Census American Housing Survey, approximately 84% of the U.S. population relies on public or private sewer systems, and 16% of the U.S. population relies on septic tank, cesspool or other sewer options. A majority of wastewater facilities are government-owned rather than regulated utilities. In the states where we operate regulated water utilities, we believe there are approximately 4,000 wastewater facilities in operation, with the majority of the population being served by government-owned wastewater systems.
Because of the fragmented nature of the water and wastewater utility industries, we believe there are many potential water and wastewater system acquisition candidates throughout the U.S. We believe the factors driving consolidation of these systems are:
the benefits of economies of scale;
the increasing cost and complexity of environmental regulations;
the need for substantial capital investment;
the need for technical and managerial expertise;
the desire to improve water quality and service;
limited access to cost-effective financing;
the monetizing of public assets to support, in some cases, the declining financial condition of municipalities; and
the use of system sale proceeds by a municipality to accomplish other public purposes.
We are actively exploring opportunities to expand our utility operations through acquisitions or other growth ventures. During the five-year period ended December 31, 2021, we expanded our utility operations by completing 29 acquisitions of water or wastewater utilities or other similar assets. Additionally, in March 2020, we completed our acquisition of Peoples, which expanded the Company’s regulated utility business to include natural gas distribution.
Supply and Facilities
Water Utility Supplies and Facilities and Wastewater Utility Facilities - Our water utility operations obtain their water supplies from surface water sources, underground aquifers, and water purchased from other water suppliers. Our water supplies are primarily self-supplied and processed at twenty-three surface water treatment plants located in five states, and numerous well stations located in the states in which we conduct business. Approximately 5.6% of our water supplies are provided through water purchased from other water suppliers. It is our policy to obtain and maintain the permits necessary to obtain and treat the water we distribute.
In September 2021, Hurricane Ida made landfall in Pennsylvania, and the Company had to temporarily shut down two of its water treatment plants, in Chester County, Pennsylvania, which had been damaged due to heavy rainfall, flooding and loss of power. These plants serve a significant portion of Aqua Pennsylvania’s service territory in southeastern Pennsylvania. The Company was able to maintain supply to most of its customers by ramping up production at some of its other treatment plants. However, due to low water pressure in some locations, Aqua Pennsylvania asked customers to adopt voluntary water conservation measures during a two-week period. The damage to the facilities occurred despite our prior efforts to shore up the facilities to prevent such floodwater occurrences.
We believe that the capacities of our sources of supply, and our water treatment, pumping and distribution facilities, are generally sufficient to meet the present requirements of our customers under normal conditions. We plan system improvements and additions to capacity in response to normal replacement and renewal needs, changing regulatory standards, changing patterns of consumption, and increased demand from customer growth. The various state utility commissions have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates.
On occasion, drought warnings and water use restrictions are issued by governmental authorities for portions of our service territories in response to extended periods of dry weather conditions. The timing and duration of the warnings and restrictions can have an impact on our water revenues and net income. In general, water consumption in the summer months is more affected by drought warnings and restrictions because discretionary and recreational use of water is at its highest during the summer months. At other times of the year, warnings and restrictions generally have less of an effect on water consumption. Portions of our northern and central Texas service areas have conservation-based water restrictions. Drought warnings and watches result in the public being asked to voluntarily reduce water consumption.
We believe that our wastewater treatment facilities are generally adequate to meet the present requirements of our customers under normal conditions. Additionally, we own several wastewater collection systems that convey the wastewater to municipally-owned facilities for treatment. Changes in regulatory requirements can be reflected in revised permit limits and conditions when permits are renewed, typically on a five year cycle, or when treatment capacity is expanded. Capital improvements are planned and budgeted to meet normal replacement and renewal needs, anticipated changes in regulations, needs for increased capacity related to projected growth, and to reduce inflow and infiltration to collection systems. The various state utility commissions have generally recognized the operating and capital costs associated with these improvements in setting wastewater rates for current and new customers. It is our policy to obtain and maintain the permits necessary for the treatment of the wastewater that we return to the environment.
Natural Gas Supply and Transportation Facilities - Our natural gas supply strategy is to ensure a dependable gas supply that is economically priced and which is available for delivery when needed. We purchase natural gas from intrastate, interstate and local sources, and transport natural gas supplies through various intrastate and interstate pipelines under contracts with remaining terms, including extensions, varying from one month to fifteen years. We anticipate that these gas supply and transportation contracts will be renewed or replaced prior to their expiration.
The regulations of the states in which we operate natural gas utilities allow us to pass through changes in the cost of natural gas to our customers under purchased gas adjustment provisions in our tariffs. Depending upon the jurisdiction, the purchased gas adjustment factors are updated periodically, ranging from quarterly to annually. The changes in the cost of gas billed to customers are subject to review by the applicable regulatory bodies.
We use various third-party storage services or owned natural gas storage facilities to meet peak-day requirements and to manage the daily changes in demand due to changes in weather.
We own and operate underground natural gas storage facilities with capacity of 10.3 billion cubic feet (Bcf). Total working capacity is 5.0 Bcf for use during the heating season with a maximum daily withdrawal rate of 109.5 million cubic feet (MMcf). Additionally, we have contracted for off-system storage from interstate pipelines. The total amount of off-system storage under contract is 35.64 Bcf with a maximum daily withdrawal rate of 589.3 MMcf.
On an ongoing basis, we enter into contracts to provide sufficient supplies and pipeline capacity to meet our customers’ natural gas requirements. However, it is possible for limited service disruptions to occur from time to time due to weather conditions, transportation constraints, and other events. As a result of these factors, supplies of natural gas may become unavailable from time to time, or prices may increase rapidly in response to temporary supply constraints or other factors. We enter into firm agreements with suppliers, including major producers and marketers, intended to provide flexibility to meet the temperature-sensitive needs of its customers. In Pennsylvania, our distribution system is connected to six interstate pipelines, where we maintain capacity we believe is sufficient to meet our customers’ gas requirements. In Kentucky, our distribution system is connected to four interstate pipelines, where we maintain capacity we believe is sufficient to meet our customers’ gas requirements. In West Virginia, our distribution system is connected to one interstate pipeline, as well as local production, where we maintain capacity we believe is sufficient to meet our customers’ gas requirements.
Natural Gas Gathering - Our Pennsylvania Regulated Natural Gas service territory is situated in the Marcellus Shale production region. Approximately 31% of the natural gas supply on the system is from locally produced gas, which we gather and transport into our distribution system. Our gathering system is regulated by the Pennsylvania Public Utility Commission which includes various safety, environmental and, in some circumstances, anti-discrimination requirements, and in some instances complaint-based rate regulation. Our gathering operations may be subject to ratable take and common purchaser statutes in the states in which we operate.
Our Regulated Natural Gas gathering operations could be adversely affected should they be subject in the future to the application of state or federal regulation of rates and services. Our gathering operations could also be subject to additional safety and operational regulations relating to the design, construction, testing, operation, replacement, and maintenance of gathering facilities. We cannot predict what effect, if any, such changes might have on our operations, but our Regulated Natural Gas segment could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.
Economic Regulation
Most of our utility operations are subject to regulation by their respective state utility commissions, which have broad administrative power and authority to regulate billing rates, determine franchise areas and conditions of service, approve acquisitions, and authorize the issuance of securities. The utility commissions also establish uniform systems of accounts and approve the terms of contracts with affiliates and customers, business combinations with other utility systems, and loans and other financings. The policies of the utility commissions often differ from state to state, and may change over time. A small number of our water and wastewater utility operations are subject to rate regulation by county or city governments. The profitability of our utility operations is influenced to a great extent by the timeliness and adequacy of rate allowances we are granted by the respective utility commissions or authorities in the various states in which we operate.
Rate Case Management Capability – We maintain a rate case management capability, the objective of which is to provide that the tariffs of our utility operations reflect, to the extent practicable, the timely recovery of increases in costs of operations, capital expenditures, interest expense, taxes, energy, materials, and compliance with environmental regulations as well as a return on equity. We file rate increase requests to recover and earn a fair return on the infrastructure investments that we make in improving or replacing our facilities and to recover expense increases. In the states in which we operate, we are primarily subject to economic regulation by the following state utility commissions:
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State | Utility Commission |
Pennsylvania | Pennsylvania Public Utility Commission |
Ohio | Public Utilities Commission of Ohio |
North Carolina | North Carolina Utilities Commission |
Texas | Public Utility Commission of Texas |
Illinois | Illinois Commerce Commission |
New Jersey | New Jersey Board of Public Utilities |
Kentucky | Public Service Commission of Kentucky |
Virginia | Virginia State Corporation Commission |
Indiana | Indiana Utility Regulatory Commission |
West Virginia | Public Service Commission of West Virginia |
Our water and wastewater operations are comprised of 45 rate divisions, and our natural gas operations are comprised of four rate divisions. Each of our utility rate divisions require a separate rate filing for the evaluation of the cost of service, including the recovery of investments, in connection with the establishment of rates for that rate division. When feasible and beneficial to our utility customers, we will seek approval from the applicable state regulatory commission to consolidate rate divisions to achieve a more even distribution of costs over a larger customer base. All of the states in which we operate permit us to file a revenue requirement for some form of consolidated rates for all, or some, of the rate divisions in that state.
In Virginia, North Carolina, and Kentucky, we may bill our utility customers, in certain circumstances, in accordance with a rate filing that is pending before the respective regulatory commission, which would allow for interim rates. As of December 31, 2021, we have no billings under interim rate arrangements for rate case filings in progress. Furthermore, some utility commissions authorize the use of expense deferrals and amortization in order to provide for an impact on our operating income by an amount that approximates the requested amount in a rate request. In these states, the additional revenue billed and collected prior to the final regulatory commission ruling is subject to refund to customers based on the outcome of the ruling. The revenue recognized and the expenses deferred by us reflect an estimate as to the final outcome of the ruling. If the request is denied completely or in part, we could be required to refund to customers some or all of the revenue billed to date and write-off some or all of the deferred expenses.
Revenue Surcharges – Eight states in which we operate water and wastewater utilities, and two states, Pennsylvania and Kentucky, in which we operate natural gas utilities permit us to add an infrastructure rehabilitation surcharge to their respective bills to offset the additional depreciation and capital costs associated with capital expenditures related to replacing and rehabilitating infrastructure systems. Without this surcharge, a utility absorbs all of the depreciation and capital costs of these projects between base rate increases. The gap between the time that a capital project is completed and the recovery of its costs in rates is known as regulatory lag. This surcharge is intended to substantially reduce regulatory lag, which could act as a disincentive for utilities to rehabilitate their infrastructure. In addition, our subsidiaries in some states use a surcharge or credit on their bills to reflect changes in costs, such as changes in state tax rates, other taxes and purchased water costs, until such time as the new cost levels are incorporated into base rates.
The infrastructure rehabilitation surcharge typically adjusts periodically based on additional qualified capital expenditures completed or anticipated in a future period, and is capped at a percentage of base rates, generally at 5% to 12.75%, and is reset to zero when new base rates that reflect the costs of those additions become effective or when a utility’s earnings exceed a regulatory benchmark. These surcharges provided revenues of $33,771,486 in 2021, $13,038,555 in 2020, and $16,006,579 in 2019.
In the majority of our natural gas service territories, the public utility commissions have authorized bare steel and cast-iron replacement programs. In Pennsylvania, we filed a Long-Term Infrastructure Replacement program with the Pennsylvania Public Utility Commission where we have committed to the replacement of bare steel and cast-iron pipe. On February 14, 2012, the Governor of Pennsylvania signed into law Act 11 of 2012, which provided a Distribution System Improvement Charge (DSIC) mechanism for certain utilities to recover costs related to repair, replacement or improvement of eligible distribution property that has not previously been reflected in rates or rate base. Through this Pennsylvania DSIC, subject to an earnings test, a utility may recover the fixed costs of eligible infrastructure incurred during the three months ended one month prior to the effective date of the charge, thereby reducing the historical regulatory lag associated with cost recovery through the traditional rate-making process. In Kentucky, we have a pipe replacement program tariff, which allows adjustment of regulated rates annually to earn a return on capital expenditures incurred subsequent to our last rate case which were associated with the replacement of bare steel and vintage plastic pipe.
Gas costs incurred to serve our natural gas customers represent a significant operating expense. Our regulated natural gas rates, in all jurisdictions, contain a Purchased Gas Adjustment (PGA), which is reflected in our tariffs. The PGA allows us to timely charge for changes in the cost of purchased gas, inclusive of unaccounted for gas expense based on actual experience. PGA procedures involve periodic filings and hearings before the state regulatory commissions to establish price adjustments for a designated future period. The procedures also provide for inclusion in later periods of any variances between actual recoveries representing the estimated costs and actual costs incurred. The PGA is subject to periodic review and audit by the state regulatory commissions who also have the authority to disallow previously incurred costs.
In Pennsylvania, the gas cost component of uncollectible accounts expense, gas procurement costs, and certain costs to maintain a supplier choice program, where customers can elect their natural gas supplier, are recovered by mechanisms outside of typical base rate recovery. Additionally, in Pennsylvania, we recover the costs related to universal service programs, whereby customers who meet certain income guidelines receive assistance toward paying their monthly bill, weatherization services, and other programs. In Kentucky, the gas cost component of uncollectible accounts expense is recovered by a recovery mechanism outside of base rate recovery.
Income Tax Accounting Change – In 2012, Aqua Pennsylvania adopted an income tax accounting method change, implemented on Essential Utilities’ 2012 federal income tax return. This accounting method change allows a tax deduction for qualifying utility asset improvements that were formerly capitalized for tax purposes, and was implemented in response to a June 2012 rate order issued by the Pennsylvania Public Utility Commission. The Pennsylvania rate order requires use of the flow-through method of income tax benefits which results in a reduction in current income tax expense through the recognition of income tax benefits resulting from the accounting method change. In the first rate order since 2012, Aqua Pennsylvania received a 2019 rate case order that provided for $158,864,688 of income tax deductions, for its water customers, annually, from the flow-through recognition of the Aqua Pennsylvania income tax accounting change, subject to a collar of $3,000,000 above or below; with the cumulative differences either refunded or recovered in the subsequent rate case. In August 2021, Aqua Pennsylvania filed an application for a base rate increase with a similar level of deduction, tax benefit and collar-mechanism.
On March 16, 2020, the Company completed the Peoples Gas Acquisition. On March 31, 2020, the Company changed the method of tax accounting for certain qualifying infrastructure investments at its Peoples Natural Gas subsidiary, its largest natural gas subsidiary in Pennsylvania. This change allows a tax deduction for qualifying utility asset improvement costs that were formerly capitalized for tax purposes. Consistent with the Company’s accounting for differences between book and tax expenditures for its Aqua Pennsylvania subsidiary, the Company is utilizing the flow-through method to account for this timing difference. In addition, the Company calculated the income tax benefits for qualifying capital expenditures made prior to March 16, 2020 (catch-up adjustment) and has recorded a regulatory liability for $160,655,000 for these income tax benefits. In May 2021, the Pennsylvania Public Utility Commission approved a settlement petition that allows Peoples Natural Gas to continue to use flow-through accounting for the current tax repair benefit and allows for the catch-up adjustment be given to its customers. These benefits are being provided back to customers over a five-year period through a credit on customer bills which commenced in August 2021. In addition, the settlement petition required the contribution of $500,000 to a customer-bill payment assistance program, completed in July 2021, and $5,000,000 in relief to past-due accounts for natural gas customers impacted by the COVID-19 pandemic, completed in December 2021.
Fair Market Value Legislation – In April 2016, Pennsylvania enacted legislation allowing the public utility commission to utilize fair market value to set ratemaking rate base instead of the depreciated original cost of water or wastewater assets for certain qualifying municipal acquisitions. The legislation includes a process for engaging two independent utility valuation experts to perform appraisals that are filed with the public utility commission and then averaged and compared to the purchase price. The ratemaking rate base is the lower of the average of the appraisals or the purchase price and is subject to regulatory approval. Illinois, Indiana, New Jersey, North Carolina, Ohio, Virginia, and Texas also have legislation that allows the use of fair market value under varying rules and circumstances. We believe that this legislation encourages consolidation in the water and wastewater industry, providing municipalities with an option for exiting the business if they are dealing with challenges associated with their aging, deteriorating water and wastewater assets, do not have the expertise or technical capabilities to continue to comply with ever-increasing environmental regulations, or simply want to focus on other community priorities.
Revenue Stability Mechanisms – Revenue stability mechanisms separate the volume of water sold from our ability to meet our cost of service and infrastructure costs. These mechanisms allows us to recognize revenue based on a target amount established in the last rate case, and then record either a regulatory asset or liability based on the cumulative difference over time, which results in either a refund due to customers or a payment from customers. In Illinois, our operating subsidiary utilizes a revenue stability mechanism. Additionally, a weather-normalization adjustment (WNA) mechanism is in place for our natural gas customers served in Kentucky. The WNA serves to minimize the effects of weather on the Company’s results for its residential and small commercial natural gas customers. This regulatory mechanism adjusts revenues earned for the variance between actual and normal weather and can have either positive (warmer than normal) or negative (colder than normal) effects on revenues. Customer bills are adjusted in the December through April billing months, with rates adjusted for the difference between actual revenues and revenues calculated under this mechanism billed to the customers.
Competition
In general, we believe that Essential Utilities and its water, wastewater, and natural gas subsidiaries have valid authority, free from unduly burdensome restrictions, to enable us to carry on our business as presently conducted in the franchised or contracted areas we now serve. The rights to provide water, wastewater, or natural gas service to customers in a particular franchised service territory are generally non-exclusive, although the applicable utility commissions usually allow only one regulated utility to provide service to customers in a given area. In some instances, another water utility provides service to a separate area within the same political subdivision served by one of our subsidiaries. Additionally, our larger natural gas customers may bypass gas distribution services by gaining distribution directly from interstate pipelines, other gas distributors, or other energy sources. As a regulated utility, we believe there is little competition for the daily water, wastewater, and natural gas service we provide to our customers.
Although our natural gas subsidiaries are not currently in significant direct competition with any other distributors of natural gas in its service areas, we do compete with suppliers of other forms of energy such as fuel oil, electricity, propane, coal, wind, and solar. Competition can be intense among the energy sources with price being the primary consideration. This is particularly true for industrial customers who have the ability to switch to alternative fuels. Competition from renewable energy sources such as solar and wind is likely to increase as the political environment currently favors these energy sources through incentives or by placing restrictions on emissions from the burning of fossil fuels.
Water and wastewater utilities may compete for the acquisition of other water and wastewater utilities or for acquiring new customers in new service territories. Competition for these acquisitions generally comes from nearby utilities, either other regulated utilities or municipal-owned utilities, and sometimes from strategic or financial purchasers seeking to enter or expand in the water and wastewater industry. We compete for new service territories and the acquisition of other utilities on the following bases:
economic value;
economies of scale;
our ability to provide quality water, wastewater, and natural gas service;
our existing infrastructure network;
our ability to perform infrastructure improvements;
our ability to comply with environmental, health, and safety regulations;
our technical, regulatory, and operational expertise;
our ability to access capital markets; and
our cost of capital.
The addition of new service territories and the acquisition of other utilities by regulated utilities such as the Company are generally subject to review and approval by the applicable state utility commissions.
In a very small number of instances in one of our southern states, where there are municipally-owned water or wastewater systems near our operating divisions, the municipally-owned system may either have water distribution or wastewater collection mains that are located adjacent to our divisions mains or may construct new mains that parallel our mains. In these rare circumstances, the municipally-owned system may attempt to voluntarily offer service to customers who are connected to our mains, resulting in our mains becoming surplus or underutilized without compensation.
In the states where our water subsidiaries operate, it is possible that portions of our subsidiaries’ operations could be acquired by municipal governments by one or more of the following methods:
eminent domain;
the right of purchase given or reserved by a municipality or political subdivision when the original franchise was granted; and
the right of purchase given or reserved under the law of the state in which the subsidiary was incorporated or from which it received its permit.
The price to be paid upon such an acquisition by the municipal government is usually determined in accordance with applicable law under eminent domain. In other instances, the price may be negotiated, fixed by appraisers selected by the parties, or computed in accordance with a formula prescribed in the law of the state or in the particular franchise or charter. We believe that our operating subsidiaries would be entitled to fair market value for any assets that are condemned, and we believe the fair market value would be in excess of the book value for such assets.
Despite maintaining a program to monitor condemnation interests and activities that may affect us over time, one of our primary strategies continues to be to acquire additional water and wastewater systems, to maintain our existing systems where there is a business or a strategic benefit, and to actively oppose unilateral efforts by municipal governments to acquire any of our operations, particularly for less than the fair market value of our operations or where the municipal government seeks to acquire more than it is entitled to under the applicable law or agreement. On occasion, we may voluntarily agree to sell systems or portions of systems in order to help focus our efforts in areas where we have more critical mass and economies of scale or for other strategic reasons.
Environmental, Health and Safety Regulation and Compliance
The Company’s mission is “to sustain life and improve economic prosperity by safely and reliably delivering Earth’s most essential resources to customers and communities”. We are committed to protecting the environment and the health and safety of our employees, customers, and the public and continue to adhere to applicable regulatory standards. We integrate environmental, health, and safety requirements into planning, decision-making, construction, operating, and maintenance activities that we perform.
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. In addition, we are subject to federal and state laws and other regulations relating to solid waste disposal, dam safety, and other aspects of our operations. Capital expenditures and operating costs required as a result of water quality standards and environmental requirements have been traditionally recognized by state utility commissions as appropriate for inclusion in establishing rates.
From time to time, Essential Utilities has acquired, and may acquire, systems that have environmental compliance issues. Environmental compliance issues also arise in the course of normal operations or as a result of regulatory changes. Essential Utilities attempts to align capital budgeting and expenditures to address these issues in due course. We believe that the capital expenditures required to address outstanding environmental compliance issues have been budgeted in our capital program and represent approximately $107,244,000, or approximately 4.1% of our expected total water and wastewater capital expenditures over the next five years. We are parties to agreements with regulatory agencies in Pennsylvania, Texas, Virginia, and Illinois under which we have committed to make improvements for environmental compliance. These agreements are intended to provide the regulators with assurance that problems covered by these agreements will be addressed, and the agreements generally provide protection from fines, penalties, and other actions while corrective measures are being implemented. We are working with state environmental officials in Pennsylvania, Texas, Virginia, and Illinois to implement or amend regulatory agreements as necessary.
Our Regulated Natural Gas utility operations are subject to stringent and complex laws and regulations pertaining to the environment. As an owner or operator of natural gas pipelines, distribution systems and storage, and the facilities that support these systems, we must comply with these laws and regulations at the federal, state, and local levels. Failure to comply with these laws and regulations may trigger a variety of administrative, civil, and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial actions, and the issuance of orders enjoining future operations. Certain environmental statutes impose strict, joint and several liability for costs required to assess, clean up, and restore sites where hazardous substances have been stored, disposed or released.
Safe Drinking Water Act - The Safe Drinking Water Act establishes criteria and procedures for the U.S. Environmental Protection Agency (EPA) to develop national quality standards for drinking water. Regulations issued pursuant to the Safe Drinking Water Act set standards regarding the amount of microbial and chemical contaminants and radionuclides in drinking water. Current requirements under the Safe Drinking Water Act are not expected to have a material impact on our business, financial condition, or results of operations as we have made and are making investments to meet existing water quality standards. We may, in the future, be required to change our method of treating drinking water at some sources of supply and make additional capital investments if additional regulations become effective.
Clean Water Act - The Clean Water Act regulates discharges from drinking water and wastewater treatment facilities into lakes, rivers, streams, and groundwater. It is our policy to obtain and maintain all required permits and approvals for the discharges from our water and wastewater facilities, and to comply with all conditions of those permits and other regulatory requirements. A program is in place to monitor facilities for compliance with permitting, monitoring and reporting for wastewater discharges. From time to time, discharge violations may occur which may result in fines. These fines and penalties, if any, are not expected to have a material impact on our business, financial condition, or results of operations. We are also parties to agreements with regulatory agencies in several states where we operate while improvements are being made to address wastewater discharge issues.
Solid Waste Disposal - The handling and disposal of waste generated from water and wastewater treatment facilities is governed by federal and state laws and regulations. A program is in place to monitor our facilities for compliance with regulatory requirements, and we are not aware of any significant environmental remediation costs necessary from our handling and disposal of waste material from our water and wastewater operations.
Dam Safety - Our subsidiaries own 30 dams, of which 14 are classified as high hazard dams that are subject to the requirements of the federal and state regulations related to dam safety, which undergo regular inspections and an annual engineering inspection. After a thorough review and inspection of our dams by professional outside engineering firms, we believe that all 14 dams are structurally sound and well-maintained, except as described below. These inspections provide recommendations for ongoing rehabilitation which we include in our capital improvement program. The Company has approximately $42,000,000 in capital improvements budgeted between 2022 and 2028 for dam improvements.
We performed studies of our dams that identified five high hazard dams in Pennsylvania and two high hazard dams in Ohio requiring capital improvements. These capital improvements result from the adoption by state regulatory agencies of revised formulas for calculating the magnitude of a possible maximum flood event. The most significant capital improvement remaining to be performed in our dam improvement program is on one dam in Pennsylvania at a total estimated cost of $17,100,000. Design for this dam commenced in 2013 and construction is expected to be completed in 2027.
A previously-owned Ohio dam requiring capital improvements was no longer used for water supply and was sold to a third party in December 2020. In connection with the sale, we contractually agreed to complete certain dam capital improvements after the sale for an estimated cost of $2,100,000 and expect to complete the repairs in 2022.
Lead and Copper Rule – The events in Flint, Michigan, which commenced in 2014, and other communities have brought attention to the issue of lead in drinking water from home plumbing. Lead in drinking water can come from lead that leaches from service lines, home plumbing solder, and fixtures or faucets. Since the Lead and Copper Rule in 1992, we have been working to prevent lead leaching from home plumbing sources by reducing water corrosivity and adding chemicals that can prevent leaching of lead in pipes and homes. We have a program to evaluate all changes in water sources and/or treatment prior to initiating a change in water supply. We also focus on identifying and removing lead service lines and encouraging customers to replace the customer-owned portion of the service line if it is lead as they are identified during our main replacement program or during other maintenance activities. We support the recommendations of The Lead Service Line Replacement Collaborative, a collaborative of leading water industry, housing, and health organizations that has recommended full replacement of lead service lines as a “best practice” to reduce lead in drinking water, but we generally only have control over the company-owned portion of each service line. In cases where we are replacing a company-owned lead service line, our standard approach is to replace the company-owned portion and advise and encourage the customer to replace the customer-owned portion of the service line, all the way to the customer’s home. In Pennsylvania, we have the legal and regulatory authority to replace the customer-owned portion of the service line and will attempt to obtain customer permission to do so. We also advise customers of the potential health impacts of lead in drinking water, and conduct lead testing at homes following replacement of a lead service line.
On January 15, 2021 the EPA published the Lead and Copper Rule Revisions (LCRR) that included deadlines for lead service line inventories and replacement plans, and then signed a final rule on June 10, 2021 to extend the effective date of the LCRR to December 16, 2021. This action extends the LCRR requirement to submit a lead service line inventory and a lead service line replacement plan to the respective states or agencies by October 16, 2024. We are continuing to enhance our lead service line inventory and refine our lead service line replacement plans which we expect to complete by the deadline. Additionally, EPA is developing a new regulation, the Lead and Copper Rule Improvements (LCRI), to better protect communities from exposure to lead in drinking water. The LCRI is expected to delay the due dates for lead service line replacement plans and result in modifications to other parts of the LCRR. We are still reviewing the overall impact of the LCRR and anticipated LCRI. Capital expenditures and operating costs associated with compliance with any of these rule revisions cannot be presently determined until our review of the LCRR and anticipated LCRI is completed.
Partnership for Safe Water Program – Essential Utilities is a proud participant in the American Water Works Association’s (AWWA) Partnership for Safe Water Program. This voluntary program is a commitment to excellence within the drinking water community above and beyond EPA’s stringent treatment goals. All of our active surface water treatment plants (within Pennsylvania, Ohio, Illinois, and Virginia) maintain good standing in the program which includes many awards of achievement. The honors include the “Director’s Award” (achieved at seven systems) which recognizes plants that have: 1) completed a comprehensive self-assessment report, 2) created an action plan for continuous improvement, and 3) provided several evaluations of performance demonstrating operational excellence. Several of our systems have met these criteria annually and have received 5, 10, 15, and 20 year subscriber awards. Furthermore, our Roaring Creek Pennsylvania treatment plant has received the Phase IV Excellence Award, the highest honor achieved in the Partnership Program.
Safety Standards - Our facilities and operations may be subject to inspections by representatives of the Occupational Safety and Health Administration from time to time. We maintain safety policies and procedures to comply with the Occupational Safety and Health Administration’s rules and regulations, but violations may occur from time to time, which may result in fines and penalties, which are not expected to have a material impact on our business, financial condition, or results of operations. We endeavor to correct such violations promptly when they come to our attention.
Pipeline Safety Improvement Act- In December 2006, Congress enacted the Pipeline, Inspection, Protection, Enforcement and Safety Act of 2006 (2006 Act), which reauthorized the programs adopted under the Pipeline Safety Improvement Act of 2002 (2002 Act). These programs included several requirements related to ensuring pipeline safety, and a requirement to assess the integrity of pipeline transmission facilities in areas of high population concentration.
Pursuant to the 2006 Act, the Pipeline and Hazardous Materials Safety Administration (PHMSA), an agency of the US Department of Transportation (DOT), issued regulations, effective February 12, 2010, requiring operators of gas distribution pipelines to develop and implement integrity management programs similar to those required for gas transmission pipelines, but tailored to reflect the differences in distribution pipelines. Operators of natural gas distribution systems were required to write and implement integrity management programs by August 2, 2011. Peoples’ natural gas distribution systems met this deadline.
Pursuant to the 2002 Act and the 2006 Act, PHMSA has adopted a number of rules concerning, among other things, distinguishing between gathering lines and transmission facilities, requiring certain design and construction features in new and replaced lines to reduce corrosion, and requiring pipeline operators to amend existing written operations and maintenance procedures and operator qualification programs. PHMSA also updated its reporting requirements for natural gas pipelines effective January 1, 2011.
In December 2011, Congress passed the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (2011 Act). This act increased the maximum civil penalties for pipeline safety administrative enforcement actions; required the DOT to study and report on the expansion of integrity management requirements and the sufficiency of existing gathering line regulations to ensure safety; required pipeline operators to verify their records on maximum allowable operating pressure; and imposed new emergency response and incident notification requirements. In 2016, the Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016 (2016 Act) reauthorized PHMSA’s pipeline safety programs through 2019 and provided limited new authority, including the ability to issue emergency orders, to set inspection requirements for certain underwater pipelines and to promulgate minimum safety standards for natural gas storage facilities, as well as to provide increased transparency into the status of as-yet-incomplete PHMSA actions required by the 2011 Act.
In June 2021, PHMSA issued an advisory bulletin to address a self-executing mandate as part of the 2016 Act. This Leak Detection and Reduction (LDAR) bulletin requires operators to update standard operating procedures to address leaks and gas releases which may be hazardous to public safety and the environment.
In November 2021, PHMSA published the final gathering line rule, with a tentative effective date of May 2022. This rule will require preventative and mitigative measures on gathering lines of certain diameters and operating pressures.
Compliance with PHMSA’s regulations, performance of the remediation activities by our natural gas distribution companies and intrastate pipelines and verification of records on maximum allowable operating pressure will continue to require increases in both capital expenditures and operating costs. The level of expenditures will depend upon several factors, including age, location and operating pressures of the facilities. In particular, the cost of compliance with the DOT’s integrity management rules will depend on integrity testing and the repairs found to be necessary by such testing. Changes to the amount of pipe subject to integrity management, whether by expansion of the definition of the type of areas subject to integrity management procedures or of the applicability of such procedures outside of those defined areas, may also affect incurred costs. Implementation of the 2011 and 2016 Acts by PHMSA may result in other regulations or the reinterpretation of existing regulations that could impact compliance costs. In addition, we may be subject to the DOT’s enforcement actions and penalties if it fails to comply with pipeline regulations.
Security
We maintain security measures at our facilities, and collaborate with federal, state and local authorities and industry trade associations regarding information on possible threats and security measures for water, wastewater, and natural gas utility operations. The costs incurred are expected to be recoverable in customer rates and are not expected to have a material impact on our business, financial condition, or results of operations.
We also maintain cyber security protection measures with respect to our information technology, including our customer data, and, in some cases, the monitoring and operation of our treatment, storage, pumping, and pipeline infrastructure. We rely on our information technology systems in connection with the operation of our business, especially with respect to customer service and billing, accounting and, in some cases, the monitoring and operation of our treatment, storage, pumping, and pipeline infrastructure. In addition, we rely on our systems to track our utility assets and to manage maintenance and construction projects, materials and supplies, and our human resource functions.
Climate Risk
We understand the urgency of the Paris Agreement and the United Nations Intergovernmental Panel on Climate Change’s science-based target of limiting the global temperature increase to well below 2 degrees Celsius. Of our Scope 1 and 2 GHG emissions, 79% are driven by our gas distribution business. Early in 2021, we announced that by 2035 we will reduce our Scope 1 and 2 GHG emissions by 60% from our 2019 baseline. This is consistent with the rate of reduction necessary through 2035 to keep on track with the Paris Agreement. This will be achieved by extensive gas pipeline replacement, renewable energy purchasing, accelerated methane leak detection and repair, and various other currently planned initiatives that are highly feasible with proven technology.
Human Capital Management
The Company values its workforce as one of its most important assets. The Company is dedicated to creating a sustainable working atmosphere for its employees to attract and retain the best employees. Human capital measures and objectives that the Company focuses on in managing its business include the health and safety of its employees, succession planning, voluntary attrition rate, and diversity, equity and inclusion initiatives.
As of December 31, 2021, we employed a total of 3,211 full-time employees. Our subsidiaries are parties to 19 labor agreements with labor unions covering 1,540 employees. The labor agreements expire at various times up until 2026.
Health and Safety - Safety is the foundation of our business and guides all our employees’ actions. The Company continues to invest in safety improvements, implement policies and procedures, develop technical training and guidelines for our employees, and leverage new tools and technology to improve our maps, records and infrastructure performance. The Company is focused on identifying and mitigating risk and safeguarding our plants and distribution lines. Our teams make safety a top priority on the job, in meetings, and within our surrounding work environments to ensure the safety of our employees and customers. To encourage managers to promote a safe environment, related metrics are incorporated in management’s incentive compensation plans.
Ahead of the closing of the Peoples Gas Acquisition in March 2020, we also created a combined Environmental Health and Safety management position to provide oversight to the gas, water, and wastewater businesses. This included the appointment of a National Safety Director charged with developing and implementing a combined health and safety program that will continue to incorporate our best practices across the Company to keep our workers safe.
The Company continues to monitor the COVID-19 pandemic and has taken actions aligned with the Centers for Disease Control and Prevention and Federal, State and local health authorities to protect its workforce so they can more safely and effectively perform their work. The Company sought to be as transparent as possible and frequently communicated with employees via email, dedicated COVID-19 intranet resources, routine huddles, and CEO town halls. In the second quarter of 2021, we started a rotational return to the office. All employees returned to their normal work locations as of June 14, 2021, and the Company has initiated a work location flexibility program for selected work groups and individuals. The Company is also in the process of establishing policies and procedures for compliance with the recently promulgated OSHA Emergency Temporary Standard for COVID-19.
The Company provides access to a variety of innovative, flexible, and convenient employee health and wellness programs. We proactively conduct communications outreach to our employees and their family members on relevant health topics. With the focus on mental health becoming more of a central part of an employee’s well-being, we have added additional resources and counseling access for employees and their families to utilize to ensure they take care of themselves.
Employee Development and Training - The Company continues to invest in training and development programs for employees so that they may evolve and enhance their skills in their areas of expertise. We also offer tuition reimbursement to all regular, full-time employees. At Essential, we believe in an integrated talent development approach. We utilize the “70/20/10 model” for development, which holds that 70% of learning happens on the job through stretch goals and critical assignments, 20% of learning occurs through mentoring and coaching and involvement in professional and industry related activities, and 10% of learning occurs within a virtual or live learning environment. We align our development model to support our vision, mission, and competencies, with a balanced approach to developing our workforce that leads us to the development of a confident, committed, and high-performance culture.
Succession Planning - Under the Company’s Corporate Governance Guidelines, the Board of Directors is responsible for the development and periodic review of a management succession plan for the Chief Executive Officer and other executives. Annually, the Board of Directors reviews the Company’s succession planning process for the Chief Executive Officer and the named executive officers. During this review, the directors review succession candidates on an immediate basis and more developmental candidates to ensure that the Company is well-prepared for the future.
Voluntary Attrition and Turnover - The Company measures turnover rates of its employees in assessing the Company’s overall human capital. The Company’s voluntary attrition rate (not including retirements) for 2021 was 2% at the executive and senior management level, 4% at the mid-level manager level, 10% at the professional level, and 6% across all other employees. These voluntary attrition rates increased from 2020. We believe issues related to the COVID-19 pandemic and the large national increase in employee retirements and attrition impacted us as well as other companies. We are working to develop programs focused on retaining our workforce.
Diversity, Equity and Inclusion - Diversity of backgrounds, ideas, thoughts, and experiences is essential to our culture and the way we do business. Creating an environment where our differences are valued and where every person feels a sense of belonging and engagement supports a thriving organization that cares about our customers. In 2020 and 2021, the Company conducted education and unconscious bias workshops to foster better understanding of points of view and how pre-conceived notions impact relationships at work. Diversifying the workforce continues to be a focus at all levels of the Company. Our focus on attracting and retaining diverse talent has resulted in growth in the number of our diverse employees from 14% in 2020 to 15% in 2021. Diversity at the management level has also grown, with 10% of the management team comprised of minorities and 22% of the management team comprised of women by the end of 2021.
We recognize an opportunity to strengthen the diversity in our company. Based on local customer demographic data, we are focused on increasing the diversity of our employee demographics to reflect the diversity in the communities that we serve. We have a range of diverse recruitment tactics and believe we can achieve our multiyear plan of reaching 17% employees of color.
Supplier Diversity
We acknowledge that supplier diversity is critical for our communities as well as for our business. We are committed to increasing our work with qualified and certified diverse suppliers from the communities and neighborhoods where we live, work, and operate each day and suppliers that use reasonable efforts to minimize pollution and improve environmental protection and sustainability. As such, we announced a multi-year plan to increase diverse supplier spend to 15% of controllable spend, which excludes spend where there is no opportunity to include diverse suppliers or spend that cannot be sourced from a diverse supplier due to a policy or law (items like power, purchased water and some one-time payments). Beginning in 2021, we added a supplier diversity component (5% weighting) to our short-term incentive plan. We also have a Supplier Code of Conduct that defines the basic requirements for suppliers of goods and services and their responsibilities to the environment and their stakeholders. We also expect our suppliers to subscribe to the principles of nondiscrimination, follow high standards of business ethics and professional conduct and adhere to our Human Rights Policy.
Management and Board Oversight
Our Board of Directors has various committees including an audit committee, an executive compensation committee, a corporate governance committee, and a risk mitigation and investment policy committee. Each of these committees has a formal charter. We also have Corporate Governance Guidelines and a Code of Ethical Business Conduct. Copies of these charters, guidelines, and codes can be obtained free of charge from our Investor Relations page on our web site, www.essential.co. In the event we amend or waive any portion of the Code of Ethical Business Conduct that applies to any of our directors, executive officers, or senior financial officers, we will post that information on our web site.
Available Information
We file annual, quarterly, current reports, proxy statements, and other information with the Securities and Exchange Commission (SEC). You may obtain our SEC filings from the SEC’s web site at www.sec.gov.
Our internet web site address is www.essential.co. We make available free of charge through our web site’s Investor Relations page all of our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information. These reports and information are available as soon as reasonably practicable after such material is electronically filed with the SEC.
In addition, you may request a copy of the foregoing filings, at no cost by writing or telephoning us at the following address or telephone number:
Investor Relations Department
Essential Utilities, Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Telephone: 610-527-8000
The references to our web site and the SEC’s web site are intended to be inactive textual references only, and the contents of those web sites are not incorporated by reference herein and should not be considered part of this or any other report that we file with or furnish to the SEC.
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Item 1A. | Risk Factors |
In addition to the other information included in this Annual Report, the following factors should be considered in evaluating our business and future prospects. Any of the following risks, either alone or taken together, could materially harm our business, financial condition, and results of operations. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our business, financial condition, and results of operations could be materially harmed.
Risk Factor Summary
Our business is subject to many risks and uncertainties. The following are the types of forward-looking statements we make throughout this Annual Report, including in these Risk Factors, and a summary of the types of risks that could impact us and cause actual results to differ from those described in such forward-looking statements:
the impact of the COVID-19 pandemic or the measures implemented by the Company as a result of the COVID-19 pandemic.
opportunities for future acquisitions, both within and outside the water, wastewater, and natural gas industries, the success of pending acquisitions and the impact of future acquisitions;
acquisition-related costs and synergies;
the sale of water and wastewater divisions;
the impact of conservation awareness of customers and more efficient fixtures and appliances on water and natural gas usage per customer;
the impact of our business on the environment, and our ability to meet our climate change goals;
our authority to carry on our business without unduly burdensome restrictions;
our capability to pursue timely rate increase requests;
the capacity of our water supplies, water facilities, wastewater facilities, and natural gas supplies and storage facilities;
the impact of decisions of governmental and regulatory bodies, including decisions to raise or lower rates and decisions regarding potential acquisitions;
developments, trends and consolidation in the water, wastewater, and natural gas utility and infrastructure industries;
the impact of changes in and compliance with governmental laws, regulations and policies, including those dealing with the environment, health and water quality, taxation, and public utility regulation;
the development of new services and technologies by us or our competitors;
the ongoing integration of the Peoples Gas Acquisition;
the availability of qualified personnel;
the condition of our assets;
recovery of capital expenditures and expenses in rates;
projected capital expenditures and related funding requirements;
the availability and cost of capital financing;
dividend payment projections;
the impact of geographic diversity on our exposure to unusual weather;
the continuation of investments in strategic ventures;
our ability to obtain fair market value for condemned assets;
the impact of fines and penalties;
the impact of legal proceedings;
general economic conditions, including inflation;
the impact of federal and/or state tax policies and the regulatory treatment of the effects of those policies; and
the amount of income tax deductions for qualifying utility asset improvements and the Internal Revenue Service’s ultimate acceptance of the deduction methodology.
Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including but not limited to:
impacts from the global outbreak of COVID-19, including on consumption, usage and collections.
the success in the closing of, and the profitability of future acquisitions;
changes in general economic, business, credit and financial market conditions;
our ability to manage the expansion of our business, including our ability to manage our expanded operations resulting from the Peoples Gas Acquisition;
changes in environmental conditions, including the effects of climate change;
our ability to integrate and otherwise realize all of the anticipated benefits of businesses, technologies or services which we may acquire;
the decisions of governmental and regulatory bodies, including decisions on regulatory filings, including rate increase requests and decisions regarding potential acquisitions;
our ability to file rate cases on a timely basis to minimize regulatory lag;
the impact of inflation on our business and on our customers;
abnormal weather conditions, including those that result in water use restrictions;
the seasonality of our business;
our ability to treat and supply water or collect and treat wastewater;
our ability to source sufficient natural gas to meet customer demand in a timely manner;
the continuous and reliable operation of our information technology systems, including the impact of cyber security attacks or other cyber-related events;
changes in governmental laws, regulations and policies, including those dealing with taxation, the environment, health and water quality, and public utility regulation;
the extent to which we are able to develop and market new and improved services;
the effect of the loss of major customers;
our ability to retain the services of key personnel and to hire qualified personnel as we expand;
labor disputes;
increasing difficulties in obtaining insurance and increased cost of insurance;
cost overruns relating to improvements to, or the expansion of, our operations;
inflation in the costs of goods and services;
the effect of natural gas price volatility;
civil disturbance or terroristic threats or acts;
changes to the rules or our assumptions underlying our determination of what qualifies for an income tax deduction for qualifying utility asset improvements;
changes in, or unanticipated, capital requirements;
changes in our credit rating or the market price of our common stock;
changes in valuation of strategic ventures;
changes in accounting pronouncements;
litigation and claims; and
restrictions on our subsidiaries’ ability to make dividends and other distributions.
Risk Related to COVID-19 Pandemic
Global or regional health pandemics, epidemics or similar public health threats, including COVID-19, could negatively impact our business, outlook, financial condition, results of operations and liquidity.
The COVID-19 pandemic, resurgences and variants of the virus that causes COVID-19, and the measures implemented to contain its spread, such as travel bans and restrictions, quarantines and vaccination mandates, continue to have widespread impacts on the global economy, our employees, customers, and third-party business partners. The severity, magnitude and duration of COVID-19 is uncertain, rapidly changing and hard to predict. It could, in the future, materially impact our business in numerous ways, including, but not limited to, those outlined below:
reduced demand from our commercial customers and shifts in demand for our regulated utility services;
delay the timeliness of our service to customers because of shutdowns and/or illness and travel restrictions among our employees or employees of other companies on whom we rely;
negatively impact the financial condition of our customers and their ability to pay for our products and services, and our ability to disconnect service for non-payment may be limited, and state regulators may impose bill deferral programs;
may limit or curtail significantly or entirely the ability of public utility commissions to approve or authorize applications and other requests we may make with respect to our regulated water and natural gas businesses; and
delays in our supply chain and our ability to complete maintenance, repairs, and capital programs, which could result in disruptions and increased costs.
These and other impacts of COVID-19 or other global or regional health pandemics, epidemics or similar public health threats could also have the effect of heightening many of the other risks described in “Risk Factors” in this Annual Report and the other reports we file from time to time with the SEC. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results of operations, financial condition and liquidity. The ultimate impact of COVID-19 on our business depends on factors beyond our knowledge or control, including the duration and severity of the outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects. Any of these factors could have a negative impact on our business, outlook, financial condition, and results of operations, which impact could be material.
General economic conditions, as impacted by COVID-19 pandemic, may affect our financial condition and results of operations.
A general economic downturn may lead to a number of impacts on our business and may affect our financial condition and results of operations. Such impacts may include:
a reduction in discretionary and recreational water use by our residential water customers, particularly during the summer months when such discretionary usage is normally at its highest;
a reduction in natural gas use by our residential customers, particularly during the winter months when such usage is normally at its highest;
a decline in usage by industrial and commercial customers as a result of decreased business activity;
an increased incidence of customers’ inability to pay or delays in paying their utility bills, or an increase in customer bankruptcies, which may lead to higher bad debt expense and reduced cash flow;
a lower natural customer growth rate due to a decline in new housing starts; and
a decline in the number of active customers due to housing vacancies.
General economic turmoil may also lead to an investment market downturn, which may result in our pension and other post-retirement plans’ asset market values suffering a decline and significant volatility. A decline in our plans’ asset market values could increase our required cash contributions to the plans and expense in subsequent years. Inflation levels in excess of historical levels could also lead to regulatory lag and thus impact our earned returns and financial results.
Moreover, inflation has recently become an area of increasing economic concern. Changes in the cost of providing our products and services, including price increases in operating and capital costs, as well as increases in labor costs, may negatively impact our financial condition and results of operations. We review the adequacy of our rates as approved by public utility commissions in relation to the increasing cost of providing services and the inherent regulatory lag in adjusting those rates. Rate increases are not retroactive and often lag increases in costs caused by inflation. On occasion, our regulated utility companies may enter into rate settlement agreements, which require us to wait for a period of time to file the next base rate increase request. These agreements may result in regulatory lag whereby inflationary increases in expenses may not be reflected in rates, and may not yet be requested, or a gap may exist between when a capital project is completed and the start of its recovery in rates. Even during periods of moderate inflation, the effects of inflation can have a negative impact on our operating results. The ability to control operating expenses is an important factor that will influence future results.
Risks Related to Acquisitions
One of the important elements of our growth strategy is the acquisition of regulated utility systems. Any acquisition we decide to undertake may involve risks. Further, competition for acquisition opportunities from other regulated utilities, governmental entities, and strategic and financial buyers may hinder our ability to grow our business. Lastly, competition and industry trends could impact our ability to retain existing natural gas customers or acquire new customers, which could have an adverse impact on our business, results of operations and financial condition.
One important element of our growth strategy is the acquisition and integration of regulated utility systems in order to broaden our service areas. In addition, the acquisition of Peoples is an opportunity to broaden our services to include natural gas distribution and additional states of operation. We will not be able to acquire other businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with acquisition candidates. It is our intent, when practical, to integrate any businesses we acquire with our existing operations. Investing in and integrating acquisitions could require us to incur significant costs and cause diversion of our managements time and resources, and we may be unable to successfully integrate our business with acquired businesses or to realize anticipated benefits of acquisitions. Acquisitions by us could also result in:
dilutive issuances of our equity securities;
incurrence of debt, contingent liabilities, and environmental liabilities;
unanticipated capital expenditures;
failure to maintain effective internal control over financial reporting;
recording goodwill and other intangible assets for which we may never realize their full value and may result in an asset impairment that may negatively affect our results of operations;
fluctuations in quarterly results;
other acquisition related expenses; and
exposure to unknown or unexpected risks and liabilities.
Some or all of these items could harm our business, financial condition, results of operations, and cash flows, and our ability to finance our business and to comply with regulatory requirements. The businesses we acquire, including Peoples, may not achieve sales and profitability that would justify our investment, and any difficulties we encounter in the integration process, including in the integration of processes necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and harm our internal controls.
Some states in which we operate allow the respective public utility commissions to use fair market value to set ratemaking rate base instead of the traditional depreciated original cost of water or wastewater assets for certain qualifying municipal acquisitions. Depending on the state, there are varying rules and circumstances in which fair value is determined. A number of states’ regulations allow ratemaking rate base to equal the lower of the average of the appraisals or the purchase price, subject to regulatory approval. There may be situations where we may pay more than the ultimate fair value of the utility assets as set by the regulatory commission, despite the fair value legislation suggesting its full recovery. In these situations, goodwill may be recognized to the extent there is an excess purchase price over the fair value of net tangible and identifiable intangible assets acquired through a business acquisition. Goodwill is not amortized but is reviewed annually or more frequently for impairment. As of December 31, 2021, People’s goodwill comprised approximately 15.5% of our total assets. Our financial condition and results of operations could be harmed by an inability to earn a return on, and recover our purchase price as a component of rate base. Regulatory actions or changes in significant assumptions, including discount and growth rates, utility sector market performance and comparable transaction multiples, projected operating and capital cash flows, and fair value of debt, could also potentially result in future impairments which could be material.
We compete with governmental entities, other regulated utilities, and strategic and financial buyers, for acquisition opportunities. As consolidation becomes more prevalent in the utility industry and competition for acquisitions increases, the prices for suitable acquisition candidates may increase to unacceptable levels and limit our ability to grow through acquisitions. In addition, our competitors may impede our growth by purchasing utilities near our existing operations, thereby preventing us from acquiring them. Governmental entities or environmental / social activist groups have challenged, and may in the future challenge our efforts to acquire new service territories, particularly from municipalities or municipal authorities. Additionally, on occasion we have entered into agreements to acquire water or wastewater utility systems that have been challenged by municipalities or other parties, or where referenda are required, which may impact our ability to complete the acquisition. Higher purchase prices and resulting rates may limit our ability to invest additional capital for system maintenance and upgrades in an optimal manner. Our growth could be hindered if we are not able to compete effectively for new companies and/or service territories with other companies or strategic and financial buyers that have lower costs of operations or capital, or that submit more attractive bids. Any of these risks may harm our business, financial condition, and results of operations.
We face the risk that large natural gas customers may bypass gas distribution services by gaining distribution directly from interstate pipelines, other gas distributors, or other energy sources. Increased competition or other changes in legislation, regulation, or policies could have a material adverse effect on our business, financial condition, or results of operations. Moreover, changes in wholesale natural gas prices compared with prices for electricity, fuel oil, coal, propane, or other energy sources may affect the retention of natural gas customers and may adversely impact our future financial condition and results of operations.
The integration of acquisitions can be a multi-year activity depending upon the complexity and significance of the acquisition.
One element of our strategic plans is our growth through acquisition strategy. Acquisitions in the utility industry are time consuming and complex, with the number of regulatory approvals needed. A significant acquisition can require significant time and resources, including devotion of management time, to integrate the acquired business. We are continuing to integrate the Peoples Gas Acquisition, and unexpected issues may adversely impact our future financial condition and results of operations.
Risks Related to Health and Safety and Environmental Concerns
Some scientific experts are predicting a worsening of weather volatility in the future, possibly created by climate change due to greenhouse gases. Changing severe weather patterns could require additional expenditures to reduce the risk associated with any increasing storm, flood, and drought occurrences.
The issue of climate change is receiving ever increasing attention worldwide. Many climate change predictions, if true, present several potential challenges to utilities, such as: increased frequency and duration of droughts, increased precipitation and flooding, potential degradation of water quality, and changes in demand for services. We maintain an ongoing facility planning process, and this planning or the enactment of new standards may result in the need for additional capital expenditures or raise our operating costs. Because of the uncertainty of weather volatility related to climate change, we cannot predict its potential impact on our business, financial condition, or results of operations. Although any potential expenditures and operating costs may be recovered in the form of higher rates, there can be no assurance that the various state utility commissions that govern our business would approve rate increases to enable us to recover such expenditures and costs. Without adequate rate recovery, our costs of complying with climate change weather related measures may negatively impact our business, financial condition, or results of operations.
In September 2021, Hurricane Ida made landfall in Pennsylvania and the Company had to temporarily shut down two of its water treatment plants, in Chester County, Pennsylvania, which had been damaged due to heavy rainfall, flooding and loss of power. These plants serve a significant portion of Aqua Pennsylvania’s service territory in southeastern Pennsylvania. The Company was able to maintain supply to most of its customers by ramping up production at some of its other treatment plants. However, due to low water pressure in some locations, Aqua Pennsylvania asked customers to adopt voluntary water conservation measures during a two-week period. The damage to the facilities occurred despite our prior efforts to shore up the facilities to prevent such floodwater occurrences. We cannot assure you that we will be able to prevent similar damage from future storms, and the costs associated with such damage could have a material impact on our business, financial conditions and results of operations.
Climate change laws and regulations have been passed and are being proposed that require compliance with greenhouse gas emissions standards, as well as other climate change initiatives, which could impact our business, financial condition or results of operations.
Climate change is receiving ever increasing attention worldwide. Many scientists, legislators, and others attribute global warming to increased levels of greenhouse gases (GHG), including carbon dioxide. Climate change laws and regulations enacted and proposed limit GHG emissions from covered entities and require additional monitoring/reporting. We produce an environmental, social, and governance report, which provides an overview of our energy usage and GHG emissions. At this time, the existing GHG laws and regulations are not expected to materially harm the Company’s operations or capital expenditures; however, the uncertainty of future climate change regulatory requirements still remains. We cannot predict the potential impact of future laws and regulations on our business, financial condition, or results of operations. Although these future expenditures and costs for regulatory compliance may be recovered in the form of higher rates, there can be no assurance that the various state utility commissions that govern our business would approve rate increases to enable us to recover such expenditures and costs. Another potential risk related to climate change could be more frequent and more severe weather events, which could increase our costs to repair damaged facilities and restore service to our customers. If we are unable to provide utility services to our customers, our financial results would be impacted by lost revenues, and we would have to seek regulatory approval to recover restoration costs.
Climate change and other environmental, social, and governance matters are increasingly important to many investors, and we may fail to provide information desired by all investors.
Climate change and other environmental, social, and governance, or ESG, matters are increasingly important to many investors, including our current investors. We have focused attention on ESG matters and the communication of our ESG activities to investors. We may fail to provide the level of information desired by all investors, including those considering an investment in our stock.
Our water supply, including water provided to our customers, is subject to various potential contaminants which may result in disruption in our services, additional costs, loss of revenue, fines, laws and/or regulations, and litigation which could harm our business, reputation, financial condition, and results of operations.
Our water supplies, including water provided to our customers, are subject to possible contaminants, including those from:
naturally occurring compounds or man-made substances;
chemicals and other hazardous materials;
lead and other materials;
pharmaceuticals and personal care products; and
possible deliberate or terrorist attacks.
Depending on the nature of the water contamination, we may have to interrupt the use of that water supply until we are able to substitute, where feasible, the flow of water from an uncontaminated water source, including if practicable, the purchase of water from other suppliers, or continue the water supply under restrictions on use for drinking or broader restrictions against all use except for basic sanitation and essential fire protection. We may experience a loss of revenue and incur significant costs, including, but not limited to, costs for water quality testing and monitoring, “do not consume” expenses, treatment of the contaminated source through modification of our current treatment facilities or development of new treatment methods, the purchase of alternative water supplies, or litigation related matters, including governmental enforcement actions. In addition, the costs we could incur to decontaminate a water source or our water distribution system and dispose of waste could also be significant. The costs resulting from the contamination may not be recoverable in rates we charge our customer, or may not be recoverable in a timely manner. Further, we may incur a loss of revenue in the event we elect to waive customers’ water and wastewater charges. If we are unable to adequately treat the contaminated water supply or substitute a water supply from an uncontaminated water source in a timely or cost-effective manner, there may be an adverse effect on our business, reputation, financial condition, and results of operations. We could also be subject to:
claims for consequences arising out of human exposure to contamination and/or hazardous substances in our water supplies, including toxic torts;
claims for other environmental damage;
claims for customers’ business interruption as a result of an interruption in water service;
claims for breach of contract;
criminal enforcement actions;
regulatory fines; or
other claims.
We incur substantial costs on an ongoing basis to comply with all laws and regulations. New or stricter laws and/or regulations could increase our costs. Although we may seek to recover these costs through an increase in customer rates, there is no guarantee that the various state regulators would approve such an increase.
The events in Flint, Michigan, which commenced in 2014, and other communities have brought attention to the issue of lead in drinking water from home plumbing. We have been working to prevent lead leaching from home plumbing sources by reducing water corrosivity and adding chemicals that can prevent leaching of lead in pipes and homes. We have a program to evaluate all changes in water sources prior to initiating a change in water supply. We also focus on identifying and removing lead service lines and encouraging customers to replace the customer-owned portion of the service line if it is lead as they are identified during our main replacement program or during other maintenance activities. In 2019, we initiated a “do not consume” advisory for some of our customers served by our Illinois subsidiary, which resulted in a loss of revenues and increased operating costs and for which we anticipate an additional recovery of other costs and losses. We filed a claim with our insurance carrier for costs and losses incurred in 2019 related to the do not consume advisory, for which we recovered a portion of the costs and losses and for which we anticipate an additional recovery of other costs and losses.
We are devoting our attention to various emerging contaminants, including the Per- and Polyfluoroalkyl Substances (PFAS) family of chemicals and other chemicals and substances that do not have any regulatory standard in drinking water. We comply with governmental agency guidance that recommends the standard of protection from these contaminants, and we monitor proposed standards and other governmental agency guidance regarding these contaminants. Additionally, commencing in 2020, we initiated a company-wide program to address these contaminants uniformly across our regulated water utilities by selecting standards adopted or proposed by New Jersey, which are the most stringent standards adopted in any state in which we do business. As a result, we are planning a capital program in the range of tens of millions of dollars over several years to install mitigation technology at our water treatment facilities where the source water is found to exceed the standard we have determined to follow. There is no guarantee that the various state regulators would approve the costs associated with our treatment of the emerging contaminants without the establishment of treatment standards by the appropriate governmental entities, or for standards set by other governmental entities. Accordingly, we have commenced legal action, and anticipate filing additional legal actions, aimed at recovering the costs associated with the treatment in our systems of emerging contaminants from polluting entities.
We may incur costs to defend our position and/or incur reputational damage even if we are not liable for consequences arising out of human exposure to contamination and/or hazardous substances in our water supplies, other environmental damage, or our customer’s business interruption. Our insurance policies may not be sufficient to cover the costs of our defense or, in the event we are liable, these claims, and losses incurred may make it difficult for us to secure insurance in the future at acceptable rates. Such claims or actions could harm our business, reputation, financial condition, and results of operations.
Transporting, distributing and storing natural gas involves numerous risks that may result in accidents and other operating risks and costs.
Natural gas transportation, distribution and storage activities inherently involve a variety of hazards and operational risks, such as leaks, accidental explosions, damage caused by third parties and mechanical problems, which could cause substantial financial losses. These risks could result in serious personal injury, loss of human life, significant damage to property, environmental pollution, impairment of operations, and substantial losses. The location of pipelines and storage facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks. These activities may also subject the Company to litigation or administrative proceedings. Such litigation or proceedings could result in substantial monetary judgments, fines or penalties against the Company or otherwise be resolved on unfavorable terms.
We are subject to federal and state laws and regulations requiring the Company to maintain certain safety and system integrity measures by identifying and managing storage and pipeline risks. In addition, companies that supply and transport gas to Peoples are also subject to similar regulations and other restrictions related to their activities. Compliance with these laws and regulations, or future changes in these laws and regulations, may, directly or indirectly, result in increased capital, operating, and other costs which may not be recoverable in a timely manner or at all from customers in rates. In accordance with customary industry practices, we maintain insurance against a significant portion, but not all, of these risks and losses. To the extent any of these events occur or regulations change, it could adversely affect our business, reputation, financial condition, and results of operations.
Risks Related to the Operation and Regulation of our Business
The rates we charge our customers are subject to regulation. If we are unable to obtain government approval of our requests for rate increases or if approved rate increases are untimely or inadequate to recover and earn a return on our capital investments, to recover expenses or taxes, or to take into account changes in water, wastewater, or natural gas usage, our profitability may suffer.
The rates we charge our customers are subject to approval by utility commissions in the states in which we operate. We file rate increase requests, from time to time, to recover our investments in utility plant and expenses. Our ability to maintain and meet our financial objectives is dependent upon the recovery of, and return on, our capital investments and expenses through the rates we charge our customers. Once a rate increase petition is filed with a utility commission, the ensuing administrative and hearing process may be lengthy and costly, and our costs may not always be fully recoverable. The timing of our rate increase requests are therefore partially dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we expect to recover through the rate increase. In addition, the amount or frequency of rate increases may be decreased or lengthened as a result of many factors including changes in regulatory oversight in the states in which we operate utilities and income tax laws, including regulations regarding tax-basis depreciation as it applies to our capital expenditures or qualifying utility asset improvements. We can provide no assurances that any future rate increase request will be approved by the appropriate utility commission; and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner.
In Virginia, North Carolina and Kentucky, we may bill our water utility customers, in certain circumstances, in accordance with a rate filing that is pending before the respective regulatory commission, which would allow for interim rates. Furthermore, some utility commissions authorize the use of expense deferrals and amortization in order to provide for an impact on our operating income by an amount that approximates the requested amount in a rate request. The additional revenue billed and collected prior to the final ruling is subject to refund to customers based on the outcome of the ruling. The revenue recognized and the expenses deferred by us reflect an estimate as to the final outcome of the ruling. If the request is denied completely or in part, we could be required to refund to customers some or all of the revenue billed to date, and write-off some or all of the deferred expenses.
Changes in our earnings may differ from changes in our rate base.
Our business is capital intensive and requires significant capital investments for additions to or replacement of property, plant and equipment. These capital investments create assets that are used and useful in providing regulated utility service, and as a result, increase our rate base, on which we generate earnings through the regulatory process. Changes in our reported earnings, however, may differ from changes in our rate base in a given period due to several factors, including rate case timing and the terms of such rate cases; over-or under-earnings in a given period due to changes in operating costs; the effects of tax rates or tax treatment of capital investments, including the effect of repair tax; capital expenditures that are not eligible for a DSIC between rate cases; acquisitions which have not yet been included in rate base; and issuances of equity. We anticipate that we may experience periods in which growth in earnings is less than growth in rate base; such differences may be material and may persist over multiple reporting periods.
Our ability to meet customers’ natural gas requirements may be impaired if contracted natural gas supplies and interstate pipelines services are not available, are not delivered in a timely manner or if federal regulations decrease its available capacity, which may result in a loss of customers and an adverse effect on our financial conditions and results of operations.
We are responsible for acquiring sufficient natural gas supplies, interstate pipeline capacity and storage capacity to meet current and future customers’ peak, annual and seasonal natural gas requirements. We rely on third-party service providers, as we purchase a portion of our natural gas supply from interstate sources and rely on interstate pipelines to transport natural gas to our distribution system, in addition to local production that is delivered directly into our pipeline system. The Federal Energy Regulatory Commission (FERC) regulates the transportation of the natural gas received from interstate sources, and any change in regulatory policies could increase our transportation costs or decrease our available pipeline capacity. A decrease in interstate pipeline capacity available, an increase in competition for interstate pipeline transportation service or other interruptions to pipeline gas supplies could reduce our normal interstate supply of natural gas. Additionally, federal or state legislation could restrict or limit natural gas drilling, which could decrease the supply of available natural gas. If we are unable to maintain access to a reliable and adequate natural gas supply or sufficient pipeline capacity to deliver that supply, we may be unable to meet our customers’ requirements, resulting in a loss of customers and an adverse effect on our financial conditions and results of operations.
Peoples has traditionally used local production as a source of supply to fulfill a portion of its supply requirements. In order to absorb local gas into its system, Peoples has in place a network of pipelines and related facilities that move the gas either to customers located where gas is produced or to the more populated areas of the service territory where the greatest level of consumption occurs, and, in summer months, to Peoples’ on-system and off-system storage facilities. This network of facilities includes gathering lines, compressor stations, and transmission lines. Peoples has entered into gas purchase agreements with various producers to supply this local production. A decrease in this supply could occur, for example, if the local gas producers no longer drill wells to offset natural well production decline or if such producers decide to cease production or produce into another pipeline. State and federal legislation or regulations could also limit drilling activities and in turn limit gas supply. If supply is limited, we would be faced with purchasing gas supplies likely at a higher cost, may be unable to find alternative gas supply, and accordingly, may be unable to meet customer requirements, resulting in a loss of customers and an adverse effect on our financial condition and results of operations.
Any failure of our water and wastewater treatment plants, network of water and wastewater pipes, or water reservoirs could result in damages that may harm our business, financial condition, and results of operations.
Our operating subsidiaries treat water and wastewater, distribute water, and collect wastewater through an extensive network of pipes, and store water in reservoirs. A failure of a major treatment plant, pipe, or reservoir could result in claims for injuries or property damage. The failure of a major treatment plant, pipe, or reservoir may also result in the need to shut down some facilities or parts of our network in order to conduct repairs. Such failures and shutdowns may limit our ability to supply water in sufficient quality and quantities to our customers or collect and treat wastewater in accordance with standards prescribed by governmental regulators, including state utility commissions, and may harm our business, financial condition, and results of operations. Any business interruption or other losses might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.
Our facilities could be the target of a possible terrorist or other deliberate attack which could harm our business, financial condition and results of operations.
In addition to the potential contamination of our water supply or deliberate gas explosions as described in separate risk factors herein, we maintain security measures at our facilities and have heightened employee and public safety official awareness of potential threats to our utility systems. We have and will continue to bear increases in costs for security precautions to protect our facilities, operations, and supplies, most of which have been recoverable under state regulatory policies. While the costs of increases in security, including capital expenditures, may be significant, we expect these costs to continue to be recoverable in utility rates. Despite our security measures, we may not be in a position to control the outcome of terrorist events, or other attacks on our utility systems, should they occur. Such an event could harm our business, financial condition, and results of operations.
Our business is impacted by weather conditions and is subject to seasonal fluctuations, which could harm demand for water and natural gas services and our business, financial condition, and results of operations.
Demand for our water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with irrigation systems, swimming pools, cooling systems, and other outside water use. Throughout the year, and particularly during typically warmer months, demand will vary with temperature, rainfall levels, and rainfall frequency. In the event that temperatures during the typically warmer months are cooler than normal, if there is more rainfall than normal, or rainfall is more frequent than normal, the demand for our water may decrease and harm our business, financial condition, and results of operations. In Illinois, our operating subsidiary has adopted a revenue stability mechanism which allows us to recognize state PUC authorized revenue for a period which is not based upon the volume of water sold during that period, and effectively reduces the impact of weather and consumption variability.
Peoples’ revenues are seasonal and temperature sensitive and vary from year-to-year, depending on weather conditions, with a substantial portion of Peoples’ revenue occurring in the first and fourth quarters of the year due to colder temperatures. In 2021, this amounted to 72%, for the first and fourth quarters. This has the effect of reducing our quarterly revenues in the spring and summer months. In addition, warmer-than-normal-weather conditions can decrease the amount of natural gas Peoples sells in any year, which could adversely affect our business, financial condition, and results of operations.
Decreased residential customer water and natural gas usage as a result of conservation efforts, and the impact of more efficient appliances and furnaces, may harm demand for our utility services and may reduce our revenues and earnings.
There has been a general decline in water usage per residential customer as a result of an increase in conservation awareness, and the impact of an increased use of more efficient plumbing fixtures and appliances. These gradual, long-term changes are normally taken into account by the utility commissions in setting rates, whereas short-term changes in water usage, if significant, may not be fully reflected in the rates we charge. We are dependent upon the revenue generated from rates charged to our residential customers for the volume of water used. If we are unable to obtain future rate increases to offset decreased residential customer water consumption to cover our investments, expenses, and return for which we initially sought the rate increase, our business, financial condition, and results of operations may be harmed.
In addition, over time, average customer gas consumption has declined, as more energy efficient appliances and furnaces have been installed and conservation programs have been implemented. If we are unable to compete effectively or if customers further reduce their gas needs, we may lose existing customers, sell less gas to our customers and/or fail to acquire new customers, which could have a material adverse effect on our business, financial condition, and results of operations.
Drought conditions and government imposed water use restrictions may impact our ability to serve our current and future customers, and may impact our customers’ use of our water, which may harm our business, financial condition, and results of operations.
We depend on an adequate water supply to meet the present and future demands of our customers. Drought conditions could interfere with our sources of water supply and could harm our ability to supply water in sufficient quantities to our existing and future customers. An interruption in our water supply could harm our business, financial condition, and results of operations. Moreover, governmental restrictions on water usage during drought conditions may result in a decreased demand for our water, even if our water supplies are sufficient to serve our customers during these drought conditions, which may harm our business, financial condition, and results of operations.
The failure of, or the requirement to repair, upgrade or dismantle any of our dams or reservoirs may harm our business, financial condition, and results of operations.
Several of our water systems include impounding dams and reservoirs of various sizes. Although we believe our dam review program, which includes regular inspections and other engineering studies, will ensure our dams are structurally sound and well-maintained, the failure of a dam could result in significant downstream damage and could result in claims for property damage or for injuries or fatalities. We periodically inspect our dams and purchase liability insurance to cover such risks, but depending on the nature of the downstream damage and cause of the failure, the policy limits of insurance coverage may not be sufficient, and losses incurred may make it difficult for us to secure insurance in the future at acceptable rates. A dam failure could also result in damage to, or disruption of, our water treatment and pumping facilities that are often located downstream from our dams and reservoirs. Significant damage to these facilities, or a significant decline in the storage of the raw water impoundment, could affect our ability to provide water to our customers until the facilities and a sufficient raw water impoundment can be restored. The estimated costs to maintain our dams are included in our capital budget projections and, although such costs to date have been recoverable in rates, there can be no assurance that rate increases will be granted in a timely or sufficient manner to recover such costs in the future, if at all.
Our operations are geographically concentrated in Pennsylvania, which make us susceptible to risks affecting Pennsylvania.
Although we operate water, wastewater, and natural gas utility infrastructure in a number of states, our operations are concentrated in Pennsylvania. As a result, our financial results are largely subject to political, resource supply, labor, utility cost and regulatory risks, economic conditions, natural disasters, and other risks affecting Pennsylvania.
Federal and state environmental laws and regulations impose substantial compliance requirements on our operations. Our operating costs could be significantly increased in order to comply with new or stricter regulatory standards imposed by federal and state environmental agencies.
Our water, wastewater, and natural gas services are governed by various federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act, Clean Air Act, Resource Conservation and Recovery Act and similar state laws, and federal and state regulations issued under these laws by the EPA and state environmental regulatory agencies. These laws and regulations establish, among other things, criteria and standards for drinking water and for discharges into the waters of the U.S. as well as dam safety, air emissions, and residuals management. Pursuant to these laws, we are required to obtain various environmental permits from environmental regulatory agencies for our operations. The Company routinely seeks to acquire wastewater systems, some of which may have combined wastewater and stormwater systems which may overflow and be subject to increased regulation by the U.S. EPA. We cannot assure you that we will be at all times in total compliance with these laws, regulations and permits. If we fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators and such noncompliance could result in civil suits. Environmental laws and regulations are complex and change frequently. These laws, and the enforcement thereof, have tended to become more stringent over time. While we have budgeted for future capital and operating expenditures to comply with these laws and our permits, it is possible that new or stricter standards could be imposed that will require additional capital expenditures or raise our operating costs. Although these expenditures and costs may be recovered in the form of higher rates, there can be no assurance that the various state utility commissions that govern our business would approve rate increases to enable us to recover such expenditures and costs. In summary, we cannot assure you that our costs of complying with, current and future environmental and health and safety laws will not harm our business, financial condition, and results of operations.
Additionally, following the Peoples Gas Acquisition, the discovery of presently unknown environmental conditions, including former manufactured gas plant sites, and claims under environmental laws and regulations may result in expenditures and liabilities, which could be material, and could materially harm our business, financial condition and results of operations.
We are increasingly dependent on the continuous and reliable operation of our information technology systems, and a disruption of these systems, resulting from cyber security attacks or other events, could harm our business.
We rely on our information technology systems in connection with the operation of our business, especially with respect to customer service and billing, accounting and, in some cases, the monitoring and operation of our treatment, storage and pumping facilities, and our natural gas pipelines. In addition, we rely on our systems to track our utility assets and to manage maintenance and construction projects, materials and supplies, and our human resource functions. We believe the addition of the Peoples information technology systems, and the integration of such systems with ours adds additional complexity. A loss of these systems, or major problems with the operation of these systems, could harm our business, financial condition, and results of operations. Our information technology systems may be vulnerable to damage or interruption from the following types of cyber security attacks or other events:
power loss, computer systems failures, and internet, telecommunications or data network failures;
operator negligence or improper operation by, or supervision of, employees;
physical and electronic loss of data;
computer viruses, cyber security attacks, intentional security breaches, hacking, denial of service actions, misappropriation of data and similar events;
difficulties in the implementation of upgrades or modification to our information technology systems; and
hurricanes, fires, floods, earthquakes and other natural disasters.
Although we do not believe that our systems are at a materially greater risk of cyber security attacks than other similar organizations, our information technology systems may be vulnerable to damage or interruption from the types of cyber security attacks or other events listed above or other similar actions, and such incidents may go undetected for a period of time. Such cyber security attacks or other events may result in:
the loss or compromise of customer, financial, employee, or operational data;
disruption of billing, collections or normal field service activities;
disruption of electronic monitoring and control of operational systems;
delays in financial reporting and other normal management functions; and
disruption in normal system operations.
Possible impacts associated with a cyber security attack or other events may include: remediation costs related to lost, stolen, or compromised data; repairs to data processing or physical systems; increased cyber security protection costs; adverse effects on our compliance with regulatory and environmental laws and regulation, including standards for drinking water; litigation; loss of revenue; and reputational damage. We maintain insurance to help defray costs associated with cyber security attacks or other events, but we cannot provide assurance that such insurance will provide coverage for any particular type of incident or event or that such insurance will be adequate, and losses incurred may make it difficult for us to secure insurance in the future at acceptable rates.
We have a cyber security controls framework in place. We monitor our control effectiveness in an increasing threat landscape and continuously take action to improve our security posture. We cannot assure you that, despite such measures, a form of system failure or data security breach will not have a material adverse effect on our financial condition and results of operations.
Our water or wastewater utility systems may be subject to condemnations or other methods of taking by governmental entities.
In the states where our subsidiaries operate water or wastewater utility systems, it is possible that portions of our subsidiaries’ operations could be acquired by municipal governments by one or more of the following methods:
eminent domain;
the right of purchase given or reserved by a municipality or political subdivision when the original franchise was granted; and
the right of purchase given or reserved under the law of the state in which the subsidiary was incorporated or from which it received its permit.
The price to be paid upon such an acquisition by the municipal government is usually determined in accordance with applicable law under eminent domain. In other instances, the price may be negotiated, fixed by appraisers selected by the parties or computed in accordance with a formula prescribed in the law of the state or in the particular franchise or charter. We believe that our operating subsidiaries would be entitled to receive fair market value for any assets that are condemned. However, there is no assurance that the fair market value received for assets condemned would be in excess of book value.
In a very small number of instances, in one of our southern states where there are municipally-owned water or wastewater systems near our operating divisions, the municipally-owned system may either have water distribution or wastewater collection mains that are located adjacent to our divisions mains or may construct new mains that parallel our mains. In these circumstances, on occasion, the municipally-owned system may attempt to offer service to customers who are connected to our mains, resulting in our mains becoming surplus or underutilized without compensation.
The final determination of our income tax liability may be materially different from our income tax provision.
Significant judgment is required in determining our provision for income taxes. Our calculation of the provision for income taxes is subject to our interpretation of applicable business tax laws in the jurisdictions in which we file. In addition, our income tax returns are subject to periodic examination by the Internal Revenue Service and other taxing authorities. In December 2012, Aqua Pennsylvania changed its tax method of accounting to permit the expensing of qualifying utility asset improvement costs that were previously being capitalized and depreciated for tax purposes. Subsequently, the Company’s Ohio and North Carolina regulated subsidiaries similarly changed their tax method of accounting, and in March 2020 Peoples Natural Gas, LLC changed its tax method of accounting. Our determination of what qualifies as a capital cost versus a tax deduction for utility asset improvements is subject to subsequent adjustment and may impact the income tax benefits that have been recognized.
Although we believe our income tax estimates, including any tax reserves for uncertain tax positions or valuation allowances on deferred tax assets are appropriate, there is no assurance that the final determination of our income tax liability will not be materially different; either higher or lower, from what is reflected in our income tax provision. In the event we are assessed additional income taxes, our business, financial condition, and results of operations could be harmed.
Wastewater operations entail significant risks and may impose significant costs.
Wastewater collection and treatment involve various unique risks. If collection or treatment systems fail or do not operate properly, or if there is a spill, untreated or partially treated wastewater could discharge onto property or into nearby streams and rivers, causing various damages and injuries, including environmental damage. These risks are most acute during periods of substantial rainfall or flooding, which are the main causes of wastewater overflow and system failure. Liabilities resulting from such damages and injuries could harm our business, financial condition, and results of operations.
Work stoppages and other labor relations matters could harm our operating results.
Approximately 48% of our Regulated Water and Regulated Natural Gas segments’ workforce are unionized under 19 labor contracts with labor unions, which expire between at various times up until 2026. In light of rising costs for healthcare and retirement benefits, contract negotiations in the future may be difficult. We are subject to a risk of work stoppages and other labor actions as we negotiate with the unions to address these issues, which could harm our business, financial condition, and results of operations. We cannot assure you that issues with our labor forces will be resolved favorably to us in the future or that we will not experience work stoppages.
Workforce-related risks may affect our results of operations.
We are subject to various workforce-related risks, including the risk that we will be unable to attract and retain qualified personnel for our water, wastewater, and natural gas operations, that we will be unable to effectively transfer the knowledge and expertise of an aging workforce to new personnel as those workers retire, and that we will be unable to reach collective bargaining arrangements with the unions that represent certain of our workers, which could result in work stoppages. Additionally, we rely on outside resources to supplement our workforce, including construction crews which are key to our infrastructure replacement program. We face the same risks associated with these outside resources as we do with our own workforce. As a result, we may be unable to hire or retain an adequate number of individuals who are knowledgeable about public utilities, water or the natural gas industry or face a lengthy time period associated with skill development and knowledge transfer. Failure to address these risks may result in increased operational and safety risks as well as increased costs. Even with reasonable plans in place to address succession planning and workforce training, we cannot control the future availability of qualified labor. If we are unable to successfully attract and retain an appropriately qualified workforce, it could adversely affect our financial condition and results of operations.
Significant or prolonged disruptions in the supply of important goods or services from third parties could harm our business, financial condition, and results of operations.
We are dependent on a continuing flow of important goods and services from suppliers for our businesses. A disruption or prolonged delays in obtaining important supplies or services, such as maintenance services, purchased water, chemicals, utility pipe, valves, hydrants, electricity, or other materials, could harm our utility services and our ability to operate in compliance with all regulatory requirements, which could harm our business, financial condition, and results of operations. In some circumstances, we rely on third parties to provide important services (such as customer bill print and mail activities or utility service operations in some of our divisions) and a disruption in these services could harm our business, financial condition, and results of operations. Some possible reasons for a delay or disruption in the supply of important goods and services include:
our suppliers may not provide materials that meet our specifications in sufficient quantities;
our suppliers may provide us with water that does not meet applicable quality standards or is contaminated;
our suppliers may provide us with natural gas not meeting quality standards or is of insufficient volume or pressure;
our suppliers may face production or shipping delays due to the COVID-19 pandemic, natural disasters, strikes, lock-outs, political disputes, or other such actions;
one or more suppliers could make strategic changes in the lines of products and services they offer; and
some of our suppliers, such as small companies, may be more likely to experience financial and operational difficulties than larger, well-established companies, because of their limited financial and other resources.
As a result of any of these factors, we may be required to find alternative suppliers for the materials and services on which we rely. Accordingly, we may experience delays in obtaining appropriate materials and services on a timely basis and in sufficient quantities from such alternative suppliers at a reasonable price, which could interrupt services to our customers and harm our business, financial condition, and results of operations.
We depend significantly on the services of the members of our management team, and the departure of any of those persons could cause our operating results to suffer.
Our success depends significantly on the continued individual and collective contributions of our management team. The loss of the services of any member of our management team or the inability to hire and retain experienced management personnel could harm our business, financial condition, and results of operations.
We may incur significant costs and liabilities resulting from pipeline integrity and other similar programs and related repairs.
Certain of Peoples’ pipeline operations are subject to pipeline safety laws and regulations. The Department of Transportation’s Pipeline and Hazardous Materials Safety Administration has adopted regulations requiring pipeline operators to develop integrity management programs, including more frequent inspections and other measures, for transmission pipelines located in “high consequence areas,” which are those areas where a leak or rupture could do the most harm. The regulations require pipeline operators, including Peoples, to, among other things:
perform ongoing assessments of pipeline integrity;
develop a baseline plan to prioritize the assessment of a covered pipeline segment;
identify and characterize applicable threats that could impact a high consequence area;
improve data collection, integration, and analysis;
develop processes for performance management, record keeping, management of change and communication;
repair and remediate pipelines as necessary; and
implement preventative and mitigating action.
We are required to maintain pipeline integrity testing programs that are intended to assess pipeline integrity. Peoples is also required to establish and maintain a Distribution Integrity Management Program for all distribution assets. This program requires protocols for identifying risks and threats to the distribution systems. The program incorporates a relative risk model to measure risk reduction to these threats. Any repair, remediation, preventative or mitigating actions may require significant capital and operating expenditures. Should we fail to comply with applicable statutes and related rules, regulations and orders, we could be subject to significant penalties and fines.
Our liquidity and, in certain circumstances, results of operations may be adversely affected by the cost of purchasing natural gas during periods in which natural gas prices are rising significantly.
The Peoples’ regulated companies purchase their natural gas supply primarily through a combination of requirements contracts, some of which contain minimum purchase obligations, monthly spot purchase contracts and forward purchase contracts. The price paid for natural gas acquired under forward purchase contracts is fixed prior to the delivery of the natural gas. Additionally, a portion of natural gas purchases is injected into natural gas storage facilities in the non-heating months and withdrawn from storage for delivery to customers during the heating months.
Our short-term borrowing requirements and liquidity are also significantly affected by the seasonal nature of the natural gas business. Changes in the price of natural gas due to, for example, extreme weather events, geopolitical forces, or regulatory policy changes, and the amount of natural gas needed to supply customers’ needs due to, for example, colder than expected seasonal temperatures, could significantly affect the price and amount of natural gas we are required to purchase and the timing of such purchases, and, in turn, affect our borrowing requirements and liquidity position. If we fail to secure sufficient natural gas supplies at appropriate prices (due to, for example, more extreme winter conditions), we may be required to purchase additional natural gas supplies or purchase natural gas at elevated prices, which could adversely affect our borrowing levels, liquidity and financial condition.
Peoples’ tariff rate schedules contain Purchased Gas Adjustment (PGA) clauses that permit filings for rate adjustments to recover the cost of purchased gas. Subject to regulatory approval, as described below, changes in the cost of purchased gas are flowed through to customers and may affect uncollectible amounts and cash flows and can therefore impact our financial condition and results of operations.
The state regulatory commissions approve the PGA changes on an interim basis, subject to refund and the outcome of a subsequent audit and prudence review. Due to such review process, there is a risk of a disallowance of full recovery of these costs. We are also subject to regulations and standards regarding the amount of lost and unaccounted for gas that may be recovered from customers. Any material disallowance of purchased gas costs would adversely affect our financial condition and results of operations.
Increases in the prices that we charge for gas may also adversely affect our business because increased prices could lead customers to reduce usage and cause some customers to have difficulty paying the resulting higher bills. These higher prices may increase bad debt expenses and ultimately reduce earnings. Additionally, rapid increases in the price of purchased gas may result in an increase in short-term debt.
Our non-regulated natural gas operations purchase natural gas utilizing a combination of requirements contracts, some of which contain minimum purchase obligations, monthly spot purchase contracts and forward purchase contracts. Although price risk for the non-regulated companies is mitigated to a degree by efforts aimed at balancing supply and demand, there are practical limitations on the ability to accurately predict demand and any failure to do so could adversely affect our financial condition and results of operations.
Risks Related to the Company’s Capital Needs and Common Stock
The Company has incurred significant additional indebtedness in connection with the Peoples Gas Acquisition. As a result, it may be more difficult for the Company to pay or refinance its debts or take other actions, and the Company may need to divert cash to fund debt service payments.
The Company has incurred significant additional indebtedness to finance the Peoples Gas Acquisition and to fund the debt refinancing of the Company’s outstanding existing debt (the Company Debt Refinancing). Additionally, in connection with the Peoples Gas Acquisition, the Company assumed approximately $1,106 million of Peoples’ indebtedness.
The Company’s increased indebtedness could:
make it more difficult and/or costly for the Company to pay or refinance its debts as they become due, particularly during adverse economic and industry conditions, because a decrease in revenues or increase in costs could cause cash flow from operations to be insufficient to make scheduled debt service payments;
limit the Company’s flexibility to pursue other strategic opportunities or react to changes in its business and the industry sectors in which it operates and, consequently, put the Company at a competitive disadvantage to its competitors that have less debt;
require a substantial portion of the Company’s available cash to be used for debt service payments, thereby reducing the availability of its cash to fund working capital, capital expenditures, development projects, acquisitions, dividend payments, and other general corporate purposes, which could harm the Company’s prospects for growth;
result in a downgrade in the credit ratings on the Company’s indebtedness, which could limit the Company’s ability to borrow additional funds on favorable terms or at all and increase the interest rates under its credit facilities and under any new indebtedness it may incur;
make it more difficult for the Company to raise capital to fund working capital, make capital expenditures, pay dividends, pursue strategic initiatives or for other purposes;
result in higher interest expense, which could be further increased in the event of increases in interest rates on the Company’s current or future borrowings subject to variable rates of interest; and
require that additional materially adverse terms, conditions or covenants be placed on the Company under its debt instruments, which covenants might include, for example, limitations on additional borrowings and specific restrictions on uses of its assets, as well as prohibitions or limitations on its ability to create liens, pay dividends, receive distributions from its subsidiaries, redeem or repurchase its stock or make investments, any of which could hinder its access to capital markets and limit or delay its ability to carry out its capital expenditure program or otherwise limit its flexibility in the conduct of its business and make it more vulnerable to economic downturns and adverse competitive and industry conditions.
The increased indebtedness in connection with the Peoples Gas Acquisition could cause us to place more reliance on cash flows from operations to pay principal and interest on debt and to satisfy our other obligations. Based on the current and expected results of operations and financial condition of the Company and the financing structure for the Peoples Gas Acquisition, the Company believes that its cash flows from operations, together with the proceeds from borrowings, and issuances of equity and debt securities in the capital markets will generate sufficient cash on a consolidated basis to make all of the principal and interest payments when such payments are due under the Company’s and its current subsidiaries’ existing credit facilities, indentures and other instruments governing their outstanding indebtedness, including the indebtedness we have incurred to fund the Peoples Gas Acquisition, and under the indebtedness assumed as a result of the Peoples Gas Acquisition. However, the Company’s expectation is based upon numerous estimates and assumptions and is subject to numerous uncertainties.
Our business requires significant capital expenditures that are partially dependent on our ability to secure appropriate funding. Disruptions in the capital markets may limit our access to capital. If we are unable to obtain sufficient capital, or if the cost of borrowing increases, it may harm our business, financial condition, results of operations, and our ability to pay dividends.
Our business is capital intensive. In addition to the capital required to fund customer growth through our acquisition strategy, on an annual basis, and particularly the Peoples Gas Acquisition, we invest significant sums for additions to or replacement of property, plant and equipment. We obtain funds for our capital expenditures from operations, contributions and advances by developers and others, debt issuances, and equity issuances. We have paid dividends consecutively for 77 years, and our Board of Directors recognizes the value that our common shareholders place on both our historical payment record and on our future anticipated dividend payments. Our ability to continue our growth through acquisitions and to maintain and meet our financial objectives is dependent upon the availability of adequate capital, and we may not be able to access the capital markets on favorable terms or at all. Additionally, if in the future, our credit facilities are not renewed or our short-term borrowings are called for repayment, we would need to seek alternative financing sources; however, there can be no assurance that these alternative financing sources would be available on terms acceptable to us. In the event we are unable to obtain sufficient capital, we may need to take steps to conserve cash by reducing our capital expenditures or dividend payments and our ability to pursue acquisitions may be limited. The reduction in capital expenditures may result in reduced potential earnings growth, affect our ability to meet environmental laws and regulations, and limit our ability to improve or expand our utility systems to the level we believe appropriate. There is no guarantee that we will be able to obtain sufficient capital in the future on reasonable terms and conditions for expansion, construction, and maintenance. In addition, delays in completing major capital projects could delay the recovery of the capital expenditures associated with such projects through rates.
If the cost of borrowing increases, we might not be able to recover increases in our cost of capital through rates. The inability to recover higher borrowing costs through rates, or the regulatory lag associated with the time that it takes to begin recovery, may harm our business, financial condition, results of operations and cash flows.
Our inability to comply with debt covenants under our loan and debt agreements could result in prepayment obligations.
We are obligated to comply with debt covenants under some of our loan and debt agreements. In addition, we incurred additional indebtedness in connection with the Peoples Gas Acquisition, including the assumption of certain outstanding indebtedness of Peoples, and are obligated to comply with the debt covenants under the agreements governing such indebtedness. Failure to comply with covenants under our loan and debt agreements could result in an event of default, which if not cured or waived, could result in us being required to repay or finance these borrowings before their due date, limit future borrowings, cause us to default on other obligations, and increase borrowing costs. If we are forced to repay or refinance (on less favorable terms) these borrowings, our business, financial condition, and results of operations could be harmed by reduced access to capital and increased costs and rates.
The price of our common stock may be volatile. This volatility may affect the price at which one could sell our common stock, and the sale or resale of substantial amounts of our common stock could adversely affect the market price of our common stock.
The sale or issuance of substantial amounts of our common stock, or the perception that additional sales or issuances could occur, could adversely affect the market price of our common stock, even if the business is doing well. In addition, the availability for sale of substantial amounts of our common stock could adversely impact its market price. Shares of our common stock will also be issuable upon settlement or redemption of our stock purchase contracts and the number of shares may be substantial. The settlement rates for the stock purchase contracts will be subject to certain anti-dilution adjustments that could increase, potentially significantly, the number of shares of our common stock issuable upon such settlement or redemption. Any of the foregoing may also impair our ability to raise additional capital through the sale of our equity securities.
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Item 1B | Unresolved Staff Comments |
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None
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Item 2. | Properties |
Our Regulated Water properties consist of water transmission and distribution mains and wastewater collection pipelines, water and wastewater treatment plants, pumping facilities, wells, tanks, meters, pipes, dams, reservoirs, buildings, vehicles, land, easements, rights-of-way, and other facilities and equipment used for the operation of our systems, including the collection, treatment, storage, and distribution of water and the collection and treatment of wastewater. Substantially all of our treatment, storage, and distribution properties are owned by our subsidiaries, and a substantial portion of our property is subject to liens of mortgage or indentures. These liens secure bonds, notes and other evidences of long-term indebtedness of our subsidiaries. For some properties that we acquired through the exercise of the power of eminent domain and other properties we purchased, we hold title for water supply purposes only. We own, operate and maintain approximately 14,275 miles of transmission and distribution mains, 23 surface water treatment plants, many well treatment stations, and 201 wastewater treatment plants. A small portion of the properties are leased under long-term leases.
Our Regulated Natural Gas properties consist of approximately 15,400 miles of natural gas distribution mains, varying in size from one-half inch to 36 inches in diameter, 1,700 miles of gathering pipeline, and 300 miles of intrastate transmission/storage pipeline. Further, in each of the cities, towns, and rural areas where we serve natural gas customers, we own the underground gas mains and service lines, metering, and regulating equipment located on customers’ premises and the district regulating equipment necessary for pressure maintenance. With a few exceptions, the measuring stations at which we receive gas from third parties are owned, operated, and maintained by others, and our distribution facilities begin at the outlet of the measuring equipment. These facilities, including odorizing equipment, are usually located on land owned by suppliers.
The following table indicates our net property, plant and equipment, in thousands of dollars, as of December 31, 2021 in the principal states where we operate:
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| Net Property, Plant and Equipment |
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Pennsylvania | $ | 7,318,160 |
| 71.4% |
Ohio |
| 594,535 |
| 5.8% |
Illinois |
| 564,783 |
| 5.5% |
North Carolina |
| 474,282 |
| 4.6% |
Texas |
| 509,563 |
| 4.9% |
Other (1) |
| 790,543 |
| 7.8% |
Consolidated | $ | 10,251,866 |
| 100.0% |
(1)Consists primarily of our operating subsidiaries in the following states: New Jersey, Indiana, Virginia, West Virginia, and Kentucky.
We believe that our properties are generally maintained in good condition and in accordance with current standards of good water, wastewater, and natural gas industry practice. We believe that our facilities are adequate and suitable for the conduct of our business and to meet customer requirements under normal circumstances.
Our corporate offices are leased from our subsidiary, Aqua Pennsylvania, and are located in Bryn Mawr, Pennsylvania.
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Item 3. | Legal Proceedings |
There are various legal proceedings in which we are involved. Although the results of legal proceedings cannot be predicted with certainty, there are no 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 materially harm our business, operating results, reputation, or financial condition.
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Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
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Item 5. | Market for the Registrants Common Stock, Related Stockholder Matters and Purchases of Equity Securities |
Our common stock is traded on the New York Stock Exchange under the ticker symbol WTRG. As of February 15, 2022, there were approximately 20,974 holders of record of our common stock.
The following table shows the cash dividends paid per share for the periods indicated:
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| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | |||||
2021 |
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Dividend paid per common share | $ | 0.2507 | $ | 0.2507 | $ | 0.2682 | $ | 0.2682 | $ | 1.0378 |
Dividend declared per common share |
| 0.2507 |
| 0.2507 |
| 0.2682 |
| 0.2682 |
| 1.0378 |
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2020 |
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Dividend paid per common share | $ | 0.2343 | $ | 0.2343 | $ | 0.2507 | $ | 0.2507 | $ | 0.9700 |
Dividend declared per common share |
| 0.2343 |
| 0.2343 |
| 0.2507 |
| 0.2507 |
| 0.9700 |
We have paid dividends consecutively for 77 years. On July 2, 2021, our Board of Directors authorized an increase of 7.0% in the September 1, 2021 quarterly dividend over the dividend Essential Utilities paid in the previous quarter. As a result of this authorization, beginning with the dividend payment in September 2021, the annualized dividend rate increased to $1.0728 per share. This is the 31st dividend increase in the past 30 years and the 23rd consecutive year that we have increased our dividend in excess of five percent. We presently intend to pay quarterly cash dividends in the future, on March 1, June 1, September 1, and December 1, subject to our earnings and financial condition, restrictions set forth in our debt instruments, regulatory requirements and such other factors as our Board of Directors may deem relevant. In 2021, our dividends paid represented 59.9% of net income.
Information with respect to restrictions set forth in our debt instruments is disclosed in Note 11 – Long-term Debt and Loans Payable in the Notes to Consolidated Financial Statements which is contained in Item 8 of this Annual Report.
During the fourth quarter of 2021, the Company did not repurchase any of its equity securities under any repurchase plan or program.
The following table summarizes the Company’s purchases of its common stock under its equity incentive plans for the quarter ending December 31, 2021:
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Issuer Purchases of Equity Securities | ||||||||
Period | Total Number of Shares Purchased (1) |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs | |
October 1-31, 2021 | - |
| $ | - |
| - |
| - |
November 1-30, 2021 | - |
| $ | - |
| - |
| - |
December 1-31, 2021 | 87 |
| $ | 48.94 |
| - |
| - |
Total | 87 |
| $ | 48.94 |
| - |
| - |
(1)These amounts consist of 87 shares acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of stock-based compensation under the plan. 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 closing price of our common stock on the day prior to award vesting.
3210
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations | |
OVERVIEW
The following discussion and analysis of our financial condition and results of operations for 2021 compared to 2020 should be read together with our Consolidated Financial Statements and accompanying Notes included in this Annual Report. For discussion of our results of operations and cash flows for 2020 compared with 2019, refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2020, filed with the SEC on March 1, 2021. This discussion contains forward-looking statements that are based on management’s current expectations, estimates, and projections about our business, operations, and financial performance. All dollar amounts are in thousands of dollars, except per share amounts.
The Company
Essential Utilities, Inc., (Essential Utilities, the Company, we, us, or our), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or natural gas services to an estimated five 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. These customers 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, pursuant to the Company’s growth strategy, 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. Lastly, the Company’s market-based activities are conducted through Aqua Infrastructure, LLC and Aqua Resources, Inc. and certain other non-regulated subsidiaries of Peoples. Prior to our October 30, 2020 sale of our investment in a joint venture, Aqua Infrastructure provided non-utility raw water supply services for firms in the natural gas drilling industry. Following the October 30, 2020 closing, Aqua Infrastructure does not provide any services to the natural gas drilling industry. Aqua Resources offers, through a third-party, water and sewer service line protection solutions and repair services to households. Other non-regulated subsidiaries of Peoples provide utility service line protection services to households and operate gas marketing and production businesses.
COVID-19 Pandemic
We provide a critical service to our customers, which means that it is paramount that we keep our employees who operate the business safe and informed while supporting our customers and assuring the continuity of our operations. We continue to monitor the COVID-19 pandemic and continue to take steps to mitigate the potential risks to our employees. We continue to implement strong physical and cyber security measures in an effort to ensure that our systems remain functional in order to both serve our operational needs with a hybrid workforce and maintain uninterrupted service to our customers. We continue to monitor developments affecting our business, workforce, and suppliers and take additional precautions as we believe are warranted. We are continuing with our capital investment program and continue to work with our suppliers to monitor and address the risks present in our supply chain. While we have experienced some delays in certain materials, we have been able to adjust our purchasing procedures to secure and stock the necessary materials without materially impacting our operations or capital investment program. We are actively monitoring our utility billings for changes in residential, commercial and industrial usage. In addition, we are monitoring collections of customer utility accounts as to potential impacts on cash flows, and increased expenses for costs associated with workforce-related expenses, security and cleaning of company offices and operating facilities, as well as other one-time expenses above the expense amounts included in general rates.
While the pandemic presents risks to the Companys business, as further described in Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, the Company has not experienced any material financial or operational impacts related to COVID-19. Despite our efforts, the potential for a material negative impact on the Company exists as the COVID-19 pandemic also depends on factors beyond our knowledge, control, or ability to predict, including the duration and severity of this pandemic, the emergence of new variants of the virus, the development and availability of effective treatments and vaccines, as well as third party actions taken to contain its spread and mitigate its public health effects.
Economic Regulation
Most of our utility operations are subject to regulation by their respective state utility commissions, which have broad administrative power and authority to regulate billing rates, determine franchise areas and conditions of service, approve acquisitions, and authorize the issuance of securities. The utility commissions also generally establish uniform systems of accounts and approve the terms of contracts with affiliates and customers, business combinations with other utility systems, and loans and other financings. The policies of the utility commissions often differ from state to state and may change over time. A small number of our operations are subject to rate regulation by county or city government. Over time, the regulatory party in a particular state may change. The profitability of our utility operations is influenced to a great extent by the timeliness and adequacy of rate allowances in the various states in which we operate. One consideration we may undertake in evaluating on which states to focus our growth and investment strategy is whether a state provides for consolidated rates, a surcharge for replacing and rehabilitating infrastructure, fair value treatment of acquired utility systems, and other regulatory policies that promote infrastructure investment and efficiency in processing rate cases.
Rate Case Management Capability – The mission of the regulated utility industry is to provide quality and reliable utility service at reasonable rates to customers, while earning a fair return for shareholders. We strive to achieve the industry’s mission by effective planning, efficient investments, and productive use of our resources. We maintain a rate case management capability to pursue timely and adequate returns on the capital investments that we make in improving our distribution system, treatment plants, information technology systems, and other infrastructure. This capital investment creates assets that are used and useful in providing utility service and is commonly referred to as rate base. Timely and adequate rate relief is important to our continued profitability and in providing a fair return to our shareholders; thus, providing access to capital markets to help fund these investments. In pursuing our rate case strategy, we consider the amount of net utility plant additions and replacements made since the previous rate decision, the changes in the cost of capital, changes in our capital structure, and changes in operating and other costs. Based on these assessments, our utility operations periodically file rate increase requests with their respective state utility commissions or local regulatory authorities. In general, as a regulated enterprise, our utility rates are established to provide full recovery of utility operating costs, taxes, interest on debt used to finance capital investments, and a return on equity used to finance capital investments. Our ability to recover our expenses in a timely manner and earn a return on equity employed in the business helps determine the profitability of the Company.
As of December 31, 2021, the Company’s rate base is estimated to be $8,600,000, which is comprised of:
$5,900,000 in the Regulated Water segment; and
$2,700,000 in the Regulated Natural Gas segment.
As of December 31, 2021, the regulatory status of the Company’s rate base is estimated to be as follows:
$7,200,000 filed with respective state utility commissions or local regulatory authorities; and
$1,400,000 not yet filed with respective state utility commissions or local regulatory authorities.
Our water and wastewater operations are composed of 45 rate divisions, and our natural gas operations are comprised of 4 rate divisions. Each of our utility rate divisions require a separate rate filing for the evaluation of the cost of service and recovery of investments in connection with the establishment of tariff rates for that rate division. When feasible and beneficial to our utility customers, we have sought approval from the applicable state utility commission to consolidate rate divisions to achieve a more even distribution of costs over a larger customer base. All of the eight states in which we operate water and wastewater utilities currently permit us to file a revenue requirement using some form of consolidated rates for some or all of the rate divisions in that state.
Our operating subsidiaries received rate increases representing estimated annualized revenues of $3,390 in 2021 resulting from six base rate decisions, $4,480 in 2020 resulting from five base rate decisions, and $52,974 in 2019 resulting from four base rate decisions. Revenues from these increases realized in the year of grant were $2,995 in 2021, $1,594 in 2020, and $32,287 in 2019.
Revenue Surcharges – Eight states in which we operate water and wastewater utilities, and three states in which we operate natural gas utilities permit us to add an infrastructure rehabilitation surcharge to their respective bills to offset the additional depreciation and capital costs associated with capital expenditures related to replacing and rehabilitating infrastructure systems. In our other states, utilities absorb all of the depreciation and capital costs of these projects between base rate increases without the benefit of additional revenues. The gap between the time that a capital project is completed and the recovery of its costs in rates is known as regulatory lag. This surcharge is intended to substantially reduce regulatory lag, which could act as a disincentive for utilities to rehabilitate their infrastructure. In addition, some states permit our subsidiaries to use a surcharge or credit on their bills to reflect allowable changes in costs, such as changes in state tax rates, other taxes and purchased water costs, until such time as the new costs are fully incorporated in base rates. Additional information regarding revenue surcharges is provided in Note 17 – Rate Activity in this Annual Report.
Inflation and Operating Costs – Most elements of operating costs are subject to the effects of inflation and changes in the number of customers served. Several elements are subject to the effects of changes in water or gas consumption, weather conditions, and the degree of water treatment required due to variations in the quality of the raw water. The principal elements of operating costs are purchased gas, labor and employee benefits, electricity, chemicals, transportation, maintenance expenses, insurance and claims costs, and costs to comply with environmental regulations. Electricity and chemical expenses vary in relationship to water or gas consumption, raw water quality, wastewater volumes, and price changes. Maintenance expenses are sensitive to extremely cold weather, which can cause utility mains to rupture and natural gas service lines to freeze, resulting in additional costs to repair the affected mains.
Materials and supplies, freight, and labor inflation resulted in increased costs in fiscal 2021, and we expect this trend will continue in fiscal 2022. Recovery of the effects of inflation through higher customer rates is dependent upon receiving adequate and timely rate increases. However, rate increases are not retroactive and often lag increases in costs caused by inflation. On occasion, our regulated utility companies may enter into rate settlement agreements, which require us to wait for a period of time to file the next base rate increase request. These agreements may result in regulatory lag whereby inflationary increases in expenses may not be reflected in rates, and may not yet be requested, or a gap may exist between when a capital project is completed and the start of its recovery in rates. Even during periods of moderate inflation, the effects of inflation can have a negative impact on our operating results.
Our natural gas distribution operations are also affected by the cost of natural gas. We are able to generally pass the cost of gas to our customers without markup under purchase gas cost adjustment mechanisms; therefore, increases in the cost of gas are offset by a corresponding increase in revenues. However, higher gas costs may adversely impact our accounts receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us to collect from our customers a portion of our bad debt expense. Additionally, higher gas costs may require us to increase borrowings under our credit facilities, resulting in higher interest expense. A typical residential natural gas bill includes charges for the cost of gas, delivery, and other charges. As of January 1, 2022, the annual portion of a typical Peoples Natural Gas residential bill related to gas costs is approximately 49%. In periods when we experience market increases in natural gas costs, such as in 2021, customer affordability and usage may be reduced. Customer conservation measures may occur that can reduce natural gas revenues, either temporarily or over time.
Income Tax Accounting Change - On March 31, 2020, the Company changed the method of tax accounting for certain qualifying infrastructure investments at its Peoples Natural Gas subsidiary, its largest natural gas subsidiary in Pennsylvania. This change allows a tax deduction for qualifying utility asset improvement costs that were formerly capitalized for tax purposes. Consistent with the Company’s accounting for differences between book and tax expenditures for its Aqua Pennsylvania subsidiary, the Company is utilizing the flow-through method to account for this timing difference. In addition, the Company calculated the income tax benefits for qualifying capital expenditures made prior to March 16, 2020 (catch-up adjustment) and has recorded a regulatory liability for $160,655 for these income tax benefits. In August 2020, the Company filed a petition with the Pennsylvania Public Utility Commission proposing treatment of the catch-up adjustment. On March 11, 2021, the Company and the statutory advocates filed a Joint Petition of Settlement (Settlement) representing a settlement of the parties, and, on May 6, 2021, it was approved by the Pennsylvania Public Utility Commission. The Settlement stipulates, among other points, that the catch-up adjustment be provided to utility customers over a five-year period, and the Company can continue to use flow-through accounting for the current tax repair benefit until its next base rate case. The five-year customer surcredit for the catch-up adjustment was initiated in August 2021. In addition, consistent with the Settlement, the Company contributed $500 to a customer-bill payment assistance program in July 2021 and in December 2021, provided $5,000 in customer rate credit relief for past-due accounts of natural gas customers impacted by the COVID-19 pandemic.
Growth-Through-Acquisition Strategy
Part of our strategy to meet the industry challenges is to actively explore opportunities to expand our utility operations through acquisitions of water, wastewater, and other utilities either in areas adjacent to our existing service areas or in new service areas, and to explore acquiring market-based businesses that are complementary to our regulated utility operations. To complement our growth strategy, we routinely evaluate the operating performance of our individual utility systems, and in instances where limited economic growth opportunities exist or where we are unable to achieve favorable operating results or a return on equity that we consider acceptable, we will seek to sell the utility system and reinvest the proceeds in other utility systems. Consistent with this strategy, we are focusing our acquisitions and resources in states where we have critical mass of operations in an effort to achieve economies of scale and increased efficiency. Our growth-through-acquisition strategy allows us to operate more efficiently by sharing operating expenses over more utility customers and provides new locations for future earnings growth through capital investment. Another element of our growth strategy is the consideration of opportunities to expand by acquiring other utilities, including those that may be in a new state if they provide promising economic growth opportunities and a return on equity that we consider acceptable. Our ability to successfully execute this strategy historically and to meet the industry challenges has largely been due to our core competencies, financial position, and our qualified and trained workforce, which we strive to retain by treating employees fairly and providing our employees with development and growth opportunities.
On March 16, 2020, we completed the acquisition of Peoples Natural Gas (the Peoples Gas Acquisition), which expanded the Company’s regulated utility business to include natural gas distribution, serving approximately 750,000 natural gas utility customers in western Pennsylvania, West Virginia, and Kentucky.
During 2021, we completed two acquisitions of water and wastewater systems, which along with the organic growth in our existing systems, represents 21,364 new customers. During 2020, in addition to the Peoples Gas Acquisition, we completed six acquisitions of water and wastewater systems, which along with the organic growth in our existing systems, represents 24,169 new customers. During 2019, we completed eight acquisitions, which along with the organic growth in our existing systems, represents 21,613 new customers.
The Company currently has eight signed purchase agreements for additional water and wastewater systems that are expected to serve approximately 235,000 equivalent retail customers or equivalent dwelling units and total approximately $471,000 in purchase price in three of our existing states. This includes the Company’s agreement to acquire the Delaware County Regional Water Quality Control Authority (DELCORA) for $276,500. DELCORA, a Pennsylvania sewer authority, serves approximately 198,000 equivalent dwelling units in the Philadelphia suburbs. Refer to Note 2 – Acquisitions in this Annual Report for further discussion.
As of December 31, 2021, the pipeline of potential water and wastewater municipal acquisitions the company is actively pursuing represents approximately 400,000 total customers or equivalent dwelling units. The Company remains on track to, on average, annually increase customers between 2 and 3% through acquisitions and organic customer growth.
Performance Measures Considered by Management
We consider the following financial measures (and the period to period changes in these financial measures) to be the fundamental basis by which we evaluate our operating results:
earnings per share;
operating revenues;
gross margin;
earnings before interest, taxes, and depreciation (EBITD);
income adjusted to remove transaction-related expenses associated with the Peoples Gas Acquisition;
earnings before income taxes;
net income; and
the dividend rate on common stock.
In addition, we consider other key measures in evaluating our utility business performance within our Regulated Water and Natural Gas segments:
our number of utility customers;
the ratio of operations and maintenance expense compared to operating revenues (this percentage is termed “operating expense ratio”);
return on revenues (net income divided by operating revenues);
rate base growth;
return on equity (net income divided by stockholders’ equity); and
the ratio of capital expenditures to depreciation expense.
Some of these measures, like EBITD and gross margin, are non-GAAP financial measures. The Company believes that the non-GAAP financial measures provide management the ability to measure the Company’s financial operating performance across periods and as contrasted to historical financial results, which are more indicative of the Company’s ongoing performance and more comparable to measures reported by other companies. When the Company discloses such non-GAAP financial measures, we believe they are useful to investors as a meaningful way to compare the Company’s operating performance against its historical financial results. We believe EBITD is a relevant and useful indicator of operating performance, as we measure it for management purposes because it provides a better understanding of our results of operations by highlighting our operations and the underlying profitability of our core businesses. Furthermore, we review the measure of earnings before unusual items that are not directly related to our core businesses, such as the measure of adjusted earnings to remove the Peoples Gas Acquisition expenses, such as transaction expenses and the change in fair value of interest rate swap agreements, which were recognized in 2019. Refer to Note 11 – Long-term Debt and Loans Payable in this Annual Report for information regarding the interest rate swap agreements.
We review these measurements regularly and compare them to historical periods, to our operating budget as approved by our Board of Directors, and to other publicly-traded utilities. Additionally, our Regulated Natural Gas segment is affected by the cost of natural gas, which is passed through to customers using a purchased gas adjustment mechanism and includes commodity price, transportation and storage costs. These costs are reflected in the consolidated statement of operations and comprehensive income as purchased gas expenses. Therefore, fluctuations in the cost of purchased gas impact operating revenues on dollar-for-dollar basis, but does not impact gross margin. Management uses gross margin, a non-GAAP financial measure, defined as operating revenues less purchased gas expense, to analyze the financial performance of our Regulated Natural Gas segment, as management believes gross margin provides a meaningful basis for evaluating our natural gas utility operations since purchased gas expenses are included in operating revenues and passed through to customers.
Our operating expense ratio is one measure that we use to evaluate our operating efficiency and management effectiveness of our regulated operations. Our operating expense ratio is affected by a number of factors, including the following:
Regulatory lag – Our rate filings are designed to provide for the recovery of increases in costs of operations (primarily labor and employee benefits, electricity, chemicals, transportation, maintenance expenses, insurance and claim costs, and costs to comply with environmental regulations), capital, and taxes. The revenue portion of the operating expense ratio can be impacted by the timeliness of recovery of, and the return on capital investments. The operating expense ratio is further influenced by regulatory lag (increases in operations and maintenance expenses not yet recovered in rates or a gap between the time that a capital project is completed and the start of its cost recovery in rates). The operating expense ratio is also influenced by decreases in operating revenues without a commensurate decrease in operations and maintenance expense, such as changes in customer usage as impacted by adverse weather conditions, or conservation trends. During periods of inflation, our operations and maintenance expenses may increase, impacting the operating expense ratio, as a result of regulatory lag, since our rate cases may not be filed timely and are not retroactive.
Acquisitions – In general, acquisitions of smaller undercapitalized utility systems in some areas may initially increase our operating expense ratio if the operating revenues generated by these operations do not reflect the true cost of service and are accompanied by a higher ratio of operations and maintenance expenses as compared to other operational areas of the company that are more densely populated and have integrated operations. In these cases, the acquired operations are characterized as having relatively higher operating costs to fixed capital costs, in contrast to the majority of our operations, which generally consist of larger, interconnected systems, with higher fixed capital costs (utility plant investment) and lower operating costs per customer. For larger acquisitions, such as the Peoples Gas Acquisition, we have incurred significant transaction expenses, which increase operations and maintenance expenses in periods prior to and in the period of the closing of the acquisition. In addition, we operate market-based subsidiary companies consisting of our non-regulated natural gas operations, Aqua Resources, and Aqua Infrastructure. The cost-structure of these market-based companies differs from our utility companies in that, although they may generate free cash flow, these companies may at times have a higher ratio of operations and maintenance expenses to operating revenues and a lower capital investment and, consequently, a lower ratio of fixed capital costs versus operating revenues in contrast to our regulated operations. As a result, the operating expense ratio is not comparable between the businesses. These market-based subsidiary companies are not a component of our Regulated Water or Regulated Natural Gas segments.
We continue to evaluate initiatives to help control operating costs and improve efficiencies.
Other Operational Measures Considered by Management
Sendout - Sendout represents the quantity of treated water delivered to our distribution systems. We use sendout as an indicator of customer demand. Weather conditions tend to impact water consumption, particularly during the late spring, summer, and early fall when discretionary and recreational use of water is at its highest. Consequently, a higher proportion of annual Regulated Water segment operating revenues are realized in the second and third quarters. In general, during this period, an extended period of hot and dry weather increases water consumption, while above-average rainfall and cool weather decreases water consumption. Conservation efforts, construction codes that require the use of low-flow plumbing fixtures, as well as mandated water use restrictions in response to drought conditions can reduce water consumption. We believe an increase in conservation awareness by our customers, including the increased use of more efficient plumbing fixtures and appliances, may continue to result in a long-term structural trend of declining water usage per customer. These gradual long-term changes are normally taken into account by the utility commissions in setting rates, whereas significant short-term changes in water usage, resulting from drought warnings, water use restrictions, or extreme weather conditions, may not be fully reflected in the rates we charge between rate proceedings. In Illinois, our operating subsidiary has adopted a revenue stability mechanism which allows us to recognize state PUC-authorized revenue for a period which is not based upon the volume of water sold during that period, and effectively lessens the impact of weather and consumption variability.
On occasion, drought warnings and water use restrictions are issued by governmental authorities for portions of our service territories in response to extended periods of dry weather conditions, regardless of our ability to meet unrestricted customer water demands. The timing and duration of the warnings and restrictions can have an impact on our water revenues and net income. In general, water consumption in the summer months is affected by drought warnings and restrictions to a higher degree because discretionary and recreational use of water is highest during the summer months, particularly in our northern service territories. At other times of the year, warnings and restrictions generally have less of an effect on water consumption. Portions of our northern and central Texas service areas have conservation water restrictions. Drought warnings and watches result in the public being asked to voluntarily reduce water consumption.
The geographic diversity of our utility customer base reduces the effect of our exposure to extreme or unusual weather conditions in any one area of the country. During the year ended December 31, 2021, our operating revenues for our Regulated Water segment were derived principally from the following states: approximately 55% in Pennsylvania, 12% in Ohio, 9% in Illinois, 8% in Texas, and 7% in North Carolina.
Heating Degree Days – The regulated natural gas utility business 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 the 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 for which no heating is required (65 degrees Fahrenheit). HDDs are used in the natural gas industry to measure the relative coldness of weather and to estimate the demand for natural gas. Normal temperatures are based on a historical twenty-year average heating degree days, as calculated from data provided by the National Weather Service for the same geographic location. During the year ended December 31, 2021, we experienced actual HDDs of 5,139 days, which was warmer by 6% than the average or normal HDDs for Pittsburgh, Pennsylvania, which we use as a proxy for our western Pennsylvania service territory.
RESULTS OF OPERATIONS
Consolidated financial and operational highlights for the years ended December 31, 2021, 2020 and 2019 are presented below. Our Regulated Natural Gas segment results, which represent Peoples Gas’ operating results, are included since its acquisition on March 16, 2020. The variance of the operating results in the first quarter of 2021 as compared to 2020 in the Regulated Natural Gas segment for the timing of the Peoples Gas Acquisition closing, resulted in an increase in the following income statement amounts for 2021: $304,571 of operating revenues, $42,503 of operations and maintenance expense, $110,117 of purchased gas expense, $23,022 of depreciation and amortization, $125,149 of operating income, and $105,853 of net income.
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Years ended December 31, | 2021 | 2020 | 2019 |
| 2021 vs. 2020 |
| 2020 vs. 2019 | |||||
Operating revenues: |
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Regulated water segment | $ | 980,203 | $ | 938,540 | $ | 886,430 | $ | 41,663 | $ | 52,110 | ||
Regulated gas segment |
| 859,902 |
| 506,564 |
| - |
| 353,338 |
| 506,564 | ||
Other and eliminations |
| 38,039 |
| 17,594 |
| 3,262 |
| 20,445 |
| 14,332 | ||
Consolidated operating revenues | $ | 1,878,144 | $ | 1,462,698 | $ | 889,692 | $ | 415,446 | $ | 573,006 | ||
Operations and maintenance expense | $ | 550,580 | $ | 528,611 | $ | 333,102 | $ | 21,969 | $ | 195,509 | ||
Net income (1) | $ | 431,612 | $ | 284,849 | $ | 224,543 | $ | 146,763 | $ | 60,306 | ||
Capital expenditures | $ | 1,020,519 | $ | 835,642 | $ | 550,273 | $ | 184,877 | $ | 285,369 | ||
Operating Statistics |
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Selected operating results as a percentage of operating revenues: |
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Operations and maintenance |
| 29.3% |
| 36.1% |
| 37.4% |
| -6.8% |
| -1.3% | ||
Depreciation and amortization |
| 15.9% |
| 17.6% |
| 17.6% |
| -1.7% |
| 0.0% | ||
Taxes other than income taxes |
| 4.6% |
| 5.2% |
| 6.7% |
| -0.6% |
| -1.5% | ||
Interest expense, net of interest income |
| 10.9% |
| 12.9% |
| 14.1% |
| -2.0% |
| -1.2% | ||
Net income (1) |
| 23.0% |
| 19.5% |
| 25.2% |
| 3.5% |
| -5.7% | ||
Return on Essential Utilities stockholders equity (1) |
| 8.3% |
| 6.1% |
| 5.8% |
| 2.2% |
| 0.3% | ||
Ratio of capital expenditures to depreciation expense |
| 3.5 |
| 3.3 |
| 3.5 |
| 0.2 |
| -0.2 | ||
Effective tax rate |
| (2.3%) |
| (7.5%) |
| (6.2%) |
| 5.2% |
| (1.3%) | ||
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(1)Reflects Peoples Gas Acquisition transaction-related expenses of $20,925 ($25,573 pre-tax) in 2020 and $18,246 ($22,891 pre-tax) in 2019; utility customer rate credits issued in 2020 of $23,004 (or $16,357 net of tax); a mark-to-market fair value adjustment expense for 2019 of $18,756 ($23,742 pre-tax) associated with interest rate swap agreements entered into to mitigate interest rate risk associated with issuance of long-term debt to fund a portion of the Peoples Gas Acquisition; and in 2019 a $14,637 ($18,528 pre-tax) loss on debt extinguishment associated with the early redemption of $313,500 of the Company’s long-term debt.
Consolidated Results of Operations Comparison for 2021 and 2020
Operating revenues - Operating revenues increased by $415,446 or 28.4% for the year ended December 31, 2021 compared to the year ended December 31, 2020. Revenues from our Regulated Water segment increased by $41,663, Regulated Natural Gas segment by $353,338 and other revenues by $20,445. The growth in our Regulated Water segment’s revenues is primarily a result of increases in our water and wastewater rates and our customer base. The increase in our Regulated Natural Gas Revenues is primarily due to a full year of People’s revenue in 2021 compared to nine months and sixteen days of results in 2020 and higher natural gas cost pass-through to customers. The variance in operating revenues in the first quarter of 2021 as compared to 2020, as a result of the timing of the Peoples’ acquisition, was $304,571. Refer below for further details on the changes on Regulated Water and Regulated Natural Gas segment revenues.
Our other revenues consist of market-based revenues at Aqua Resources, Aqua Infrastructure, and our non-regulated natural gas operations (post-closing) amounting to $38,435 in 2021, $17,776 in 2020, and $3,395 in 2019. The increase in other revenues in 2021 as compared to 2020 is largely due to higher purchased gas revenues from our non-regulated natural gas operations of $15,230 resulting from the timing of Peoples’ acquisition in 2020 and higher gas costs in 2021.
Operating expenses - Operations and maintenance expenses increased in 2021, as compared to 2020, by $21,969 or 4.2%, primarily due to:
increase in operations and maintenance expenses for our Regulated Natural Gas business of $42,503 representing the variance in the first quarter of 2021 versus first quarter of 2020 as a result of the timing of the Peoples Gas Acquisition in 2020;
costs related to the restoration and repair of facilities in southeastern Pennsylvania damaged by Hurricane Ida of $2,820;
increase in employee related costs of $8,624 related to pension and post-retirement benefits, medical and labor;
increase in insurance expense of $6,397 due to higher insurance claims;
an asset impairment charge of $4,695 to write down a portion of the right of use asset of our Regulated Natural Gas Segment’s office space to fair value;
increase in outside services of $9,586;
the prior year effect of net insurance proceeds of $2,874 and a reduction in expenses in 2021 of $690 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 into 2022; offset by
decrease in COVID-19 pandemic related expenses of $18,044 and decrease in charitable donations expense of $14,014; and,
the prior year effect of transaction expenses of $25,397 in the first quarter of 2020 for the Peoples Gas Acquisition, primarily representing expenses associated with investment banking fees, employee related expenses, obtaining regulatory approvals, legal expenses, and integration planning.
Purchased gas increased by $174,517 or 105.3% in 2021 compared to 2020. Purchased gas represents the cost of gas sold by Peoples for the regulated and non-regulated gas business and has a corresponding offset in revenue. This expense increased for the regulated natural gas business and non-regulated business by $159,287 and $15,230, respectively, as a result of the increase in natural gas prices and the timing of People’s acquisition.
Depreciation and amortization expense increased by $40,748 or 16.2% and $145 or 2.6%, respectively, in 2021 over 2020, principally due to the timing of the Peoples Gas Acquisition, continued capital expenditures to expand and improve our utility facilities, our acquisitions of new utility systems, and additional rate case filings. Expenses associated with filing rate cases are deferred and amortized over periods that generally range from one to three years.
Taxes other than income taxes totaled $86,641 in 2021, $76,597 in 2020, and $59,955 in 2019, and has increased by $10,044 or 13.1% in 2021 as compared to 2020 principally due to the timing of the Peoples Gas Acquisition, increase in payroll taxes of $2,736 and reclassification of regulatory fees and assessments previously recorded in Operations and maintenance expense of $3,210.
Other expense, net - Interest expense was $207,709 in 2021, $188,435 in 2020, and 125,383 in 2019. Interest expense increased in 2021 primarily due to an increase in average borrowings, and interest on debt assumed in the Peoples Gas Acquisition, offset by a decrease in average interest rates. The weighted average cost of fixed rate long-term debt was 3.61% at December 31, 2021, 3.73% at December 31, 2020, and 4.09% at December 31, 2019. The weighted average cost of fixed and variable rate long-term debt was 3.49% at December 31, 2021, 3.56% at December 31, 2020, and 4.09% at December 31, 2019.
Interest income was $2,384 in 2021, $5,363 in 2020, and $25,406 in 2019. The decrease in 2021 is primarily due to the utilization of the proceeds held from our 2019 equity and debt offerings to close the Peoples Gas Acquisition on March 16, 2020.
Allowance for funds used during construction (AFUDC) was $20,792 in 2021, $12,687 in 2020, and $16,172 in 2019, and varies as a result of changes in the average balance of utility plant construction work in progress, to which AFUDC is applied, changes in the AFUDC rate which is based predominantly on short-term interest rates, changes in the balance of short-debt, and changes in the amount of AFUDC related to equity. The increase in 2021 is primarily due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied. The amount of AFUDC related to equity was $16,282 in 2021, $8,253 in 2020, and $11,941 in 2019.
Gain on sale of other assets totaled $976 in 2021, $661 in 2020, and $923 in 2019, and consists of the sales of property, plant and equipment.
Equity loss (earnings) in joint venture was $3,374 in 2020, and $(2,210) in 2019. Our investment in the joint venture was sold in October 2020.
Other totaled $(2,848) in 2021, $(3,383) in 2020, and $5,691 in 2019, and largely consists of the non-service cost component of our net benefit cost for pension benefits. In 2021, there was a higher return on assets than costs recognized which resulted to a net benefit for the year. The net benefit in 2020 is primarily due to a recovery of a previously incurred cost that resulted in the recognition of a regulatory asset based on the Company’s recovery in a rate case.
Provision for income tax (benefit) - Our effective income tax rate was (2.3)% in 2021, (7.5)% in 2020, and (6.2)% in 2019. The Company’s provision for income taxes represents an income tax benefit due to the effects of tax deductions recognized for certain qualifying infrastructure improvements for Aqua Pennsylvania and Peoples Natural Gas. The effective income tax rate increased in 2021 due to the increase in our income before income taxes of $157,029, offset partially by the income tax benefit recognized as a result of tax deductions for qualifying infrastructure investments of Peoples Natural Gas. On March 31, 2020, we changed the method of tax accounting for certain qualifying infrastructure investments at Peoples Natural Gas, our largest natural gas subsidiary in Pennsylvania, which provided for a reduction to income tax expense of $27,822 in 2020 and $55,132 in 2021 due to the flow-through treatment of the current tax repair benefits.
Net income -
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|
| Years ended December 31, | |||||
| 2021 | 2020 | 2019 | |||
Operating income | $ | 602,709 | $ | 434,686 | $ | 340,159 |
Net income |
| 431,612 |
| 284,849 |
| 224,543 |
Diluted net income per share |
| 1.67 |
| 1.12 |
| 1.04 |
The changes in diluted net income per share in 2021 over the previous year were due to the aforementioned changes.
While the importance to the future realization of improved profitability relies on continued adequate rate increases reflecting increased operating costs and new capital improvements, other factors such as transaction expenses for acquisitions will likely cause changes in operating income, net income and diluted net income per share.
Segment Results of Operations Comparison for 2021 and 2020
We have identified twelve operating segments, and we have two reportable segments based on the following:
Eight segments are composed of our water and wastewater regulated utility operations in the eight states where we provide these services. These operating segments are aggregated into one reportable segment, Regulated Water, since each of these operating segments has the following similarities: economic characteristics, nature of services, production processes, customers, water distribution and/or wastewater collection methods, and the nature of the regulatory environment.
Our Regulated Natural Gas segment is composed of natural gas utility companies in three states acquired in the Peoples Gas Acquisition. These utilities provide natural gas distribution services, and their operating results subsequent to the March 16, 2020 acquisition date are reported in the Regulated Natural Gas segment.
Three segments are not quantitatively significant to be reportable and are composed of our non-regulated natural gas operations, Aqua Resources, and Aqua Infrastructure. These segments are included as a component of “Other,” in addition to corporate costs that have not been allocated to the Regulated Water and Regulated Natural Gas segments, because they would not be recoverable as a cost of utility service, and intersegment eliminations. Corporate costs include general and administrative expenses, and interest expense.
Regulated Water Segment
The following tables present the operating results and customers served for our Regulated Water segment, for and as of the year ended December 31,:
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|
|
|
|
| 2021 |
| 2020 |
| 2019 |
| 2021 vs. 2020 |
| 2020 vs. 2019 |
Sendout (in millions of gallons) |
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|
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|
| ||
Pennsylvania |
| 42,198 |
| 41,683 |
| 42,074 |
| 515 |
| (391) |
Ohio |
| 13,971 |
| 14,020 |
| 13,346 |
| (49) |
| 674 |
Illinois |
| 8,764 |
| 8,651 |
| 8,712 |
| 113 |
| (61) |
Texas |
| 7,212 |
| 7,393 |
| 6,937 |
| (181) |
| 456 |
North Carolina |
| 5,984 |
| 5,780 |
| 5,727 |
| 204 |
| 53 |
Other states |
| 6,191 |
| 6,299 |
| 6,113 |
| (108) |
| 186 |
Subtotal |
| 84,320 |
| 83,826 |
| 82,909 |
| 494 |
| 917 |
Elimination |
| (154) |
| (65) |
| (65) |
| (89) |
| - |
Total sendout by state |
| 84,166 |
| 83,761 |
| 82,844 |
| 405 |
| 917 |
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|
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|
|
|
|
Utility customers: |
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|
|
|
|
|
|
|
|
|
Residential water |
| 842,200 |
| 832,902 |
| 822,817 |
| 9,298 |
| 10,085 |
Commercial water |
| 42,864 |
| 42,535 |
| 41,892 |
| 329 |
| 643 |
Industrial water |
| 1,331 |
| 1,338 |
| 1,339 |
| (7) |
| (1) |
Other water |
| 17,932 |
| 18,561 |
| 18,984 |
| (629) |
| (423) |
Wastewater |
| 162,478 |
| 151,965 |
| 141,672 |
| 10,513 |
| 10,293 |
Total water and wastewater utility customers |
| 1,066,805 |
| 1,047,301 |
| 1,026,704 |
| 19,504 |
| 20,597 |
|
|
|
|
|
|
|
|
|
|
|
Operating revenues: |
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|
|
|
|
|
|
|
|
|
Residential water | $ | 561,996 | $ | 567,485 | $ | 518,192 | $ | (5,489) | $ | 49,293 |
Commercial water |
| 151,071 |
| 143,479 |
| 145,599 |
| 7,592 |
| (2,120) |
Industrial water |
| 30,230 |
| 29,764 |
| 30,667 |
| 466 |
| (903) |
Other water |
| 89,472 |
| 67,712 |
| 72,942 |
| 21,760 |
| (5,230) |
Wastewater |
| 132,316 |
| 121,117 |
| 105,204 |
| 11,199 |
| 15,913 |
Customer rate credits |
| - |
| (4,080) |
| - |
| 4,080 |
| (4,080) |
Other utility |
| 15,118 |
| 13,063 |
| 13,826 |
| 2,055 |
| (763) |
Total operating revenues |
| 980,203 |
| 938,540 |
| 886,430 |
| 41,663 |
| 52,110 |
Operating expenses: |
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|
|
|
|
|
|
|
|
|
Operations and maintenance expense |
| 332,598 |
| 309,608 |
| 315,052 |
| 22,990 |
| (5,444) |
Depreciation and amortization |
| 182,074 |
| 171,152 |
| 155,898 |
| 10,922 |
| 15,254 |
Taxes other than income taxes |
| 63,264 |
| 60,505 |
| 59,955 |
| 2,759 |
| 550 |
Operating income |
| 402,267 |
| 397,275 |
| 355,525 |
| 4,992 |
| 41,750 |
Other expense, net |
| 81,931 |
| 91,001 |
| 81,872 |
| (9,070) |
| 9,129 |
Income before income taxes |
| 320,336 |
| 306,274 |
| 273,653 |
| 14,062 |
| 32,621 |
Provision for income taxes (benefit) |
| 26,633 |
| 22,481 |
| (1,267) |
| 4,152 |
| 23,748 |
Net income | $ | 293,703 | $ | 283,793 | $ | 274,920 | $ | 9,910 | $ | 8,873 |
Operating revenues - The growth in our Regulated Water segment’s revenues over the past three years is primarily a result of increases in our water and wastewater rates and our customer base. Water and wastewater rate increases, including infrastructure rehabilitation surcharges, implemented during the past three years have provided additional operating revenues of $27,421 in 2021, $32,660 in 2020, $55,658 in 2019. The number of customers increased at an annual compound rate of 2.0% over the past three years due to acquisitions and organic growth, adjusted to exclude customers associated with utility system dispositions. Acquisitions in our Regulated Water segment have provided additional water and wastewater revenues of $6,750 in 2021, $10,951 in 2020, and $8,393 in 2019.
In 2021 and 2020, we experienced a decrease in water and wastewater revenues of $1,146 and $1,402, respectively, as a result of an advisory for some of our water utility customers served by our Illinois subsidiary, and do not expect the revenue impact to continue into 2022.
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the Company granted $4,080 of customer rate credits to its water and wastewater customers in 2020. There were no water and wastewater customer rate credits issued in 2021.
Our Regulated Water segment also includes operating revenues of $13,358 in 2021 and $8,781 in 2020, and $13,835 in 2019, associated with revenues earned primarily from fees received from telecommunication operators that have put cellular antennas on our water towers, fees earned from municipalities for our operation of their water or wastewater treatment services or to perform billing services, and fees earned from developers for accessing our water mains.
Operating expenses - Operations and maintenance expense for the year ended December 31, 2021 was $332,598 compared to $309,608 in the prior period. The increase of $22,990 or 7.4% was primarily due to the following:
costs related to the restoration and repair of facilities damaged by Hurricane Ida of $2,820;
increase in employee related costs of $10,495 related to pension and post-retirement benefits, medical and labor
increase in outside services of $5,986; and,
the prior year effect of net insurance proceeds of $2,874 and a reduction in expenses in 2021 of $690 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 into 2022; offset by
the decrease in COVID-19 pandemic related expenses of $2,366.
Depreciation and amortization increased by $10,922 or 6.4% primarily due to continued capital spend.
Taxes other than income taxes increased by $2,759 or 4.6%.
Other expense, net - Interest expense, net, increased by $6,546 or 6.4% primarily due to the increase in average borrowings.
AFUDC increased by $8,027 or 71.5% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Other expense decreased by $7,589, primarily due to the decrease in the non-service cost component of net pension and postretirement benefit cost in our Regulated Water segment. This is driven by improved investment returns as a result of favorable market experience from the prior period.
Regulated Natural Gas Segment
The following tables present the operating results and customers served for our Regulated Natural Gas segment, for the period since the acquisition date of March 16, 2020, for and as of the year ended December 31,:
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|
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|
| 2021 |
| 2020 (a) |
| 2021 vs. 2020 |
Gas utility customers: |
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|
|
|
|
|
Residential gas |
| 692,174 |
| 690,642 |
| 1,532 |
Commercial gas |
| 59,595 |
| 59,424 |
| 171 |
Industrial gas |
| 1,475 |
| 1,436 |
| 39 |
Total gas utility customers |
| 753,244 |
| 751,502 |
| 1,742 |
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|
|
|
|
|
|
Delivered volumes (thousand cubic feet) |
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|
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|
|
|
Residential gas |
| 56,542,038 |
| 33,675,963 |
| 22,866,075 |
Commercial gas |
| 33,403,899 |
| 20,082,555 |
| 13,321,344 |
Industrial gas |
| 49,726,237 |
| 37,936,661 |
| 11,789,576 |
Total delivered volumes |
| 139,672,174 |
| 91,695,179 |
| 47,976,995 |
Heating Degree Days (b) |
| 5,139 |
| 3,013 |
| 2,126 |
Average Heating Degree Days (c) |
| 5,466 |
| 2,973 |
| 2,493 |
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|
|
|
|
| 2021 |
| 2020 (a) |
| 2021 vs. 2020 |
Operating revenues: |
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|
|
|
|
|
Residential gas | $ | 530,338 | $ | 314,274 | $ | 216,064 |
Commercial gas |
| 99,596 |
| 50,239 |
| 49,357 |
Industrial gas |
| 3,427 |
| 6,923 |
| (3,496) |
Gas transportation |
| 198,195 |
| 133,685 |
| 64,510 |
Customer rate credits |
| (5,000) |
| (18,924) |
| 13,924 |
Other utility |
| 33,346 |
| 20,367 |
| 12,979 |
Total operating revenues |
| 859,902 |
| 506,564 |
| 353,338 |
Operating expenses: |
|
|
|
|
|
|
Operations and maintenance expense |
| 226,194 |
| 198,383 |
| 27,811 |
Purchased gas |
| 313,390 |
| 154,103 |
| 159,287 |
Depreciation and amortization |
| 113,238 |
| 84,201 |
| 29,037 |
Taxes other than income taxes |
| 20,801 |
| 13,307 |
| 7,494 |
Operating income |
| 186,279 |
| 56,570 |
| 129,709 |
Other expense, net |
| 78,099 |
| 25,252 |
| 52,847 |
Income before income taxes |
| 108,180 |
| 31,318 |
| 76,862 |
Income tax benefit |
| (40,013) |
| (25,133) |
| (14,880) |
Net income | $ | 148,193 | $ | 56,451 | $ | 91,742 |
(a) Includes operating results since the completion of the Peoples Gas Acquisition on March 16, 2020.
(b) Unit of measure reflecting temperature-sensitive natural gas consumption, calculated by subtracting the average of a day’s high and low temperatures from 65 degrees Fahrenheit.
(c) Based on historical twenty-year average heating degree days, as calculated from data provided by the National Weather Service for the same geographic location.
Operating revenues - Operating revenues from the Regulated Natural Gas segment increased by $353,338 or 69.8% due to:
increase of $304,571 representing variance in the first quarter of 2021 versus first quarter of 2020 as a result of the timing of the Peoples Gas Acquisition in 2020;
impact of higher gas cost of $47,548 in 2021 as compared to 2020;
higher average delivery and rider rates of $5,272;
prior year effect of customer rate credits of $18,924 granted to our natural gas customers associated with the approval of the Peoples Gas Acquisition;
and rate variance of $3,346;
offset by lower usage of $13,664 due to warmer weather in 2021 as compared to 2020; $11,124 credit to customers for tax repair catch-up; $5,000 rate credit to customers with past-due accounts receivable; and an increased refund of the tax benefit associated with the Tax Cuts and Jobs Act of $1,456.
Operating expenses - Operations and maintenance expense for the year ended December 31, 2021 increased by $27,811 or 14.0% primarily due to the following:
increase of $42,503 representing variance in the first quarter of 2021 versus first quarter of 2020 as a result of the timing of the Peoples’ acquisition in 2020;
increases in employee related costs of $1,918 and outside services expense of $3,600;
and an asset impairment charge of $4,695 to write down a portion of the right of use asset of our Regulated Natural Gas Segment’s office space to fair value;
offset by decreases in COVID-19 pandemic related expenses of $8,371 and a decrease of $14,514 in charitable donations expense.
Our Regulated Natural Gas segment is affected by the cost of natural gas, which is passed through to customers using a purchased gas adjustment clause and includes commodity price, transportation and storage costs. These costs are reflected in the consolidated statement of operations and comprehensive income as purchased gas expenses. Therefore, fluctuations in the cost of purchased gas impact operating revenues on dollar-for-dollar basis but does not impact gross margin. Purchased gas increased by $159,287 or 103.4% due to an increase in the price of natural gas in 2021 as compared to the prior year. Management uses gross margin, a non-GAAP financial measure, defined as operating revenues less purchased gas expense, to analyze the financial performance of our Regulated Natural Gas segment, as management believes gross margin provides a meaningful basis for evaluating our natural gas utility operations since purchased gas expenses are included in operating revenues and passed through to customers. The following table includes the reconciliation of gross margin (non-GAAP) to operating revenues (GAAP) for our Regulated Natural Gas segment for the period since the acquisition date of March 16, 2020:
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|
|
| Years ended December 31, | ||||
| 2021 |
| 2020 | ||
Operating revenues (GAAP) | $ | 859,902 |
| $ | 506,564 |
Purchased gas |
| 313,390 |
|
| 154,103 |
Gross margin (non-GAAP) | $ | 546,512 |
| $ | 352,461 |
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|
|
The term gross margin is not intended to represent operating revenues, the most comparable GAAP financial measure, as an indicator of operating performance. In addition, our measurement of gross margin is not necessarily comparable to similarly titled measures reported by other companies.
Depreciation and amortization increased by $29,037 or 34.5% primarily due to the timing of the Peoples Gas Acquisition and continued capital spend.
Taxes other than income taxes increased by $7,494 or 56.3% mainly due to the timing of the Peoples Gas Acquisition and higher property tax expense.
Other expense, net - Interest expense, net, increased by $46,612 or 160.6% for 2021 compared to 2020 due to additional borrowings pushed down by Parent.
AFUDC increased by $78 or 5.4% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Other expense increased by $6,313 due to the non-service cost component of our net benefit cost for pension and post-retirement benefits.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flow and Capital Expenditures
Net operating cash flows, dividends paid on common stock, capital expenditures, including allowances for funds used during construction, and expenditures for acquiring utility systems for the three years ended December 31, 2021, 2020 and 2019 were as follows:
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|
|
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|
|
| Net Operating Cash Flows | Dividends | Capital Expenditures | Acquisitions | ||||
2019 |
| 338,523 |
| 188,512 |
| 550,273 |
| 59,687 |
2020 |
| 508,024 |
| 232,571 |
| 835,642 |
| 3,501,835 |
2021 |
| 644,679 |
| 258,650 |
| 1,020,519 |
| 36,326 |
| $ | 1,491,226 | $ | 679,733 | $ | 2,406,434 | $ | 3,597,848 |
Net cash flows from operating activities increased primarily due to higher net income resulting from full year of Peoples operating results in 2021 compared to nine and a half months in 2020. Net cash flows from operating activities increased from 2019 to 2020 primarily due to the prior year effect of the 2019 payment for the settlement of the interest rate swap agreements of $83,520, and an increase in net income.
Included in capital expenditures for the three year period are: expenditures for the rehabilitation of existing utility systems, the expansion of our utility systems, modernization and replacement of existing treatment facilities, meters, office facilities, information technology, vehicles, and equipment. During this three year period, we received $33,941 of customer advances and contributions in aid of construction to finance new utility mains and related facilities that are not included in the capital expenditures presented in the above table. In addition, during this period, we have made repayments of debt, which includes the net effect of borrowings and repayments under our long-term revolving credit facility, of $2,571,586 and have refunded $22,887 of customers’ advances for construction. Dividends increased during the past three years as a result of annual increases in the dividends declared and paid and increases in the number of shares outstanding.
Our planned 2022 capital program, excluding the costs of new mains financed by advances and contributions in aid of construction is estimated to be approximately $1,000,000 in infrastructure improvements for the communities we serve. The 2022 capital program is expected to include $618,200 for infrastructure rehabilitation surcharge qualified projects. Our planned 2022 capital program in Pennsylvania for our water and natural gas utilities is estimated to be approximately $709,600, a portion of which is expected to be eligible as a deduction for qualifying utility asset improvements for Federal income tax purposes. Our overall 2022 capital program along with $132,146 of debt repayments and $428,319 of other contractual cash obligations, as reported in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations”, has been, or is expected to be, financed through internally-generated funds, our revolving credit facilities, and the issuance of long-term debt.
Future utility construction in the period 2023 through 2024, including recurring programs, such as the ongoing replacement or rehabilitation of utility meters and mains, water treatment plant upgrades, storage facility renovations, pipes, service lines, and additional transmission mains to meet customer demands, excluding the costs of new mains financed by advances and contributions in aid of construction, is estimated to require aggregate expenditures of approximately $1,940,000. We anticipate that approximately less than one-half of these expenditures will require external financing. We expect to refinance $576,580 of long-term debt during this period as it becomes due with new issues of long-term debt, internally-generated funds, and our revolving credit facilities. The estimates discussed above do not include any amounts for possible future acquisitions of utility systems or the financing necessary to support them.
Our primary sources of liquidity are cash flows from operations (including the allowed deferral of Federal income tax payments), borrowings under various short-term lines of credit and other credit facilities, and customer advances and contributions in aid of construction. Our cash flow from operations, or internally-generated funds, is impacted by the timing of rate relief, utility operating revenues, and changes in Federal tax laws, and accelerated tax depreciation or deductions for utility construction projects. We fund our capital and typical acquisitions through internally-generated funds, supplemented by short-term lines of credit. Over time, we partially repay or pay-down our short-term lines of credit with long-term debt. In 2020, we financed a portion of the Peoples Gas Acquisition purchase price, and refinanced certain debt of the Company, with a mix of common equity, equity-linked securities, and debt financing, which included senior notes issued in capital markets transactions, and credit facilities. The ability to finance our future construction programs, as well as our acquisition activities, depends on our ability to attract the necessary external debt and equity financing and maintain internally-generated funds. Timely rate orders permitting compensatory rates of return on invested capital will be required by our operating subsidiaries to achieve an adequate level of earnings and cash flow to enable them to secure the capital they will need to operate and to maintain satisfactory debt coverage ratios.
Acquisitions
As part of the Company’s growth-through-acquisition strategy, as of December 31, 2021, the Company has entered into purchase agreements to acquire the water or wastewater utility system assets of seven municipalities and a private company for a total combined purchase price in cash of $471,000. The purchase price for these pending acquisitions is subject to certain adjustments at closing, and the pending acquisitions are subject to regulatory approvals, including the final determination of the fair value of the rate base acquired. Closings for these acquisitions are expected to occur through 2023, which is subject to the timing of the various regulatory approval processes. These acquisitions are expected to add approximately 235,000 equivalent retail customers in three of the states in which the Company operates.
In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves 992 customers in Harris County, Texas, and the wastewater utility system assets of the Village of Bourbonnais, which serves approximately 6,500 customers in Kankakee County, Illinois. The total cash purchase prices for these utility systems were $4,000 and $32,100, respectively.
On March 16, 2020, the Company completed the Peoples Gas Acquisition, which expanded the Company’s regulated utility business to include natural gas distribution, serving approximately 750,000 natural gas utility customers in western Pennsylvania, West Virginia and Kentucky. The Company paid cash consideration of $3,465,344, which was subject to adjustment based upon the terms of the purchase agreement. The Company financed this acquisition through the April 2019 issuances of $1,293,750 of common stock, $900,000 of senior notes (of which $436,000 was for this acquisition), $690,000 of tangible equity units, and the issuance of $750,000 of common stock through a private placement, and borrowings on our revolving credit facility. Additionally, during 2020, we completed six acquisitions of water and wastewater utility systems for $63,279 in cash in three of the states in which we operate, adding 10,585 customers.
In December 2019, the Company acquired the wastewater utility system assets of Cheltenham Township, Pennsylvania, which serves 9,887 customers. The total cash purchase price for the utility system was $50,250. The purchase price allocation for this acquisition consisted primarily of acquired property, plant and equipment of $44,558 and goodwill of $5,692. Additionally, during 2019, we completed seven acquisitions of water and wastewater utility systems for $9,437 in cash in four of the states in which we operate, adding 2,393 customers. Refer to Note 2 – Acquisitions in this Annual Report for additional information.
Excluding the Peoples Gas Acquisition, during the past three years, we have expended cash of $159,292 related to the acquisition of both water and wastewater utility systems. We continue to pursue the acquisition of water and wastewater utility systems and explore other utility acquisitions that may be in a new state. Our typical acquisitions are expected to be financed with short-term debt with subsequent repayment from the proceeds of long-term debt, retained earnings, or equity issuances.
Dispositions
We routinely review and evaluate areas of our business and operating divisions and, over time, may sell utility systems or portions of systems. In 2019, the Company sold a water system in Virginia that served approximately 500 customers, which resulted in proceeds of $1,882, and recognized a gain on sale of $405.
In October 2020, the Company also sold its investment in a joint venture. Its investment represented its 49% investment in a joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale of north central Pennsylvania, and recorded a charge of $3,700 associated with the sale. Refer to Note 3 – Dispositions in this Annual Report for additional information.
Sources of Capital
Since net operating cash flow plus advances and contributions in aid of construction have not been sufficient to fully fund our cash requirements including capital expenditures and our growth through acquisitions program, which included financings for a portion of the Peoples Gas Acquisition, we issued $5,979,914 of long-term debt, and obtained other short-term borrowings during the past three years. At December 31, 2021, we have a $1,000,000 long-term revolving credit facility that expires in December 2023, of which $20,922 was designated for letter of credit usage, $679,078 was available for borrowing, and $300,000 of borrowings were outstanding at December 31, 2021. In addition, we have short-term lines of credit of $235,500 of which $170,500 was available as of December 31, 2021. Included in the short-term lines of credit is an Aqua Pennsylvania $100,000 364 day unsecured revolving credit facility and a Peoples Natural Gas $100,000 364 day unsecured revolving credit facility. These short-term lines of credit are subject to renewal on an annual basis. Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be.
On April 15, 2021, our operating subsidiary, Aqua Ohio, Inc., issued $100,000 of first mortgage bonds, of which $50,000 is due in 2031 and $50,000 is due in 2051, with interest rates of 2.37% and 3.35%, respectively. The proceeds from these bonds were used for general corporate purposes and to repay existing indebtedness. Further, on April 19, 2021, the Company issued $400,000 of long-term debt, with expenses of $4,010, which is due in 2031 with an interest rate of 2.40%. The Company used the proceeds from this issuance to repay $50,000 of borrowings under the Aqua Pennsylvania revolving credit facility, and the balance was used to repay in full the borrowings under its existing five-year unsecured revolving credit agreement.
In August 2020, we entered into a forward equity sale agreement for 6,700,000 shares of common stock with a third party (the “forward purchaser”). In connection with the forward equity sale agreement, the forward purchaser borrowed an equal number of shares of our common stock from stock lenders and sold the borrowed shares to the public. We did not receive any proceeds from the sale of our common stock by the forward purchaser until settlement of the forward equity sale agreement. On August 9, 2021, the Company settled the forward equity sale agreement in full by physical share settlement. The Company issued 6,700,000 shares and received cash proceeds of $299,739 at a forward price of $44.74 per share. Pursuant to the agreement, the forward price was computed based upon the initial forward price of $46.00 per share, adjusted for a floating interest rate factor equal to a specified daily rate less a spread and scheduled dividends during the term of the agreement. The Company used the proceeds received upon settlement of the forward equity sale agreement to fund general corporate purposes, including for water and wastewater acquisitions, working capital and capital expenditures. The forward equity sale agreement has now been completely settled, and there are no additional shares subject to the forward equity sale agreement.
On March 29, 2019, the Company entered into a Stock Purchase Agreement (the Stock Purchase Agreement) with Canada Pension Plan Investment Board (the Investor), pursuant to which the Company agreed to issue and sell to the Investor in a private placement (the Private Placement) 21,661,095 newly issued shares of common stock, par value $0.50 per share (the Common Stock). On March 16, 2020, in connection with the closing of the Peoples Gas Acquisition, the Company closed on the Private Placement and received gross proceeds of $749,907, less expenses of $20,606. In June 2021, the Company filed a registration statement on Form S-3 ASR registering the Private Placement shares for resale. Refer to Note 13 – Stockholders’ Equity in this Annual Report for further information.
Our consolidated balance sheet historically has had a negative working capital position, whereby routinely our current liabilities 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 common 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.
Our loan and debt agreements require us to comply with certain financial covenants, which among other things, subject to specific exceptions, limit the Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and require a minimum level of earnings coverage over interest expense. During 2021, we were in compliance with our debt covenants under our credit facilities. Failure to comply with our debt covenants could result in an event of default, which could result in us being required to repay or refinance our borrowings before their due date, possibly limiting our future borrowings, and increasing our borrowing costs.
In April 2021, the Company filed a universal shelf registration statement through a filing with the SEC to allow for the potential future offer and sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities, and other securities specified therein at indeterminate prices. In April 2019, March 2020 and August 2020, we issued common stock, including common stock in connection with a forward equity sale agreement, long-term debt and tangible equity units in several offerings under this shelf registration statement. Refer to Note 11 – Long-term Debt and Loans Payable and Note 13 – Stockholders’ Equity in this Annual Report for further information regarding these financings.
In addition, we have an acquisition shelf registration statement, which was filed with the SEC on February 27, 2015, to permit the offering from time to time of an aggregate of $500,000 of our common stock and shares of preferred stock in connection with acquisitions. During 2016, we issued 439,943 shares of common stock totaling $12,845 to acquire a water system. The balance remaining available for use under the acquisition shelf registration as of December 31, 2021 is $487,155.
We will determine the form and terms of any further securities issued under the universal shelf registration statement and the acquisition shelf registration statement at the time of issuance.
We offer a Dividend Reinvestment and Direct Stock Purchase Plan (the Plan) that provides a convenient and economical way to purchase shares of the Company. Under the direct stock purchase portion of the Plan, shares are issued throughout the year. The dividend reinvestment portion of the Plan offers a five percent discount on the purchase of shares of common stock with reinvested dividends. As of the December 2021 dividend payment, holders of 5.8% of the common shares outstanding participated in the dividend reinvestment portion of the Plan. The shares issued under the Plan are either original issue shares or shares purchased by the Company’s transfer agent in the open-market. During the past three years, we have sold 1,000,468 original issue shares of common stock for net proceeds of $42,280 through the dividend reinvestment portion of the Plan, and we used the proceeds to invest in our operating subsidiaries, to repay short-term debt, and for general corporate purposes. In 2021, 2020 and 2019, we sold 374,824, 388,978 and 236,666 original issues shares of common stock for net proceeds of $16,799, $16,522 and $8,959, respectively, through the dividend reinvestment portion of the plan. In 2019, 183,731 shares of common stock were purchased under the dividend reinvestment portion of the Plan by the Company’s transfer agent in the open-market for $7,777.
Off-Balance Sheet Financing Arrangements
We do not engage in any off-balance sheet financing arrangements. We do not have any interest in entities referred to as variable interest entities, which includes special purpose entities and other structured finance entities. For risk management purposes, the Company has used interest rate swap agreements. Refer to Note 11 – Long-term Debt and Loans Payable in this Annual Report for further information regarding these agreements.
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2021:
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| Payments Due By Period | |||||||
| Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | |||||
Long-term debt | $ | 5,947,357 | $ | 132,146 | $ | 576,580 | $ | 173,328 | $ | 5,065,303 |
Interest on fixed-rate, long-term debt (1) |
| 194,374 |
| 3,880 |
| 15,968 |
| 8,302 |
| 166,224 |
Operating leases (2) |
| 71,243 |
| 9,730 |
| 18,301 |
| 15,692 |
| 27,520 |
Unconditional purchase obligations (3) |
| 16,914 |
| 4,535 |
| 7,497 |
| 4,551 |
| 331 |
Gas purchase obligations (4) |
| 3,045,125 |
| 271,168 |
| 508,699 |
| 505,417 |
| 1,759,841 |
Other purchase obligations (5) |
| 113,299 |
| 113,299 |
| - |
| - |
| - |
Pension plan obligations (6) |
| 20,390 |
| 20,390 |
| - |
| - |
| - |
Other obligations (7) |
| 19,837 |
| 5,317 |
| 6,384 |
| 4,550 |
| 3,586 |
Total | $ | 9,428,539 | $ | 560,465 | $ | 1,133,429 | $ | 711,840 | $ | 7,022,805 |
(1)Represents interest payable on fixed rate, long-term debt. Amounts reported may differ from actual due to future refinancing of debt.
(2)Represents minimum lease payments for long-term operating leases of land, office facilities, office equipment, and vehicles.
(3)Represents our commitment to purchase minimum quantities of water as stipulated in agreements with other water purveyors. We use purchased water to supplement our water supply, particularly during periods of peak customer demand. Our actual purchases may exceed the minimum required levels.
(4)Represents our commitment to purchase minimum quantities of natural gas stipulated in agreements with various producers of natural gas to meet regulated customers’ natural gas requirements.
(5)Represents an approximation of the open purchase orders for goods and services purchased in the ordinary course of business.
(6)Represents contributions to be made to the Company’s retirement plans.
(7)Represents expenditures estimated to be required under legal and binding contractual obligations.
In addition to the contractual obligations table above, we have the following obligations:
Refunds of customer’s advances for construction - We pay refunds on customers’ advances for construction over a specific period of time based on operating revenues related to developer-installed utility mains or as new customers are connected to and take service from such mains. After all refunds are paid, any remaining balance is transferred to contributions in aid of construction. The refund amounts are not included in the above table because the refund amounts and timing are dependent upon several variables, including new customer connections, customer consumption levels and future rate increases, which cannot be accurately estimated. Portions of these refund amounts are payable annually through 2030 and amounts not paid by the contract expiration dates become non-refundable.
Asset Retirement Obligations – We recognize asset retirement obligations associated with retirements of production, storage wells and other pipeline components at fair value, as incurred, or when sufficient information becomes available to determine a reasonable estimate of the fair value of the retirement activities to be performed. Expected obligations are not included in the above table because the amounts and timing are dependent upon several variables, which cannot be accurately estimated.
Uncertain tax positions - We have uncertain tax positions of $20,201. Although we believe our tax positions comply with applicable law, we have made judgments as to the sustainability of each uncertain tax position based on its technical merits. Due to the uncertainty of future cash outflows, if any, associated with our uncertain tax positions, we are unable to make a reasonable estimate of the timing or amounts that may be paid. See Note 7 – Income Taxes in this Annual Report for further information on our uncertain tax positions.
We will fund these contractual obligations with cash flows from operations and liquidity sources held by or available to us.
The Company is routinely involved in legal matters, including both asserted and unasserted legal claims, during the ordinary course of business. See Note 9 – Commitments and Contingencies in this Annual Report for a discussion of the Company’s legal matters. It is not always possible for management to make a meaningful estimate of the potential loss or range of loss associated with such litigation. Also, unanticipated changes in circumstances and/or revisions to the assessed probability of the outcomes of legal matters could result in expenses being incurred in future periods as well as an increase in actual cash required to resolve the legal matter.
Capitalization
The following table summarizes our capitalization as of December 31, 2021 and 2020:
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December 31, | 2021 | 2020 | |||
Long-term debt (1) | 53.4% | 54.6% | |||
Essential Utilities stockholders equity | 46.6% | 45.4% | |||
| 100.0% | 100.0% | |||
(1)Includes current portion, as well as our borrowings under a variable rate revolving credit agreement of $300,000 at December 31, 2021, $385,000 at December 31, 2020.
Over the past two years, the changes in the capitalization ratios primarily resulted from the issuance of debt to finance our acquisitions and capital program, changes in net income, the issuance of common stock, and the declaration of dividends.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial condition and results of operations are impacted by the methods, assumptions, and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to our financial condition or results of operations and require estimates or other judgments of matters of uncertainty. Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the financial statements. We believe our most critical accounting policies include the use of regulatory assets and liabilities, revenue recognition, the valuation of our long-lived assets (which consist primarily of utility plant in service, regulatory assets, and goodwill), our accounting for post-retirement benefits, and our accounting for income taxes. We have discussed the selection and development of our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
Regulatory Assets and Liabilities ─ We defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the rate-making process in a period different from when the costs and credits were incurred. These deferred amounts, both assets and liabilities, are then recognized in the consolidated statement of operations in the same period that they are reflected in our rates charged for utility service. We make significant judgments and estimates to record regulatory assets and liabilities, such as for amounts related to income taxes, pension and postretirement benefits, acquisitions and capital projects. For each regulatory jurisdiction with regulated operations, we evaluate at the end of each reporting period, whether the regulatory assets and liabilities continue to meet the probable criteria for future recovery or refund. The evaluation considers factors such as regulatory orders or guidelines, in the same regulatory jurisdiction, of a specific matter or a similar matter, as provided to us in the past or to other regulated utilities. In addition, the evaluation may be impacted by changes in the regulatory environment and pending or new legislation that could impact the ability to recover costs through regulated rates. There may be multiple participants to rate or transactional regulatory proceedings who might offer different views on various aspects of such proceedings, and in these instances may challenge our prudence of business policies and practices, seek cost disallowances or request other relief.
In the event that our assessment as to the probability of the inclusion in the rate-making process is incorrect, the associated regulatory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval.
Revenue Recognition ─ Our utility revenues recognized in an accounting period include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the last billing to the end of the accounting period. The estimated usage is based on our judgment and assumptions; our actual results could differ from these estimates, which would result in operating revenues being adjusted in the period that the revision to our estimates is determined.
In Virginia, North Carolina, and Kentucky, we may bill our utility customers, in certain circumstances, in accordance with a rate filing that is pending before the respective regulatory commission, which would allow interim rates before the final commission rate order is issued. The revenue recognized reflects an estimate based on our judgment of the final outcome of the commission’s ruling. We monitor the applicable facts and circumstances regularly and revise the estimate as required. The revenue billed and collected prior to the final ruling is subject to refund based on the commission’s final ruling.
Valuation of Long-Lived Assets, Goodwill and Intangible Assets ─ We review our long-lived assets for impairment, including utility plant in service and investment in joint venture. We also review regulatory assets for the continued application of the FASB accounting guidance for regulated operations. Our review determines whether there have been changes in circumstances or events, such as regulatory disallowances, or abandonments, that have occurred that require adjustments to the carrying value of these assets. Adjustments to the carrying value of these assets would be made in instances where their inclusion in the rate-making process is unlikely. For utility plant in service, we would recognize an impairment loss for any amount disallowed by the respective utility commission.
Our long-lived assets, which consist primarily of utility plant in service, operating lease right-of-use assets and intangible assets, are reviewed for impairment when changes in circumstances or events occur. These circumstances or events could include a decline in the market value or physical condition of a long-lived asset, an adverse change in the manner in which long-lived assets are used or planned to be used, a change in historical trends, operating cash flows associated with the long-lived assets, changes in macroeconomic conditions, industry and market conditions, or overall financial performance. When these circumstances or events occur, we determine whether it is more likely than not that the fair value of those assets s less than their carrying amount. If we determine that it is more likely than not (that is, the likelihood of more than 50 percent), we would recognize an impairment charge if it is determined that the carrying amount of an asset exceeds the sum of the undiscounted estimated cash flows. In this circumstance, we would recognize an impairment charge equal to the difference between the carrying amount and the fair value of the asset. Fair value is estimated to be the present value of future net cash flows associated with the asset, discounted using a discount rate commensurate with the risk and remaining life of the asset. This assessment requires significant management judgment and estimates that are based on budgets, general strategic business plans, historical trends and other data and relevant factors. These estimates include significant inherent uncertainties, since they involve forecasting future events. If changes in circumstances or events occur, or estimates and assumptions that were used in this review are changed, we may be required to record an impairment charge on our long-lived assets. During the year ended December 31, 2021, the Company recorded an impairment loss to write down a portion of the operating lease right-of-use asset for office space not used in operations. Refer to Note 1 – Summary of Significant Accounting Policies – Impairment of Long-Lived Assets in this Annual Report for additional information regarding the review of long-lived assets for impairment.
We test the goodwill attributable for each of our reporting units for impairment at least annually on July 31, or more often, if circumstances indicate a possible impairment may exist. When testing goodwill for impairment, we may assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and entity specific events, for some or all of our reporting units to determine whether it’s more likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, based on our assessment of the qualitative factors previously noted, or at our discretion, we may perform a quantitative goodwill impairment test by determining the fair value of a reporting unit by weighting the results from the income approach and the market approach. These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of our business. If we perform a quantitative test and determine that the fair value of a reporting unit is less than its carrying amount, we would record an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The assessment requires significant management judgment and estimates that are based on budgets, general strategic business plans, historical trends and other data and relevant factors. If changes in circumstances or events occur, or estimates and assumptions that were used in our impairment test change, we may be required to record an impairment charge for goodwill. Refer to Note 1 – Summary of Significant Accounting Policies – Goodwill in this Annual Report for information regarding the results of our annual impairment test.
Accounting for Post-Retirement Benefits ─ We maintain a qualified and a non-qualified defined benefit pension plan and plans that provide for post-retirement benefits other than pensions. Accounting for pension and other post-retirement benefits requires an extensive use of assumptions including the discount rate, expected return on plan assets, the rate of future compensation increases received by our employees, mortality, turnover and medical costs. Each assumption is reviewed annually with assistance from our actuarial consultant, who provides guidance in establishing the assumptions. The assumptions are selected to represent the average expected experience over time and may differ in any one year from actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of pension and other post-retirement benefits expense that we recognize.
Our discount rate assumption, which is used to calculate the present value of the projected benefit payments of our post-retirement benefits, was determined by selecting a hypothetical portfolio of high quality corporate bonds appropriate to match the projected benefit payments of the plans. The selected bond portfolio was derived from a universe of Aa-graded corporate bonds. The discount rate was then developed as the rate that equates the market value of the bonds purchased to the discounted value of the projected benefit payments of the plans. A decrease in the discount rate would generally increase our post-retirement benefits expense and benefit obligation. After reviewing the hypothetical portfolio of bonds, we selected a discount rate of 2.91% for our pension plan, and 2.96% for our other post-retirement benefit plans as of December 31, 2021, which represent a 34 and 28 basis-point increase as compared to the discount rates selected at December 31, 2020, respectively. Our post-retirement benefits expense under these plans is determined using the discount rate as of the beginning of the year, which was 2.57% for our pension plan and 2.68% for our other-postretirement benefit plan for 2021, and will be 2.91% for our pension plan, and 2.96% for our other post-retirement benefit plans for 2022.
Our expected return on plan assets is determined by evaluating the asset class return expectations with our advisors as well as actual, long-term, historical results of our asset returns. The Company’s market-related value of plan assets is equal to the fair value of the plans’ assets as of the last day of its fiscal year and is a determinant for the expected return on plan assets, which is a component of post-retirement benefits expense. The allocation of our plans’ assets impacts our expected return on plan assets. The expected return on plan assets is based on a targeted allocation of 50% to 70% return seeking assets and 30% to 50% liability hedging assets. Our post-retirement benefits expense increases as the expected return on plan assets decreases. We believe that our actual long-term asset allocations on average will approximate our targeted allocations. Our targeted allocations are driven by our investment strategy to earn a reasonable rate of return while maintaining risk at acceptable levels through the diversification of investments across and within various asset categories. For 2021, we used a 5.6% expected return on plan assets assumption, and are currently reviewing this assumption for 2022 and expect it may decrease slightly in 2022.
Funding requirements for qualified defined benefit pension plans are determined by government regulations and not by accounting pronouncements. In accordance with funding rules and our funding policy, during 2022 our pension contribution is expected to be $20,390. Future years’ contributions will be subject to economic conditions, plan participant data and the funding rules in effect at such time as the funding calculations are performed, though we expect future changes in the amount of contributions and expense recognized to be generally included in customer rates.
Accounting for Income Taxes ─ We estimate the amount of income tax payable or refundable for the current year and the deferred income tax liabilities and assets that results from estimating temporary differences resulting from the treatment of specific items, such as depreciation, for tax and financial statement reporting. Generally, these differences result in the recognition of a deferred tax asset or liability on our consolidated balance sheet and require us to make judgments regarding the probability of the ultimate tax impact of the various transactions we enter into. Based on these judgments, we may record tax reserves or adjustments to valuation allowances on deferred tax assets to reflect the expected realization of future tax benefits. Actual income taxes could vary from these estimates and changes in these estimates can increase income tax expense in the period that these changes in estimates occur.
Our determination of what qualifies as a capital cost versus a tax deduction, for qualifying utility asset improvements, as it relates to our income tax accounting method, is subject to subsequent adjustment as well as IRS audits, changes in income tax laws, including regulations regarding tax-basis depreciation as it applies to our capital expenditures, or qualifying utility asset improvements, the expiration of a statute of limitations, or other unforeseen matters could impact the tax benefits that have already been recognized. We establish reserves for uncertain tax positions based upon management’s judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. We believe our tax positions comply with applicable law and that we have adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than our estimates recorded, we would then need to adjust our tax reserves which could result in additional income tax expense or benefits in the period that this information is known.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
We describe the impact of recent accounting pronouncements in Note 1 – Summary of Significant Accounting Policies in this Annual Report.
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We are subject to market risks in the normal course of business, including changes in interest rates, gas commodity prices and equity prices. Volatile equity market conditions arising from the COVID-19 pandemic may result in our pension and other post-retirement plans’ assets market values suffering a decline, which could increase our required cash contributions to the plans and expense in subsequent years. The exposure to changes in interest rates is a result of financings through the issuance of fixed rate long-term debt. Such exposure is typically related to financings between utility rate increases, since generally our rate increases include a revenue level to allow recovery of our current cost of capital. Interest rate risk is managed through the use of a combination of long-term debt, which is at fixed interest rates; short-term debt, which is at floating interest rates; and at times in the past interest rate swap agreements. As of December 31, 2021, the debt maturities by period, in thousands of dollars, and the weighted average interest rate for long-term debt are as follows:
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| 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | Fair Value | ||||||||
Long-term debt: |
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Fixed rate | $ | 132,146 | $ | 207,262 | $ | 69,318 | $ | 151,848 | $ | 21,480 |
| 5,065,303 | $ | 5,647,357 | $ | 6,182,499 |
Variable rate |
| - |
| 300,000 |
| - |
| - |
| - |
| - |
| 300,000 |
| 300,000 |
Total | $ | 132,146 | $ | 507,262 | $ | 69,318 | $ | 151,848 | $ | 21,480 | $ | 5,065,303 | $ | 5,947,357 | $ | 6,482,499 |
Weighted average interest rate |
| 3.03% |
| 2.45% |
| 4.05% |
| 5.05% |
| 7.38% |
| 3.36% |
| 3.49% |
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From time to time, we make investments in marketable equity securities. As a result, we are exposed to the risk of changes in equity prices for the marketable equity securities. As of December 31, 2021, we have assets of, in thousands of dollars, $28,576 to fund our deferred compensation and non-qualified pension plan liabilities. The market risk of the deferred compensation plan assets are borne by the participants in the deferred compensation plan.
In October 2018, the Company entered into interest rate swap agreements to mitigate interest rate risk associated with our debt issuances to fund a portion of the Peoples Gas Acquisition. The interest rate swaps were settled in April 2019 upon issuance of the debt used to finance a portion of the purchase price of this acquisition. The interest rate swap agreements did not qualify for hedge accounting and any changes in the fair value of the swaps was included in our earnings. The interest rate swap agreements were classified as financial derivatives used for non-trading activities.
Our natural gas commodity price risk, driven mainly by price fluctuations of natural gas, is mitigated by our purchased-gas cost adjustment mechanisms. We also use derivative instruments to economically hedge the cost of anticipated natural gas purchases during the winter heating months that seeks to offset the risk to our customers from upward market price volatility. These instruments include requirements contracts and spot purchase contracts to meet our regulated customers’ natural gas requirements and these instruments may have fixed or variable pricing. The variable price contracts qualify as derivative instruments; however, because the contract price is the prevailing price at the future transaction date the contract has no determinable fair value. The fixed price contracts and firm commitments to purchase a fixed quantity of gas in the future qualify for the normal purchases and normal sales exception that is allowed for contracts that are probable of delivery in the normal course of business and, as such, are accounted for under the accrual basis and not recorded at fair value in the Company’s consolidated financial statements. We also manage gas commodity price risk and supply risk by injecting natural gas into storage during the summer months and withdrawing the natural gas during the winter heating season.
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Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Essential Utilities, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets, including the consolidated statements of capitalization, of Essential Utilities, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive income, of equity, and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes and schedule of condensed parent company financial statements as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021 appearing after the signature pages (collectively referred to as the “consolidated financial statements”). We also have audited the Companys internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Companys management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Companys internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for Rate Regulation
As described in Notes 1 and 6 to the consolidated financial statements, most of the operating companies of the Company that are regulated public utilities are subject to regulation by the utility commissions of the states in which they operate. Some of the operating companies that are regulated public utilities are subject to rate regulation by county or city government. As of December 31, 2021, regulatory assets were $1.4 billion and regulatory liabilities were $0.8 billion. Regulated public utilities follow the Financial Accounting Standards Board’s accounting guidance for regulated operations, which provides for the recognition of regulatory assets and liabilities as allowed by regulators for costs or credits that are reflected in current rates or are considered probable of being included in future rates. The regulatory assets represent costs that are probable to be fully recovered from customers in future rates while regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or amounts recovered from customers in advance of incurring the costs. The regulatory assets or liabilities are then relieved as the cost or credit is reflected in the Company’s rates charged for utility service. If, as a result of a change in circumstances, it is determined that a regulated operating company no longer meets the criteria to apply regulatory accounting, the operating company would have to discontinue regulatory accounting and write-off the respective regulatory assets and liabilities. Management makes significant judgments and estimates to record regulatory assets and liabilities. For each regulatory jurisdiction with regulated operations, management evaluates at the end of each reporting period, whether the regulatory assets and liabilities continue to meet the probable criteria for future recovery or refund. The evaluation considers factors such as regulatory orders or guidelines, in the same regulatory jurisdiction, of a specific matter or a similar matter, as provided to the Company in the past or to other regulated utilities. In addition, the evaluation may be impacted by changes in the regulatory environment and pending or new legislation that could impact the ability to recover costs through regulated rates. There may be multiple participants to rate or transactional regulatory proceedings who might offer different views on various aspects of such proceedings, and in these instances, may challenge the prudence of business policies and practices, seek cost disallowances or request other relief.
The principal considerations for our determination that performing procedures relating to management’s accounting for rate regulation is a critical audit matter are the significant judgment by management when assessing the impact of regulation on the accounting for regulatory assets and liabilities, which in turn led to a high degree of auditor judgment and effort in performing procedures and in evaluating audit evidence related to whether the regulatory assets will be recovered and liabilities will be refunded.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s evaluation of regulatory matters impacting regulatory assets and liabilities, including controls over the recovery of regulatory assets and the refund of regulatory liabilities. These procedures also included, among others (i) obtaining the Company’s correspondence with regulators and assessing the reasonableness of management’s judgments regarding the recovery of regulatory assets and refund of regulatory liabilities, (ii) assessing the reasonableness of management’s accounting judgments related to new and updated regulatory orders and guidelines, and (iii) testing the calculation of regulatory assets and liabilities based on provisions outlined in regulatory correspondence.
/s/
March 1, 2022
We have served as the Company’s auditor since 2000.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
|
|
|
|
|
| December 31, | |||
|
| 2021 |
| 2020 |
Assets |
|
|
|
|
Property, plant and equipment, at cost | $ | | $ | |
Less: accumulated depreciation |
| |
| |
Net property, plant and equipment |
| |
| |
|
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
| |
| |
Accounts receivable, net |
| |
| |
Unbilled revenues |
| |
| |
Inventory - materials and supplies |
| |
| |
Inventory - gas stored |
| |
| |
Prepayments and other current assets |
| |
| |
Regulatory assets |
| |
| |
Total current assets |
| |
| |
|
|
|
|
|
Regulatory assets |
| |
| |
Deferred charges and other assets, net |
| |
| |
Funds restricted for construction activity |
| |
| |
Goodwill |
| |
| |
Operating lease right-of-use assets |
| |
| |
Intangible assets |
| |
| |
Total assets | $ | | $ | |
|
|
|
|
|
See accompanying notes to consolidated financial statements. | ||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands of dollars, except per share amounts)
|
|
|
|
|
| December 31, | |||
|
| 2021 |
| 2020 |
Liabilities and Equity |
|
|
|
|
Essential Utilities stockholders equity: |
|
|
|
|
Common stock at $ | $ | | $ | |
Capital in excess of par value |
| |
| |
Retained earnings |
| |
| |
Treasury stock, at cost, |
| ( |
| ( |
Total stockholders equity |
| |
| |
|
|
|
|
|
Long-term debt, excluding current portion |
| |
| |
Less: debt issuance costs |
| |
| |
Long-term debt, excluding current portion, net of debt issuance costs |
| |
| |
Commitments and contingencies (See Note 9) |
|
| ||
|
|
|
|
|
Current liabilities: |
|
|
|
|
Current portion of long-term debt |
| |
| |
Loans payable |
| |
| |
Accounts payable |
| |
| |
Book overdraft |
| |
| |
Accrued interest |
| |
| |
Accrued taxes |
| |
| |
Regulatory liabilities |
| |
| |
Other accrued liabilities |
| |
| |
Total current liabilities |
| |
| |
|
|
|
|
|
Deferred credits and other liabilities: |
|
|
|
|
Deferred income taxes and investment tax credits |
| |
| |
Customers advances for construction |
| |
| |
Regulatory liabilities |
| |
| |
Asset retirement obligations |
| |
| |
Operating lease liabilities |
| |
| |
Pension and other postretirement benefit liabilities |
| |
| |
Other |
| |
| |
Total deferred credits and other liabilities |
| |
| |
|
|
|
|
|
Contributions in aid of construction |
| |
| |
Total liabilities and equity | $ | | $ | |
|
|
|
|
|
See accompanying notes to consolidated financial statements. | ||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
|
|
|
|
|
|
|
| Years ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Operating revenues | $ | | $ | | $ | |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Operations and maintenance |
| |
| |
| |
Purchased gas |
| |
| |
| - |
Depreciation |
| |
| |
| |
Amortization |
| |
| |
| ( |
Taxes other than income taxes |
| |
| |
| |
Total operating expenses |
| |
| |
| |
|
|
|
|
|
|
|
Operating income |
| |
| |
| |
Other expense (income): |
|
|
|
|
|
|
Interest expense |
| |
| |
| |
Interest income |
| ( |
| ( |
| ( |
Allowance for funds used during construction |
| ( |
| ( |
| ( |
Change in fair value of interest rate swap agreements |
| - |
| - |
| |
Loss on debt extinguishment |
| - |
| - |
| |
Gain on sale of other assets |
| ( |
| ( |
| ( |
Equity loss (earnings) in joint venture |
| - |
| |
| ( |
Other |
| ( |
| ( |
| |
Income before income taxes |
| |
| |
| |
Provision for income tax benefit |
| ( |
| ( |
| ( |
Net income | $ | | $ | | $ | |
|
|
|
|
|
|
|
Comprehensive income | $ | | $ | | $ | |
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
Basic | $ | | $ | | $ | |
Diluted | $ | | $ | | $ | |
|
|
|
|
|
|
|
Average common shares outstanding during the period: |
|
|
|
|
|
|
Basic |
| |
| |
| |
Diluted |
| |
| |
| |
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. | ||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
|
|
|
|
|
|
|
| December 31, | |||
|
|
| 2021 |
| 2020 |
Essential Utilities stockholders equity: |
|
|
|
| |
Common stock, $ | $ | | $ | | |
Capital in excess of par value |
| |
| | |
Retained earnings |
| |
| | |
Treasury stock, at cost |
| ( |
| ( | |
Total stockholders equity |
| |
| | |
|
|
|
|
|
|
Long-term debt of subsidiaries (substantially collateralized by utility plant): |
|
|
|
| |
Interest Rate Range | Maturity Date Range |
|
|
|
|
| |
| | ||
| |
| | ||
| |
| | ||
| |
| | ||
| |
| | ||
| |
| | ||
| |
| | ||
| |
| | ||
| |
| | ||
| |
| | ||
|
|
| |
| |
|
|
|
|
|
|
Notes payable to bank under revolving credit agreement, variable rate, due |
| |
| | |
Unsecured notes payable: |
|
|
|
| |
Amortizing notes at |
|
| |
| |
Notes at 2.40% due 2031 |
|
| |
| - |
Notes at |
|
| |
| |
Notes ranging from |
| |
| | |
Notes at |
| |
| | |
Notes ranging from |
| |
| | |
Total long-term debt |
|
| |
| |
|
|
|
|
|
|
Current portion of long-term debt |
| |
| | |
Long-term debt, excluding current portion |
| |
| | |
Less: debt issuance costs |
|
| |
| |
Long-term debt, excluding current portion, net of debt issuance costs |
| |
| | |
|
|
|
|
|
|
Total capitalization | $ | | $ | | |
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. | |||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock |
| Capital in excess of par value |
| Retained earnings |
| Treasury stock |
|
| Total |
Balance at December 31, 2018 | $ | | $ | | $ | | $ | ( | $ |
| |
Net income |
| - |
| - |
| |
| - |
|
| |
Dividends declared ($ |
| - |
| - |
| ( |
| - |
|
| ( |
Stock issued to finance acquisition ( |
| |
| |
| - |
| - |
|
| |
Proceeds from stock purchase contracts issued under tangible equity units |
| - |
| |
| - |
| - |
|
| |
Issuance of common stock from stock purchase contracts ( |
| |
| ( |
| - |
| - |
|
| - |
Issuance of common stock under dividend reinvestment plan ( |
| |
| |
| - |
| - |
|
| |
Repurchase of stock ( |
| - |
| - |
| - |
| ( |
|
| ( |
Equity compensation plan ( |
| |
| ( |
| - |
| - |
|
| - |
Exercise of stock options ( |
| |
| |
| - |
| - |
|
| |
Stock-based compensation |
| - |
| |
| ( |
| - |
|
| |
Other |
| - |
| ( |
| - |
| - |
|
| ( |
Balance at December 31, 2019 |
| |
| |
| |
| ( |
|
| |
Net income |
| - |
| - |
| |
| - |
|
| |
Dividends declared ($ |
| - |
| - |
| ( |
| - |
|
| ( |
Issuance of common stock from private placement ( |
| |
| |
| - |
| - |
|
| |
Issuance of common stock from stock purchase contracts ( |
| |
| ( |
| - |
| - |
|
| - |
Issuance of common stock under dividend reinvestment plan ( |
| |
| |
| - |
| - |
|
| |
Repurchase of stock ( |
| - |
| - |
| - |
| ( |
|
| ( |
Equity compensation plan ( |
| |
| ( |
| - |
| - |
|
| - |
Exercise of stock options ( |
| |
| |
| - |
| - |
|
| |
Stock-based compensation |
| - |
| |
| ( |
| - |
|
| |
Other |
| - |
| ( |
| - |
| |
|
| ( |
Balance at December 31, 2020 |
| |
| |
| |
| ( |
|
| |
Net income |
| - |
| - |
| |
| - |
|
| |
Dividends declared ($ |
| - |
| - |
| ( |
| - |
|
| ( |
Issuance of common stock from stock purchase contracts ( |
| |
| ( |
| - |
| - |
|
| - |
Issuance of common stock under dividend reinvestment plan ( |
| |
| |
| - |
| - |
|
| |
Issuance of common stock from forward equity sale agreement ( |
| |
| |
| - |
| - |
|
| |
Repurchase of stock ( |
| - |
| - |
| - |
| ( |
|
| ( |
Equity compensation plan ( |
| |
| ( |
| - |
| - |
|
| - |
Exercise of stock options ( |
| |
| |
| - |
| - |
|
| |
Stock-based compensation |
| - |
| |
| ( |
| - |
|
| |
Other |
| - |
| ( |
| - |
| |
|
| |
Balance at December 31, 2021 | $ | | $ | | $ | | $ | ( | $ |
| |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. | |||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars, except per share amounts)
|
|
|
|
|
|
|
| Years ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Cash flows from operating activities: |
|
|
|
|
|
|
Net income | $ | | $ | | $ | |
Adjustments to reconcile net income to net cash flows from operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
| |
| |
| |
Deferred income taxes |
| ( |
| ( |
| ( |
Provision for doubtful accounts |
| |
| |
| |
Stock-based compensation |
| |
| |
| |
Gain on sale of utility system and other assets |
| ( |
| ( |
| ( |
Loss on interest rate swap agreements |
| - |
| - |
| |
Loss on debt extinguishment |
| - |
| - |
| |
Settlement of interest rate swap agreements |
| - |
| - |
| ( |
Net change in receivables, inventory, deferred purchased gas costs and prepayments |
| ( |
| ( |
| ( |
Net change in payables, accrued interest, accrued taxes and other accrued liabilities |
| |
| ( |
| |
Pension and other postretirement benefits contributions |
| ( |
| ( |
| ( |
Other |
| |
| |
| |
Net cash flows from operating activities |
| |
| |
| |
Cash flows from investing activities: |
|
|
|
|
|
|
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $ |
| ( |
| ( |
| ( |
Acquisitions of utility systems and other, net |
| ( |
| ( |
| ( |
Net proceeds from the sale of utility systems and other assets |
| |
| |
| |
Other |
| ( |
| |
| |
Net cash flows used in investing activities |
| ( |
| ( |
| ( |
Cash flows from financing activities: |
|
|
|
|
|
|
Customers advances and contributions in aid of construction |
| |
| |
| |
Repayments of customers advances |
| ( |
| ( |
| ( |
Net proceeds (repayments) of short-term debt |
| ( |
| ( |
| |
Proceeds from long-term debt |
| |
| |
| |
Repayments of long-term debt |
| ( |
| ( |
| ( |
Extinguishment of long-term debt |
| - |
| - |
| ( |
Change in cash overdraft position |
| |
| |
| |
Proceeds from issuance of common stock under dividend reinvestment plan |
| |
| |
| |
Proceeds from issuance of common stock from private placement |
| - |
| |
| |
Proceeds from issuance of common stock from forward equity sale agreement |
| |
| - |
| - |
Proceeds from tangible equity unit issuance |
| - |
| - |
| |
Proceeds from exercised stock options |
| |
| |
| |
Repurchase of common stock |
| ( |
| ( |
| ( |
Dividends paid on common stock |
| ( |
| ( |
| ( |
Other |
| |
| ( |
| ( |
Net cash flows from financing activities |
| |
| |
| |
Net increase (decrease) in cash and cash equivalents |
| |
| ( |
| |
Cash and cash equivalents at beginning of year |
| |
| |
| |
Cash and cash equivalents at end of year | $ | | $ | | $ | |
Cash paid during the year for: |
|
|
|
|
|
|
Interest, net of amounts capitalized | $ | | $ | | $ | |
Income taxes |
| |
| |
| |
Non-cash investing activities: |
|
|
|
|
|
|
Property, plant and equipment additions purchased at the period end, but not yet paid | $ | | $ | | $ | |
Non-cash utility property contributions |
| |
| |
| |
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
|
Refer to Note 2 – Acquisitions, Note 11 – Long-term Debt and Loans Payable, and Note 15 – Employee Stock and Incentive Plan for a description of non-cash activities.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Utility expenditures for maintenance and repairs, including major maintenance projects and minor renewals, are charged to operating expenses when incurred in accordance with the system of accounts prescribed by the utility commissions of the states in which the company operates. The cost of new units of property and betterments are capitalized. Utility expenditures for water main cleaning and relining of pipes are deferred and are presented in net property, plant and equipment in accordance with the FASB’s accounting guidance for regulated operations. As of December 31, 2021, $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The cost of software upgrades and enhancements are capitalized if they result in added functionality, which enables the software to perform tasks it was previously incapable of performing. Information technology costs associated with major system installations, conversions and improvements, such as software training, data conversion and business process reengineering costs, are deferred as a regulatory asset if the Company expects to recover these costs in future rates. If these costs are not deferred, then these costs are charged to operating expenses when incurred. As of December 31, 2021, $
When units of utility property are replaced, retired or abandoned, the recorded value thereof is credited to the asset account and such value, together with the net cost of removal, is charged to accumulated depreciation. To the extent the Company anticipates recovery of the cost of removal or other retirement costs through rates after the retirement costs are incurred, a regulatory asset is recorded as those costs are incurred. In some cases, the Company recovers retirement costs through rates during the life of the associated asset and before the costs are incurred. These amounts, which are not yet utilized, result in a regulatory liability being reported based on the amounts previously recovered through customer rates.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Generally, payment is due within 30 days once a bill is issued to a customer. Sales tax and other taxes we collect on behalf of government authorities, concurrent with our revenue-producing activities, are primarily excluded from revenue.
The following table presents our revenues disaggregated by major source and customer class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 | Water Revenues | Wastewater Revenues |
| Natural Gas Revenues | Other Revenues | |||
Revenues from contracts with customers: |
|
|
|
|
|
|
|
|
Residential | $ | | $ | | $ | | $ | - |
Commercial |
| |
| |
| |
| - |
Fire protection |
| |
| - |
| - |
| - |
Industrial |
| |
| |
| |
| - |
Gas transportation |
| - |
| - |
| |
| - |
Other water |
| |
| - |
| - |
| - |
Other wastewater |
| - |
| |
| - |
| - |
Customer rate credits |
| - |
| - |
| ( |
| - |
Other utility |
| - |
| - |
| |
| |
Revenues from contracts with customers |
| |
| |
| |
| |
Alternative revenue program |
| |
| ( |
| |
| - |
Other and eliminations |
| - |
| - |
| - |
| |
Consolidated | $ | | $ | | $ | | $ | |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
2020 | Water Revenues | Wastewater Revenues |
| Natural Gas Revenues | Other Revenues | |||
Revenues from contracts with customers: |
|
|
|
|
|
|
|
|
Residential | $ | | $ | | $ | | $ | - |
Commercial |
| |
| |
| |
| - |
Fire protection |
| |
| - |
| - |
| - |
Industrial |
| |
| |
| |
| - |
Gas transportation |
| - |
| - |
| |
| - |
Other water |
| |
| - |
| - |
| - |
Other wastewater |
| - |
| |
| - |
| - |
Customer rate credits |
| ( |
| ( |
| ( |
| - |
Other utility |
| - |
| - |
| |
| |
Revenues from contracts with customers |
| |
| |
| |
| |
Alternative revenue program |
| |
| |
| |
| - |
Other and eliminations |
| - |
| - |
| - |
| |
Consolidated | $ | | $ | | $ | | $ | |
|
|
|
|
|
|
|
2019 | Water Revenues | Wastewater Revenues | Other Revenues | |||
Revenues from contracts with customers: |
|
|
|
|
|
|
Residential | $ | | $ | | $ | - |
Commercial |
| |
| |
| - |
Fire protection |
| |
| - |
| - |
Industrial |
| |
| |
| - |
Other water |
| |
| - |
| - |
Other wastewater |
| - |
| |
| - |
Other utility |
| - |
| - |
| |
Revenues from contracts with customers |
| |
| |
| |
Alternative revenue program |
| |
| ( |
| - |
Other and eliminations |
| - |
| - |
| |
Consolidated | $ | | $ | | $ | |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Tariff Revenues – These revenues are categorized by customer class: residential, commercial, fire protection, industrial, gas transportation, other water, and other wastewater. The rates that generate these revenues are approved by the respective state utility commission, and revenues are billed cyclically and accrued for when unbilled. The regulated natural gas rates are set and adjusted for increases or decreases in our purchased gas costs through purchased gas adjustment mechanisms. Purchased gas adjustment mechanisms provide us with a means to recover purchased gas costs on an ongoing basis without filing a rate case. Other water and other wastewater revenues consists primarily of fines, penalties, surcharges, and availability lot fees. Our performance obligation for tariff revenues is to provide potable water, wastewater treatment service, or delivery and sale of natural gas to customers. This performance obligation is satisfied over time as the services are rendered. The amounts that the Company has a right to invoice for tariff revenues reflect the right to consideration from the customers in an amount that corresponds directly with the value transferred to the customer for the performance completed to date.
Other Utility Revenues – Other utility revenues represent revenues earned primarily from: antenna revenues, which represents fees received from telecommunication operators that have put cellular antennas on our water towers; operation and maintenance and billing contracts, which represent fees earned from municipalities for our operation of their water or wastewater treatment services or performing billing services; and fees earned from developers for accessing our water mains, miscellaneous service revenue from gas distribution operations, gas processing and handling revenue, sales of natural gas at market-based rates and contracted fixed prices, sales of gas purchased from third parties, and other gas marketing activities. The performance obligations vary for these revenues, but all are primarily recognized over time as the service is delivered.
Alternative Revenue Program:
oWater / Wastewater Revenues – These revenues represent the difference between the actual billed utility volumetric water and wastewater revenues for Aqua Illinois and the revenues set in the last Aqua Illinois rate case. In accordance with the Illinois Commerce Commission, we recognize revenues based on the target amount established in the last rate case, and then record either a regulatory asset or liability based on the cumulative annual difference between the target and actual amounts billed, which results in either a payment from customers or a refund due to customers. The cumulative annual difference is either refunded to customers or collected from customers over a nine-month period.
oNatural Gas Revenues – These revenues represent the weather-normalization adjustment (“WNA”) mechanism in place for our natural gas customers served in Kentucky. The WNA serves to minimize the effects of weather on the Company’s results for its residential and small commercial natural gas customers. This regulatory mechanism adjusts revenues earned for the variance between actual and normal weather and can have either positive (warmer than normal) or negative (colder than normal) effects on revenues. Customer bills are adjusted in the December through April billing months, with rates adjusted for the difference between actual revenues and revenues calculated under this mechanism billed to the customers.
These revenue programs represent a contract between the utility and its regulators, not customers, and therefore are not within the scope of the FASB’s accounting guidance for recognizing revenue from contracts with customers.
Other and Eliminations – Other and eliminations consist of our market-based revenues, which comprises: our non-regulated natural gas operations, Aqua Infrastructure, and Aqua Resources (described below), and intercompany eliminations for revenue billed between our subsidiaries. Our non-regulated natural gas operations consist of utility service line protection solutions and repair services for households and the operation of gas marketing and production entities. Revenue is recognized and the performance obligation is satisfied over time as the service is delivered.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available, and segment management regularly reviews the operating results of that component. We assigned assets and liabilities to each reporting unit based on either specific identification or by using judgment for the remaining assets and liabilities that are not specific to a reporting unit. Goodwill was assigned to the reporting units based on a combination of specific identification and relative fair values.
The Company performed a quantitative assessment for its annual test of the goodwill attributable to its Regulated Natural Gas reporting unit as of July 31, 2021. We estimated the fair value of the reporting unit by weighting results from the market approach and the income approach. Key assumptions in the valuation methodologies for goodwill included growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on our analysis, we determined that the fair values of our Regulated Natural Gas reporting unit exceeded its carrying values, indicating none of its goodwill was impaired.
The Company performed a qualitative assessment for its annual test of the goodwill attributable to its Regulated Water and Aqua Resources reporting units as of July 31, 2021, and concluded that it is more likely than not that the fair value of each reporting unit, which has goodwill recorded, exceeded its carrying amount, indicating that none of the Company’s goodwill was impaired.
The following table summarizes the changes in the Company’s goodwill:
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| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated |
Balance at December 31, 2019 | $ | | $ |
| $ | | $ | |
Goodwill acquired |
| |
| |
| - |
| |
Reclassifications to utility plant acquisition adjustment |
| ( |
| - |
| - |
| ( |
Balance at December 31, 2020 |
| |
| |
| |
| |
Goodwill acquired |
| - |
| - |
| - |
| - |
Measurement period purchase price allocation adjustments |
| - |
| |
| - |
| |
Reclassifications to utility plant acquisition adjustment |
| ( |
| - |
| - |
| ( |
Balance at December 31, 2021 | $ | | $ | | $ | | $ | |
The measurement period purchase price allocation adjustments resulted from the completion of the Peoples Gas Acquisition on March 16, 2020, which resulted in goodwill of $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in non-active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
Level 3: inputs that are unobservable and significant to the fair value measurement.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Pronouncements to be adopted upon the effective date:
In August 2020, the FASB issued updated accounting guidance on accounting for convertible instruments and contracts in an entity’s own equity. The updated guidance reduces the number of accounting models for convertible debt and convertible preferred stock instruments and makes certain disclosure amendments intended to improve the information provided to users. Additionally, the guidance also amends the derivative guidance for the “own stock” scope exception, which exempts qualifying instruments from being accounted for as derivatives if certain criteria are met. Further, the standard changes the way certain convertible instruments are treated when calculating earnings per share. The updated accounting guidance is effective for fiscal years beginning after December 15, 2021 with early adoption permitted beginning in 2021. The adoption of this standard is not expected to have a material impact to the Company’s financial statements.
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 is evaluating the requirements of the updated guidance to determine the impact of adoption.
Pronouncements adopted during the fiscal year:
In March 2020, the FASB issued accounting guidance that provides companies with optional guidance, including expedients and exceptions for applying generally accepted accounting principles to contracts and other transactions affected by reference rate reform, such as the London Interbank Offered Rate (LIBOR). The accounting guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company adopted the guidance in the fourth quarter of 2021 and there was no impact on its Consolidated Financial Statements upon adoption.
In December 2019, the FASB issued updated accounting guidance that simplifies the accounting for income taxes. The updated guidance removes certain exceptions to the general principles of accounting for income taxes to reduce the cost and complexity of its application, including the accounting for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, deferred tax liabilities for equity method investments when a foreign subsidiary becomes an equity method investment or when a foreign equity method investment becomes a subsidiary, and calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. Additionally, the updated guidance clarifies and amends the existing guidance over accounting for franchise taxes and other taxes partially based on income, an entity’s tax basis of goodwill, separate entity financial statements, interim recognition of enactment of tax laws or rate changes, and improvements to the codification for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. As permitted, we adopted this updated guidance on January 1, 2021, which did not have a material impact on our consolidated financial statements.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Peoples Gas Acquisition
On March 16, 2020 (the “Closing Date”), the Company completed the acquisition of Peoples Natural Gas (the “Peoples Gas Acquisition”), which expanded the Company’s regulated utility business to include natural gas distribution, serving approximately
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Base purchase price | $ | |
Adjustments: |
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Estimated change in working capital |
| |
Certain estimated capital expenditures |
| |
Assumption of indebtedness |
| ( |
Cash consideration | $ | |
The assumption of $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company accounted for the Peoples Gas Acquisition as a business combination using the acquisition method of accounting. The purchase price was allocated to the net tangible and intangible assets based upon their estimated fair values at the date of the acquisition. The purchase price allocation was preliminary and was subject to revision through the end of the measurement period on March 15, 2021. During the first quarter of 2021, the Company recorded an adjustment to increase goodwill by $
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| Amounts |
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| Amounts |
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| Previously |
| Measurement |
| Recognized as of |
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| Recognized as of |
| Period |
| Acquisition Date |
|
| Acquisition Date (a) |
| Adjustments |
| (as Adjusted) |
Property, plant and equipment, net | $ | | $ | - | $ | |
Current assets |
| |
| ( |
| |
Regulatory assets |
| |
| ( |
| |
Goodwill |
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| |
| |
Other long-term assets |
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| - |
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Total assets acquired |
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| ( |
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Current portion of long-term debt |
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| - |
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Loans payable |
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| - |
| |
Other current liabilities |
| |
| ( |
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Long-term debt |
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| - |
| |
Deferred income taxes |
| |
| ( |
| |
Regulatory liabilities |
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| |
| |
Other long-term liabilities |
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| ( |
| |
Total liabilities assumed |
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| ( |
| |
Net assets acquired | $ | | $ | - | $ | |
The fair value of long-term debt was determined based on prevailing market prices for similar debt issuances as of March 16, 2020, which resulted in an adjustment to increase the carrying amount by $
Goodwill is attributable to the assembled workforce of Peoples, planned growth in new markets, and planned growth in rate base through continued investment in utility infrastructure. Goodwill recorded for the Peoples Gas Acquisition is not expected to be deductible for tax purposes.
The Company incurred transaction-related expenses for the Peoples Gas Acquisition, which consisted of costs recorded as operations and maintenance expenses in the first quarter of 2020 of $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The results of Peoples have been included in our consolidated financial statements as of the Closing Date. Peoples contributed revenues of $
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| Years ended December 31, | ||||
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| 2020 |
|
| 2019 |
Operating revenues | $ | |
| $ | |
Net income |
| |
|
| |
The supplemental pro forma information is not necessarily representative of the actual results that may have occurred for these periods or of the results that may occur in the future. This supplemental pro forma information is based upon the historical operating results of Peoples for periods prior to the Closing Date, and is adjusted to reflect the effect of non-recurring acquisition-related costs, incurred in 2020 and 2019 as if they occurred on January 1, 2019, including $
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the Company committed to addressing the replacement of gathering pipe over a
On October 23, 2018, the Company entered into interest rate swap agreements to mitigate interest rate risk associated with an anticipated $
Water and Wastewater Utility Acquisitions – Pending Completion
In December 2021, the Company entered into a purchase agreement to acquire the water utility assets of the Southern Oaks Water System, which serves approximately
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
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 based 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. The closing for the wastewater assets of Lower Makefield Township is expected to occur in the first quarter of 2022, and the closings of our acquisitions of East Whiteland Township, Willistown Township, Oak Brook and Shenandoah Borough are expected to occur in the second half of 2022. The closings of our Beaver Falls and Southern Oaks acquisitions are expected to occur late in 2022 or in early 2023. Closing for our utility acquisitions are subject to the timing of the regulatory approval process.
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
Water and Wastewater Utility Acquisitions - Completed
In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves
In December 2020, the Company acquired the wastewater utility system asset of New Garden Township, Pennsylvania, which serves
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In December 2019, the Company acquired the wastewater utility system assets of Cheltenham Township, Pennsylvania, which serves
The following dispositions have not been presented as discontinued operations in the Company’s consolidated financial statements as they do not qualify as discontinued operations, since their disposal does not represent a strategic shift that has a major effect on our operations or financial results. Except where noted otherwise, the gains or losses disclosed below are reported in the consolidated statements of operations and comprehensive income as a component of operations and maintenance expense.
In October 2020 the Company sold its investment in a joint venture. Its investment represented its
In 2018, the Company decided to market for sale a water system in Virginia that serves approximately
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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| December 31, |
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| 2021 |
| 2020 |
|
| Approximate Range of Useful Lives |
| Weighted Average Useful Life |
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Regulated Water segment: |
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Utility plant and equipment |
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Mains and accessories | $ | | $ | |
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Services, hydrants, treatment plants and reservoirs |
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Operations structures and water tanks |
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Miscellaneous pumping and purification equipment |
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Meters, transportation and other operating equipment |
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Land and other non-depreciable assets |
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| - |
| - |
Utility plant and equipment - regulated water segment |
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| |
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Utility construction work in progress |
| |
| |
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| - |
| - |
Net utility plant acquisition adjustment |
| ( |
| ( |
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| ||
Non-utility plant and equipment |
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Property, Plant and Equipment - Regulated Water segment |
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Regulated Gas segment: |
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Natural gas transmission |
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Natural gas storage |
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Natural gas gathering and processing |
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Natural gas distribution |
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Meters, transportation and other operating equipment |
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Land and other non-depreciable assets |
| |
| |
|
| - |
| - |
Utility plant and equipment - Regulated Natural Gas segment |
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Utility construction work-in-progress |
| |
| |
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| - |
| - |
Property, plant and equipment-Regulated Natural Gas segment |
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Total property, plant and equipment | $ | | $ | |
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| December 31, | |||
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| 2021 |
| 2020 |
Billed utility revenue | $ | | $ | |
Other |
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| |
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| |
Less allowance for doubtful accounts |
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| |
Net accounts receivable | $ | | $ | |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company’s utility customers are located principally in the following states:
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| 2021 | 2020 | 2019 | |||
Balance at January 1, | $ | | $ | | $ | |
Amounts charged to expense |
| |
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| |
Accounts written off |
| ( |
| ( |
| ( |
Recoveries of accounts written off and other |
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Balance at December 31, | $ | | $ | | $ | |
The regulatory assets represent costs that are probable to be fully recovered from customers in future rates while regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or amounts recovered from customers in advance of incurring the costs. Except for income taxes and utility plant retirement costs, regulatory assets and regulatory liabilities are excluded from the Company’s rate base and do not earn a return. The components of regulatory assets and regulatory liabilities are as follows:
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| December 31, 2021 |
| December 31, 2020 | ||||||
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| Regulatory |
| Regulatory |
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| Regulatory |
| Regulatory |
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| Assets |
| Liabilities |
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| Assets |
| Liabilities |
Income taxes | $ | | $ | |
| $ | | $ | |
Purchased gas costs |
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| - |
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Utility plant retirement costs |
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Post-retirement benefits |
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Accrued vacation |
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| - |
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| - |
Water tank painting |
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| - |
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Fair value adjustment of long-term debt assumed in acquisition |
| |
| - |
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| - |
Debt refinancing |
| |
| - |
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| - |
Rate case filing expenses and other |
| |
| |
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| |
| $ | | $ | |
| $ | | $ | |
Items giving rise to deferred state income taxes, as well as a portion of deferred Federal income taxes related to specific differences between tax and book depreciation expense, are recognized in the rate setting process on a cash basis or as a reduction in current income tax expense and will be recovered as they reverse. Amounts include differences that arise between specific utility asset improvement costs capitalized for book and deducted as an expense for tax purposes. Additionally, the recording of AFUDC for equity funds results in the recognition of a regulatory asset for income taxes, which represents amounts due related to the revenue requirement. The regulatory asset / (liability) for income taxes as of December 31, 2021 and 2020 includes an amount of $(
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
A portion of the regulatory liability for income taxes is related to Aqua Pennsylvania’s income tax accounting change for the tax benefits realized on the Company’s 2012 tax return, which have not yet reduced current income tax expense due to a rate order requiring a
The regulatory asset or liability for purchased gas costs reflects the differences between actual purchased gas costs and the levels of recovery for these costs in current rates. The unrecovered costs are recovered and the over-recovered costs are refunded in future periods, typically within a year, through quarterly and annual filings with the applicable state regulatory agency.
The regulatory asset for utility plant retirement costs, including cost of removal, represents costs already incurred that are expected to be recovered in future rates over a five year recovery period. The regulatory liability for utility plant retirement costs represents amounts recovered through rates during the life of the associated asset and before the costs are incurred.
The regulatory asset for accrued vacation represents costs that would otherwise be charged to operations and maintenance expense for vacation that is earned by employees, which is recovered as a cost of service.
The regulatory asset for post-retirement benefits, which includes pension and other post-retirement benefits, primarily reflects a regulatory asset that has been recorded for the costs that would otherwise be charged to stockholders’ equity for the underfunded status of the Company’s pension and other post-retirement benefit plans. The Company also has a regulatory asset related to post-retirement benefits costs that represent costs already incurred which are now being or anticipated to be recovered in rates over a period ranging from approximately
Expenses associated with water tank painting are deferred and amortized over a period of time as approved in the regulatory process. Water tank painting costs are generally being amortized over a period ranging from
The Company recorded a fair value adjustment for fixed rate, long-term debt assumed in acquisitions that matures in various years ranging from 2022 to 2032. The regulatory asset or liability results from the rate setting process continuing to recognize the historical interest cost of the assumed debt.
The regulatory asset for debt refinancing represents a portion of a make whole payment of $
The regulatory asset related to rate case filing expenses and other represents the costs associated with filing for rate increases that are deferred and amortized over periods that generally range from
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The regulatory asset related to the costs incurred for information technology software projects and water main cleaning and relining projects are described in Note 1 – Summary of Significant Accounting Policies – Property, Plant and Equipment and Depreciation.
Income tax benefit for the years ended December 31, is comprised of the following:
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| Years Ended December 31, | |||||
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| 2021 |
| 2020 |
| 2019 |
Current: |
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Federal | $ | ( | $ | ( | $ | ( |
State |
| |
| ( |
| |
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| ( |
| ( |
| ( |
Deferred: |
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Federal |
| |
| ( |
| ( |
State |
| ( |
| ( |
| ( |
|
| ( |
| ( |
| ( |
Total tax benefit | $ | ( | $ | ( | $ | ( |
The statutory Federal tax rate is
The reasons for the differences between amounts computed by applying the statutory Federal corporate income tax rate to income before income tax expense are as follows:
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| Years Ended December 31, | |||||
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| 2021 |
| 2020 |
| 2019 |
Computed Federal tax expense at statutory rate | $ | | $ | | $ | |
Decrease in Federal tax expense related to an income tax accounting change for qualifying utility asset improvement costs |
| ( |
| ( |
| ( |
State income taxes, net of Federal tax benefit |
| ( |
| ( |
| ( |
Increase in tax expense for depreciation expense to be recovered in future rates |
| |
| |
| |
Stock-based compensation |
| ( |
| ( |
| ( |
Deduction for Essential Utilities common dividends paid under employee benefit plan |
| ( |
| ( |
| ( |
Amortization of deferred investment tax credits |
| ( |
| ( |
| ( |
Impact of Federal rate change and amortization of excess deferred income tax |
| ( |
| ( |
| ( |
Impact of acquisitions and reorganizations |
| ( |
| - |
| - |
Other, net |
| ( |
| |
| |
Actual income tax benefit | $ | ( | $ | ( | $ | ( |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In response to a June 2012 rate order issued by the Pennsylvania Public Utility Commission to Aqua Pennsylvania, the Company changed its tax method of accounting for qualifying utility system repairs, which provides for the expensing of qualifying utility asset improvement costs that were previously being capitalized and depreciated for book and tax purposes. The rate order allows for a reduction in current income tax expense as a result of the flow-through recognition of some income tax benefits due to the income tax accounting change. The Company recorded income tax benefits of $
Aqua Pennsylvania adopted this method of tax accounting in 2012, and for prior tax years, the qualifying utility system asset improvement costs were previously capitalized and depreciated for book and tax purposes. The Company recognized a tax deduction on its 2012 Federal tax return of $
The following table provides the changes in the Company’s unrecognized tax benefits:
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| 2021 | 2020 | ||
Balance at January 1, | $ | | $ | |
Impact of current year activity on tax provision |
| |
| |
Balance at December 31, | $ | | $ | |
In accordance with the FASB’s accounting guidance for income taxes we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. From time to time, the Company may be assessed interest and penalties by taxing authorities, which would be recorded as income tax expense. There were
On its 2012 Federal tax return, filed in September 2013, Aqua Pennsylvania filed a change in accounting method to adopt the IRS temporary tangible property regulations. This method change allowed the Company to take a current year deduction for expenses that were previously capitalized for tax purposes. Since the filing of the 2012 tax return, the IRS has issued final regulations. While the Company maintains the belief that the deduction taken on its tax return is appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. Provisions for uncertain tax positions were recorded to reflect the possible challenge of the Company’s methodology for determining its repair deduction as required by the FASB’s accounting guidance for income taxes. Should the taxing authority challenge the Company’s tax treatment, and ultimately disallow a portion of the repair deduction, the Company expects Federal net operating loss carryforwards to offset any resulting liability, and state net operating loss carryforwards will offset a portion of any resulting liability.
The unrecognized tax benefits relate to the income tax accounting change, and the tax position is attributable to a temporary difference. The Company does not anticipate material changes to its unrecognized tax benefits within the next year. As a result of the regulatory treatment afforded by the income tax accounting change in Pennsylvania and despite this position being a temporary difference, as of December 31, 2021 and 2020, $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the components of net deferred tax liability:
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| December 31, | |||
| 2021 | 2020 | ||
Deferred tax assets: |
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Customers advances for construction | $ | | $ | |
Costs expensed for book not deducted for tax, principally accrued expenses |
| |
| |
Post-retirement benefits |
| |
| |
Tax effect of regulatory liabilities for post-retirement benefits |
| |
| - |
Tax attribute and credit carryforwards |
| |
| |
Operating lease liabilities |
| |
| |
Unrecovered purchased gas costs |
| - |
| |
Other |
| |
| |
|
| |
| |
Less valuation allowance |
| ( |
| ( |
|
| |
| |
|
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|
|
|
Deferred tax liabilities: |
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|
|
|
Utility plant, principally due to depreciation and differences in the basis of fixed assets due to variation in tax and book accounting |
| |
| |
Deferred taxes associated with the gross-up of revenues necessary to recover, in rates, the effect of temporary differences |
| |
| |
Tax effect of regulatory asset for post-retirement benefits |
| - |
| |
Utility plant acquisition adjustment basis differences |
| |
| |
Deferred investment tax credit |
| |
| |
Operating lease right-of-use assets |
| |
| |
Over-recovered purchased gas costs |
| |
| - |
|
| |
| |
|
|
|
|
|
Net deferred tax liability | $ | | $ | |
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|
|
At December 31, 2021, the Company has a cumulative Federal NOL of $
At December 31, 2021, the Company has a cumulative state NOL of $
At December 31, 2021, the Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On March 16, 2020, the Company completed the Peoples Gas Acquisition. On March 31, 2020, the Company changed the method of tax accounting for certain qualifying infrastructure investments at its Peoples Natural Gas subsidiary, its largest natural gas subsidiary in Pennsylvania. This change allows a tax deduction for qualifying utility asset improvement costs that were formerly capitalized for tax purposes. Consistent with the Company’s accounting for differences between book and tax expenditures for its Aqua Pennsylvania subsidiary, the Company is utilizing the flow-through method to account for this timing difference. In addition, the Company calculated the income tax benefits for qualifying capital expenditures made prior to March 16, 2020 (“catch-up adjustment”) and has recorded a regulatory liability for $
In connection with the completion of the Peoples Gas Acquisition, as the Company identified changes to acquired deferred tax asset or liabilities, including the impact of valuation allowances or liabilities related to uncertain tax positions during the one year measurement period that ended on March 15, 2021, and they were related to new information obtained about facts and circumstances that existed as of the acquisition date, those changes were considered a measurement-period adjustment, and resulted in an adjustment to goodwill. The Company records all other changes to deferred tax assets and liabilities in current-period income tax expense.
On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs (“IIJ”) Act. The IIJ contained several tax provisions, including the modification of the tax code to exclude from taxable income any contribution in aid of construction. This provision effectively restored the exclusion that existed prior to the enactment of TCJA and would generally apply to contributions made after December 31, 2020. The Company evaluated the tax provisions included in the IIJ, and their impact was incorporated in the calculation of the income tax provision.
The following table provides the components of taxes other than income taxes, including the expenses of Peoples for the period since the completion of the acquisition on March 16, 2020:
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| Years Ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Property | $ | $ | $ | |||
Gross receipts, excise and franchise |
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| |||
Payroll |
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| |||
Regulatory assessments |
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| |||
Pumping fees |
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| |||
Other |
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| |||
Total taxes other than income taxes | $ | | $ | | $ | |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Commitments –
The Company maintains agreements with other water purveyors for the purchase of water to supplement its water supply, particularly during periods of peak demand. The agreements stipulate purchases of minimum quantities of water to the year 2029. The estimated annual commitments related to such purchases through 2026 are expected to average $
The Company has entered into purchase obligations, in the ordinary course of business, that include agreements for water treatment processes at some of its wells in a small number of its divisions. The
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| 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||
$ | | $ | | $ | | $ | | $ | | $ | |
The Company’s natural gas supply is provided by sources on the interstate pipeline system and from local western Pennsylvania gas well production. The Company has various interstate pipeline service agreements that provide for firm transportation capacity, firm storage capacity, and other services and include capacity reservation charges based upon the maximum daily and annual contract quantities set forth in the agreements. Some of these agreements have minimum volume obligations and are transacted at applicable tariff and negotiated rates to the year 2034. The estimated annual commitments related to such purchases through 2026 are expected to average $
The purchased water, water treatment, and purchased gas expenses under these agreements were as follows:
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| Years Ended December 31, | |||||
| 2021 | 2020 | 2019 | |||
Purchased water under long-term agreements | $ | | $ | | $ | |
Water treatment expense under contractual agreement |
| |
| |
| |
Purchased natural gas under long-term agreements |
| |
| |
| - |
Contingencies – The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved. As of December 31, 2021, the aggregate amount of $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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. During the second quarter of 2021, an immaterial amount was accrued for the portion of the fine or penalty that we determined to be probable and estimable of being incurred. In addition, on September 3, 2019, two individuals, on behalf of themselves and those similarly situated, commenced an action against the Company’s Illinois subsidiary in the State court in Will County, Illinois related to this do not consume advisory. The complaint seeks class action certification, attorneys fees, and damages, including, but not limited to, out of pocket damages, and discomfort, aggravation, and annoyance” based upon the water provided by the Company’s subsidiary to a discrete service area in University Park Illinois. The complaint contains allegations of damages as a result of supplied water that exceeded the standards established by the federal Lead and Copper Rule. The complaint is in the discovery phase and class certification has not been granted. The Company is vigorously defending against this claim. A claim for the expenses incurred has been submitted to the Company’s insurance carrier for potential recovery of a portion of these costs, and on August 3, 2020, the Company received $
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 $
The Company leases land, office facilities, office equipment, and vehicles for use in its operations, which are accounted for as operating leases. Leases with a term of 12 months or less are not recorded on the balance sheet; rather, lease expense is recognized over the lease term. Our leases have remaining lives of
Some of the Company’s leases can be extended on a month-to-month basis, which allow us to terminate the lease at any given month without penalty while others include options to extend the leases for up to
The Company accounts for lease and non-lease components of lease arrangements separately. For calculating lease liabilities, we may deem lease terms to include options to extend or terminate the lease when it’s reasonably certain that we will exercise that option. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Lease liabilities and corresponding right-of-use assets are recorded based on the present value of the lease payments over the expected lease term, including leases with variable payments that are based on a market rate or an index and net of any impairment. All other variable payments are expensed as incurred. Since the Company’s lease agreements do not provide an implicit interest rate, we utilize our incremental borrowing rate to determine the discount rate used to present value the lease payments.
During the fourth quarter of 2021, the Company determined that there were impairment indicators that required the Company to review a portion of office space that was not used in operations for impairment. Accordingly, the Company performed undiscounted cash flow analyses on the related right-of-use asset group and determined that such right-of-use asset was impaired. This resulted in a non-cash impairment charge of $
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| Years Ended December 31, | |||||
| 2021 | 2020 | 2019 | |||
Components of lease expense were as follows: |
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Operating lease cost | $ | | $ | | $ | |
|
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| Years Ended December 31, | |||
| 2021 | 2020 | ||
Supplemental cash flow information related to leases was as follows: |
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Cash paid for amounts included in the measurement of lease liabilities: |
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Operating cash flows from operating leases | $ | $ | | |
|
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| December 31, | |||
| 2021 | 2020 | ||
Supplemental balance sheet information related to leases was as follows: |
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Operating leases: |
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Operating lease right-of-use assets | $ | | $ | |
|
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Other accrued liabilities | $ | | $ | |
Operating lease liabilities |
| |
| |
Total operating lease liabilities | $ | | $ | |
|
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|
|
|
|
|
|
| December 31, | |||
| 2021 | 2020 | ||
Weighted average remaining lease term: |
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Operating leases |
|
| ||
|
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|
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Weighted average discount rate: |
|
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|
|
Operating leases |
|
| ||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Maturities of operating lease liabilities and a reconciliation of the operating lease liabilities reported on our consolidated balance sheets as of December 31, 2021 are as follows:
|
|
|
| Operating Leases | |
2022 | $ | |
2023 |
| |
2024 |
| |
2025 |
| |
2026 |
| |
Thereafter |
| |
Total operating lease payments | $ | |
|
|
|
Total operating lease payments | $ | |
Less operating lease liabilities |
| |
Present value adjustment | $ | |
Long-term Debt – The consolidated statements of capitalization provide a summary of long-term debt as of December 31, 2021 and 2020. The supplemental indentures with respect to specific issues of the first mortgage bonds restrict the ability of Aqua Pennsylvania and other operating subsidiaries of the Company to declare dividends, in cash or property, or repurchase or otherwise acquire the stock of these companies. Loan agreements for Aqua Pennsylvania and other operating subsidiaries of the Company have restrictions on minimum net assets. As of December 31, 2021, restrictions on the net assets of the Company were $
Sinking fund payments are required by the terms of specific issues of long-term debt. Excluding amounts due under the Company’s revolving credit agreement, the future sinking fund payments and debt maturities of the Company’s long-term debt are as follows:
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Interest Rate Range |
| 2022 |
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| Thereafter |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
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| |
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| |
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| |
|
| - |
|
| - |
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| |
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| |
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| |
|
| |
|
| - |
|
| |
|
| - |
|
| |
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| |
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| |
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| |
|
| |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
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| |
|
| - |
Total | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On April 15, 2021, the Company’s operating subsidiary, Aqua Ohio, Inc., issued $
In November 2020, Aqua Pennsylvania issued $
On April 3, 2020, the Company entered into a
On March 13, 2020, the Company entered into a
The Company completed the Peoples Gas Acquisition on March 16, 2020, which resulted in the assumption of $
In December 2019, Aqua Pennsylvania issued $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On May 18, 2019, the Company redeemed $
On April 26, 2019, the Company issued $
The weighted average cost of long-term debt at December 31, 2021 and 2020 was
As of December 31, 2021, the Company has an amended $
The Company is obligated to comply with covenants under some of its loan and debt agreements. These covenants contain a number of restrictive financial covenants, which among other things limit, subject to specific exceptions, the Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and require a minimum level of earnings coverage over interest expense. During 2021, the Company was in compliance with its debt covenants under its loan and debt agreements. Failure to comply with the Company’s debt covenants could result in an event of default, which could result in the Company being required to repay or finance its borrowings before their due date, possibly limiting the Company’s future borrowings, and increasing its borrowing costs.
Loans Payable – In November 2021, Aqua Pennsylvania renewed its $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In November 2021, Peoples Natural Gas Companies renewed its $
At December 31, 2021 and 2020, the Company had other combined short-term lines of credit of $
Interest Income and Expense– Interest income of $
Interest Rate Swap Agreements – In October 2018, the Company entered into interest rate swap agreements to mitigate interest rate risk associated with an anticipated $
The interest rate swaps did not qualify for hedge accounting and any changes in the fair value of the swaps was included in our earnings. The interest rate swaps were classified as financial derivatives used for non-trading activities. The Company recorded the fair value of the interest rate swaps by discounting the future net cash flows associated with the debt issuance and recognized either an asset or liability at the balance sheet date.
The following table provides a summary of the amounts recognized in earnings for our interest rate swap agreements:
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| Amount of Loss Recognized in Income on Derivatives | |||||||
|
|
| Years Ended December 31, | |||||||
| Location of Loss Recognized |
| 2021 |
| 2020 |
| 2019 | |||
Derivatives not designated as hedging instrument: |
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Interest rate swaps | Other expense |
| $ | - |
| $ | - |
| $ | ( |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Financial instruments are recorded at carrying value in the financial statements and approximate fair value, with the exception of long-term debt, as of the dates presented. The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments.
The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of December 31, 2021 and 2020, the carrying amount of the Company’s loans payable was $
Unrealized gains and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:
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| Years ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Net gain recognized during the period on equity securities |
| $ | |
| $ | |
| $ | |
Less: net gain / loss recognized during the period on equity securities sold during the period |
|
| - |
|
| - |
|
| - |
Unrealized gain 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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| December 31, | |||
|
| 2021 |
| 2020 |
Carrying amount | $ | | $ | |
Estimated fair value |
| |
| |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
At December 31, 2021, the Company had 600,000,000 shares of common stock authorized; par value $
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| December 31, | ||
| 2021 | 2020 | 2019 |
Shares outstanding | | | |
Treasury shares | | | |
Forward Equity Sale
In August 2020, the Company entered into a forward equity sale agreement for
On August 9, 2021, the Company settled the forward equity sale agreement in full by physical share settlement. The Company issued
Private Placement
On March 29, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Canada Pension Plan Investment Board (the “Investor”), pursuant to which the Company agreed to issue and sell to the Investor in a private placement (the “Private Placement”)
The shares issued and sold to the Investor pursuant to the Private Placement were to be priced at the lower of (1) $
The Stock Purchase Agreement contains customary representations, warranties and covenants of the Company and the Investor, and the parties have agreed to indemnify each other for losses related to breaches of their respective representations and warranties. At the closing of the Private Placement, the Company reimbursed the Investor for reasonable out-of-pocket diligence expenses of $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Common Stock / Tangible Equity Unit Issuances
On April 23, 2019, the Company issued $
Each Unit consists of a prepaid stock purchase contract and an amortizing note due April 30, 2022, each issued by the Company. Unless earlier settled or redeemed, each stock purchase contract will automatically settle on April 30, 2022 (subject to postponement in limited circumstances) for between
The issuance of the common stock and the Units (including the component stock purchase contracts and amortizing notes) were separate public issuances made by means of separate prospectus supplements pursuant to the Company’s universal “pay as you go” shelf registration statement, which allows for the potential future offer and sale by us, from time to time, in one or more public offerings, of an indeterminate amount of the Company’s common stock, preferred stock, debt securities, and other securities specified therein at indeterminate prices.
The Company recorded the issuance of the purchase contract portion of the Units as additional paid-in-capital of $
At December 31, 2021, the Company had
In April 2021, the Company filed a universal shelf registration, through a filing with the Securities and Exchange Commission (“SEC”), to allow for the potential future offer and sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities and other securities specified therein at indeterminate prices.
The Company has an acquisition shelf registration statement on file with the SEC which permits the offering, from time to time, of an aggregate of $
The form and terms of any securities issued under the universal shelf registration statement and the acquisition shelf registration statement will be determined at the time of issuance.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company has a Dividend Reinvestment and Direct Stock Purchase Plan (“Plan”) that allows reinvested dividends to be used to purchase shares of common stock at a
The Company’s accumulated other comprehensive income is reported in the consolidated statements of equity. The Company recorded a regulatory asset for its underfunded status of its pension and other post-retirement benefit plans that would otherwise be charged to other comprehensive income, as it anticipates recovery of its costs through customer rates.
Basic net income per share is based on the weighted average number of common shares outstanding and the minimum number of shares to be issued upon settlement of the stock purchase contracts issued under the tangible equity units. Diluted net income per share is based on the weighted average number of common shares outstanding and potentially dilutive shares, and the expected number of shares to be issued upon settlement of the stock purchase contracts issued under the tangible equity units, based on the applicable market value of our common stock. The dilutive effect of employee stock-based compensation and shares issuable under the forward equity sale agreement (from the date the Company entered into the forward equity sale agreement to the settlement date) are included in the computation of diluted net income per share. The dilutive effect of stock-based compensation and shares issuable under the forward equity sale agreement are calculated by using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation and settlement of the forward equity sale agreement. The treasury stock method assumes that the proceeds from stock-based compensation and settlement of the forward equity sale agreement are 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 share:
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| Years ended December 31, | ||
| 2021 | 2020 | 2019 |
Average common shares outstanding during the period for basic computation | | | |
Effect of dilutive securities: |
|
|
|
Forward equity sale agreement | | - | - |
Issuance of common stock from private placement | - | | - |
Tangible equity units | - | - | - |
Employee stock-based compensation | | | |
Average common shares outstanding during the period for diluted computation | | | |
For the year ended December 31, 2020, the average common shares outstanding during the period for diluted computation reflects the impact of the issuance of common stock from the March 16, 2020 private placement as if the shares were issued on January 1, 2020.
For the years ended December 31, 2021, 2020 and 2019, all of the Company’s employee stock options were included in the calculation of diluted net income per share as the calculated cost to exercise the stock options was less than the average market price of the Company’s common stock during these periods. Additionally, the dilutive effect of performance share units and restricted share units granted are included in the Company’s calculation of diluted net income per share.
For the years ended December 31, 2021, 2020, and 2019, the average common shares outstanding during the period for basic computation 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)
Equity per common share was $
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 – During 2021 and 2020, the Company granted 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
The Company did
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|
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| Performance Grant | |
| 2021 and 2020 | |
Metric 1 – Company’s total shareholder return (“TSR”) compared to the TSR for a specific peer group of investor-owned utilities (a market-based condition) |
| |
Metric 2 – Achievement of a targeted cumulative level of rate base growth as a result of acquisitions (a performance-based condition) |
| |
Metric 3 – Achievement of targets for maintaining consolidated operations and maintenance expenses over the three year measurement period (a performance-based condition) |
| |
The following table provides the compensation expense and income tax benefit for PSUs:
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| Years ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Stock-based compensation within operations and maintenance expense | $ | $ | $ | |||
Income tax benefit |
|
|
| |||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes nonvested PSU transactions for the year ended December 31, 2021:
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| Number of Share Units |
| Weighted Average Fair Value |
Nonvested share units at beginning of period | | $ | |
Granted | |
| |
Performance criteria adjustment | |
| |
Forfeited | ( |
| |
Share units issued | ( |
| |
Nonvested share units at end of period | |
| |
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions associated with the PSUs using the Monte Carlo valuation method, which assesses the probabilities of various outcomes of market conditions. The other portion of the fair value of the PSUs associated with performance-based conditions was 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 fair value of each PSU grant is amortized into compensation expense on a straight-line basis over their respective vesting periods, generally
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| ||||
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| ||||
| Years ended December 31, | |||||||||
|
| 2021 |
| 2020 |
| 2019 | ||||
Expected term (years) |
|
| |
| - | |||||
Risk-free interest rate |
|
|
| - | ||||||
Expected volatility |
|
|
| - | ||||||
Weighted average fair value of PSUs granted | $ | | $ | | $ | - | ||||
Intrinsic value of vested PSUs | $ | | $ | | $ | | ||||
Fair value of vested PSUs | $ | | $ | | $ | | ||||
As of December 31, 2021, $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock and is valued based on the fair market value of the Company’s stock on the date of grant. RSUs are eligible to be earned at the end of a specified restricted period, generally
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|
| Years ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Stock-based compensation within operations and maintenance expense | $ | | $ | | $ | |
Income tax benefit |
|
| |
| | |
The following table summarizes nonvested RSU transactions for the year ended December 31, 2021:
|
|
|
|
| Number of Stock Units |
| Weighted Average Fair Value |
Nonvested stock units at beginning of period | | $ | |
Granted | |
| |
Stock units vested and issued | ( |
| |
Forfeited | ( |
| |
Nonvested stock units at end of period | |
| |
The following table summarizes the value of RSUs:
|
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|
|
| Years ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Weighted average fair value of RSUs granted | $ | | $ | | $ | |
Intrinsic value of vested RSUs |
| |
| |
| |
Fair value of vested RSUs |
| |
| |
| |
As of December 31, 2021, $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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
The Company did
The fair value of each stock option is amortized into compensation expense using the graded vesting method, which results in the recognition of compensation costs over the requisite service period for each separately vesting tranche of the stock options as though the stock options were, in substance, multiple stock option grants. The following table provides compensation expense and income tax benefit for stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Stock-based compensation within operations and maintenance expenses | $ | | $ | | $ | |
Income tax benefit |
|
| |
| | |
Options under the plans were issued at the closing market price of the stock on the day of the grant. The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model, which relies on assumptions that require management’s judgment. The following table provides the assumptions used in the pricing model for grants and the resulting grant date fair value of stock options granted in the period reported:
|
| ||
|
| ||
|
| ||
|
| ||
| Year ended December 31, | ||
| 2019 | ||
5.47 | |||
2.53% | |||
17.7% | |||
2.44% | |||
$ 5.25 | |||
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. The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes stock option transactions for the year ended December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
| Weighted Average Exercise Price | Weighted Average Remaining Life (years) |
| Aggregate Intrinsic Value |
Outstanding, beginning of year | | $ | |
|
|
|
Granted | |
|
|
|
| |
Forfeited | ( |
| |
|
|
|
Expired / Cancelled | ( |
| |
|
|
|
Exercised | ( |
| |
|
|
|
Outstanding at end of year | | $ | | | $ | |
|
|
|
|
|
|
|
Exercisable at end of year | | $ | | | $ | |
The intrinsic value of stock options is the amount by which the market price of the stock on a given date, such as at the end of the period or on the day of exercise, exceeded the closing market price of stock on the date of grant. The following table summarizes the intrinsic value of stock options exercised and the fair value of stock options which vested:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Intrinsic value of options exercised | $ | $ | $ | |||
Fair value of options vested |
| |
| |
| |
The following table summarizes information about the options outstanding and options exercisable as of December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
|
| Options Exercisable | |||||
| Shares | Weighted Average Remaining Life (years) |
| Weighted Average Exercise Price |
|
| Shares |
| Weighted Average Exercise Price |
Range of prices: |
|
|
|
|
|
|
|
|
|
$ | | | $ | |
|
| | $ | |
$ | | |
| |
|
| |
| |
$ | | |
| |
|
| |
| |
$36.00 and above | | |
| |
|
|
|
|
|
| | | $ | |
|
| | $ | |
As of December 31, 2021, there was $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 Company did
The following table provides the compensation cost and income tax benefit for stock-based compensation related to restricted stock:
|
|
|
|
|
|
|
| Year ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Stock-based compensation within operations and maintenance expense | $ | | $ | | $ | - |
Income tax benefit |
| |
| |
| - |
The following table summarizes restricted stock transactions for the year ended December 31, 2021:
|
|
|
|
|
|
|
|
| Number of Shares |
| Weighted Average Fair Value |
Nonvested shares at beginning of period | | $ | |
Granted | |
| |
Vested | ( |
| |
Nonvested shares at end of period | | $ | |
Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. Stock awards are granted to the Company’s non-employee directors. The issuance of stock awards results in compensation expense which is equal to the fair market value of the stock on the grant date, and is expensed immediately upon grant. The following table provides compensation cost and income tax benefit for stock-based compensation related to stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Stock-based compensation within operations and maintenance expense | $ | | $ | | $ | |
Income tax benefit |
| |
| |
| |
The following table summarizes the value of stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, | |||||
|
| 2021 |
| 2020 |
| 2019 |
Intrinsic and fair value of stock awards vested | $ | | $ | | $ | |
Weighted average fair value of stock awards granted |
| |
| |
| |
The following table summarizes stock award transactions for year ended December 31, 2021:
|
|
|
|
| Number of Stock Awards |
| Weighted Average 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)
The Company maintains a qualified, defined benefit pension plan that covers its full-time employees who were hired prior to the date their respective pension plan was closed to new participants. Retirement benefits under the plan are generally based on the employee’s total years of service and compensation during the last five years of employment. The Company’s policy is to fund the plan annually at a level which is deductible for income tax purposes and which provides assets sufficient to meet its pension obligations over time. To offset some limitations imposed by the Internal Revenue Code with respect to payments under qualified plans, the Company has a non-qualified Supplemental Pension Benefit Plan for Salaried Employees in order to prevent some employees from being penalized by these limitations, and to provide certain retirement benefits based on employee’s years of service and compensation. The net pension costs and obligations of the qualified and non-qualified plans are included in the tables which follow. Employees hired after their respective pension plan was closed, may participate in a defined contribution plan that provides a Company matching contribution on amounts contributed by participants and an annual profit-sharing contribution based upon a percentage of the eligible participants’ compensation.
On March 16, 2020, the Company completed the Peoples Gas Acquisition and assumed the pension and other postretirement benefit plans for its employees. On April 1, 2020, the Company merged the pension plans acquired in the Peoples Gas Acquisition into the Company’s Pension Plan.
Effective July 1, 2015, the Company added a permanent lump sum option to the form of benefit payments offered to participants of the qualified defined benefit pension plan upon retirement or termination. The plan paid $
In addition to providing pension benefits, the Company offers post-retirement benefits other than pensions to employees retiring with a minimum level of service and hired before their respective plan closed to new participants. These benefits include continuation of medical and prescription drug benefits, or a cash contribution toward such benefits, for eligible retirees and life insurance benefits for eligible retirees. The Company funds these benefits through various trust accounts. The benefits of retired officers and other eligible retirees are paid by the Company and not from plan assets due to limitations imposed by the Internal Revenue Code.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits |
| Other Post-retirement Benefits | ||
Years: |
|
|
|
|
|
2022 | $ | |
| $ | |
2023 |
| |
|
| |
2024 |
| |
|
| |
2025 |
| |
|
| |
2026 |
| |
|
| |
2027-2031 |
| |
|
| |
The changes in the benefit obligation and fair value of plan assets, the funded status of the plans and the assumptions used in the measurement of the company’s benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits |
| Other Post-retirement Benefits | ||||||
|
| 2021 |
| 2020 |
|
| 2021 |
| 2020 |
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1, | $ | | $ | |
| $ | | $ | |
Service cost |
| |
| |
|
| |
| |
Interest cost |
| |
| |
|
| |
| |
Actuarial (gain) loss |
| ( |
| |
|
| ( |
| |
Plan participants contributions |
|
|
|
|
|
| |
| |
Benefits paid |
| ( |
| ( |
|
| ( |
| ( |
Acquisitions |
|
|
| |
|
|
| | |
Benefit obligation at December 31, |
| |
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1, |
| |
| |
|
| |
| |
Actual return on plan assets |
| |
| |
|
| |
| |
Employer contributions |
| |
| |
|
| |
| |
Participants contributions |
|
|
|
|
|
| |
| |
Benefits paid |
| ( |
| ( |
|
| ( |
| ( |
Acquisitions |
|
|
| |
|
|
|
| |
Fair value of plan assets at December 31, |
| |
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
Funded status of plan: |
|
|
|
|
|
|
|
|
|
Net liability recognized at December 31, | $ | | $ | |
| $ | | $ | |
The following table provides the net liability recognized on the consolidated balance sheets at December 31,:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits |
| Other Post-retirement Benefits | ||||||
|
| 2021 |
| 2020 |
|
| 2021 | 2020 | |
Non-current asset | $ | | $ | - |
| $ | | $ | |
Current liability |
| ( |
| ( |
|
| ( |
| ( |
Noncurrent liability |
| ( |
| ( |
|
| ( |
| ( |
Net liability recognized | $ | ( | $ | ( |
| $ | ( | $ | ( |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides selected information about plans with accumulated benefit obligation and projected benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2021 |
|
| December 31, 2020 | ||||||
| Pension Benefits |
| Other |
| Pension Benefits |
| Other | ||||
Selected information for plans with projected benefit obligation in excess of plan assets: |
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation | $ | |
| $ | N/A |
| $ | |
| $ | N/A |
Fair value of plan assets |
| - |
|
| N/A |
|
| |
|
| N/A |
|
|
|
|
|
|
|
|
|
|
|
|
Selected information for plans with accumulated benefit obligation in excess of plan assets: |
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation | $ | |
| $ | |
| $ | |
| $ | |
Fair value of plan assets |
| - |
|
| |
|
| |
|
| |
The following table provides the components of net periodic benefit costs for the years ended December 31,:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits |
| Other Post-retirement Benefits | ||||||||||
|
| 2021 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| 2019 |
Service cost | $ | | $ | | $ | |
| $ | | $ | | $ | |
Interest cost |
| |
| |
| |
|
| |
| |
| |
Expected return on plan assets |
| ( |
| ( |
| ( |
|
| ( |
| ( |
| ( |
Amortization of prior service cost (credit) |
| |
| |
| |
|
| ( |
| ( |
| ( |
Amortization of actuarial loss |
| |
| |
| |
|
| |
| |
| |
Net periodic benefit cost (credit) | $ | ( | $ | | $ | |
| $ | | $ | | $ | |
The Company records the underfunded/overfunded status of its pension and other post-retirement benefit plans on its consolidated balance sheets and records a regulatory asset/liability for these costs that would otherwise be charged to stockholders’ equity, as the Company anticipates recoverability of the costs through customer rates to be probable. Changes in the plans’ funded status will affect the assets and liabilities recorded on the balance sheet. Due to the Company’s regulatory treatment, the recognition of the funded status is recorded as a regulatory asset pursuant to the FASB’s accounting guidance for regulated operations.
The following table provides the amounts recognized in regulatory assets and regulatory liabilities that have not been recognized as components of net periodic benefit cost as of December 31:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
| Pension Benefits |
| Other Post-retirement Benefits | |||||||
|
| 2021 |
| 2020 |
| 2021 | 2020 | |||
Net actuarial loss (gain) | $ | | $ | |
| $ | ( | $ | | |
Prior service cost (credit) |
| |
| |
|
| - |
| ( | |
Total recognized in regulatory assets (liabilities) | $ | | $ | |
| $ | ( | $ | | |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Accounting for pensions and other post-retirement benefits requires 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. Each assumption is reviewed annually with assistance from the Company’s actuarial consultant who provides guidance in establishing the assumptions. The assumptions are selected to represent the average expected experience over time and may differ in any one year from actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of pension and other post-retirement benefit expense that the Company recognizes.
The significant assumptions related to the Company’s benefit obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits |
| Other Post-retirement Benefits | ||
| 2021 | 2020 |
| 2021 | 2020 |
Weighted Average Assumptions Used to Determine Benefit Obligations as of December 31, |
|
|
|
|
|
Discount rate |
| ||||
Rate of compensation increase |
| n/a | n/a | ||
|
|
|
|
|
|
Assumed Health Care Cost Trend Rates Used to Determine Benefit Obligations as of December 31, |
|
|
|
|
|
Health care cost trend rate | n/a | n/a |
| ||
Rate to which the cost trend is assumed to decline (the ultimate trend rate) | n/a | n/a |
| ||
Year that the rate reaches the ultimate trend rate | n/a | n/a |
| ||
n/a – Assumption is not applicable.
The significant assumptions related to the Company’s net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits |
| Other Post-retirement Benefits | ||||
| 2021 | 2020 | 2019 |
| 2021 | 2020 | 2019 |
Weighted Average Assumptions Used to Determine Net Periodic Benefit Costs for Years Ended December 31, |
|
|
|
|
|
|
|
Discount rate |
| ||||||
Expected return on plan assets |
| ||||||
Rate of compensation increase |
| n/a | n/a | n/a | |||
|
|
|
|
|
|
|
|
Assumed Health Care Cost Trend Rates Used to Determine Net Periodic Benefit Costs for Years Ended December 31, |
|
|
|
|
|
|
|
Health care cost trend rate | n/a | n/a | n/a |
| |||
Rate to which the cost trend is assumed to decline (the ultimate trend rate) | n/a | n/a | n/a |
| |||
Year that the rate reaches the ultimate trend rate | n/a | n/a | n/a |
| |||
n/a – Assumption is not applicable.
The Company’s discount rate assumption, which is utilized to calculate the present value of the projected benefit payments of our post-retirement benefits, was determined by selecting a hypothetical portfolio of high quality corporate bonds appropriate to match the projected benefit payments of the plans. The selected bond portfolio was derived from a universe of Aa-graded corporate bonds. The discount rate was then developed as the rate that equates the market value of the bonds purchased to the discounted value of the plan’s benefit payments. The Company’s pension expense and liability (benefit obligations) increases as the discount rate is reduced.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company’s expected return on plan assets is determined by evaluating the asset class return expectations with its advisors as well as actual, long-term, historical results of our asset returns. The Company’s market related value of plan assets is equal to the fair value of the plan’s assets as of the last day of its fiscal year, and is a determinant for the expected return on plan assets which is a component of post-retirement benefits expense. The Company’s pension expense increases as the expected return on plan assets decreases. For 2021, the Company used a
The Company’s pension plan asset allocation and the target allocation by asset class are as follows:
|
|
|
|
|
|
|
|
| Percentage of Plan Assets at December 31, |
| |
| Target Allocation |
| 2021 | 2020 |
|
Return seeking assets |
|
| |||
Liability hedging assets |
|
| |||
Total |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Assets measured at NAV (a) |
|
| Total |
Common stock | $ | | $ | - | $ | - | $ | - |
| $ | |
Return seeking assets: |
|
|
|
|
|
|
|
|
|
|
|
Global equities |
| - |
| - |
| - |
| |
|
| |
Hedge / diversifying strategies |
| - |
| - |
| - |
| |
|
| |
Credit |
| - |
| - |
| - |
| |
|
| |
Liability hedging assets |
| - |
| - |
| - |
| |
|
| |
Cash and cash equivalents |
| |
| - |
| - |
| - |
|
| |
Total pension assets | $ | | $ | - | $ | - | $ | |
| $ | |
(a)Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy.
The fair value of the Company’s pension plans’ assets at December 31, 2020 by asset class are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Assets measured at NAV (a) |
|
| Total |
Common stock | $ | | $ | - | $ | - | $ | - |
| $ | |
Return seeking assets: |
|
|
|
|
|
|
|
|
|
|
|
Global equities |
| - |
| - |
| - |
| |
|
| |
Hedge / diversifying strategies |
| - |
| - |
| - |
| |
|
| |
Credit |
| - |
| - |
| - |
| |
|
| |
Liability hedging assets |
| - |
| - |
| - |
| |
|
| |
Cash and cash equivalents |
| |
| - |
| - |
| - |
|
| |
Total pension assets | $ | | $ | - | $ | - | $ | |
| $ | |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Equity securities include our common stock in the amounts of $
The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset class are as follows:
|
|
|
|
|
|
|
|
| Percentage of Plan Assets at December 31, |
| |
| Target Allocation |
| 2021 | 2020 |
|
Return seeking assets |
|
| |||
Liability hedging assets |
|
| |||
Total |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Assets measured at NAV (a) |
|
| Total |
Return seeking assets: |
|
|
|
|
|
|
|
|
|
|
|
Global equities | $ | | $ | - | $ | - | $ | |
| $ | |
Real estate securities |
| |
| - |
| - |
| |
|
| |
Liability hedging assets |
| |
| - |
| - |
| |
|
| |
Cash and cash equivalents |
| |
| - |
| - |
|
|
|
| |
Total other post-retirement assets | $ | | $ | - | $ | - | $ | |
| $ | |
(a)Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy.
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2020 by asset class are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Assets measured at NAV (a) |
|
| Total |
Return seeking assets: |
|
|
|
|
|
|
|
|
|
|
|
Global equities | $ | | $ | - | $ | - | $ | |
| $ | |
Real estate securities |
| |
| - |
| - |
| |
|
| |
Liability hedging assets |
| |
| - |
| - |
| |
|
| |
Cash and cash equivalents |
| |
| - |
| - |
| - |
|
| |
Total other post-retirement assets | $ | | $ | - | $ | - | $ | |
| $ | |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Valuation Techniques Used to Determine Fair Value
Common Stocks - Investments in common stocks are valued using unadjusted quoted prices obtained from active markets.
Return Seeking Assets – Investments in return seeking assets consists of the following:
oGlobal equities, which consist of common and preferred shares of stock, traded on U.S. or foreign exchanges that are valued using unadjusted quoted prices obtained from active markets, or commingled fund vehicles, consisting of such securities valued using NAV, which are not classified within the fair value hierarchy.
oReal estate securities, which consist of securities, traded on U.S. or foreign exchanges that are valued using unadjusted quoted prices obtained from active markets, or for real estate commingle fund vehicles that are not publicly quoted, the fund administrators value the funds using the NAV per fund share, derived from the quoted prices in active markets of the underlying securities and are not classified within the fair value hierarchy.
oHedge / diversifying strategies, which consist of a multi-manager fund vehicle having underlying exposures that collectively seek to provide low correlation of return to equity and fixed income markets, thereby offering diversification. As a multi-manager fund investment, NAV is derived from underlying manager NAVs, which are derived from the quoted prices in active markets of the underlying securities and are not classified within the fair value hierarchy.
oCredit, which consist of certain opportunistic, return-oriented credits which primarily include below investment grade bonds (i.e. high yield bonds), bank loans, and securitized debt. Credits are valued using the NAV per fund share, derived from either quoted prices in active markets of the underlying securities, or less active markets, or quotes of similar assets, and are not classified within the fair value hierarchy.
Liability Hedging Assets – Investments in liability hedging assets consist of funds investing in high-quality fixed income (i.e. U.S. Treasury securities and government bonds), and for funds for which market quotations are readily available, are valued at the last reported closing price on the primary market or exchange on which they are traded. Funds for which market quotations are not readily available, are valued using the NAV per fund share, derived from the quoted prices in active markets of the underlying securities and are not classified within the fair value hierarchy.
Cash and Cash Equivalents – Investments in cash and cash equivalents are comprised of both uninvested cash and money market funds. The uninvested cash is valued based on its carrying value, and the money market funds are valued utilizing the net asset value per unit obtained from published market prices.
Funding requirements for qualified defined benefit pension plans are determined by government regulations and not by accounting pronouncements. In accordance with funding rules and the Company’s funding policy, during 2022 our pension contribution is expected to be $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On August 20, 2021, Aqua Pennsylvania, filed an application with the Pennsylvania Public Utility Commission designed to increase water and wastewater rates by $
In May 2019, the Pennsylvania Public Utility Commission granted Aqua Pennsylvania a water and wastewater increase designed to increase total operating revenues by $
On October 26, 2020, the Company’s water and wastewater utility operating divisions in North Carolina received an order from the North Carolina Utilities Commission resulting in an increase of $
In May 2019, the Company’s operating subsidiary in New Jersey received an order from the New Jersey Board of Public Utilities, resulting in an increase of $
In addition to the Pennsylvania, North Carolina, and New Jersey rate awards noted above, the Company’s operating subsidiaries were allowed annualized rate increases of $
Rate cases are also underway for certain of our water and wastewater utility operating divisions in Ohio.
Eight states in which the Company operates permit water and wastewater utilities to add a surcharge to their water or wastewater bills to offset the additional depreciation and capital costs related to infrastructure system replacement and rehabilitation projects completed and placed into service between base rate filings. Additionally, Pennsylvania and Kentucky allow for the use of an infrastructure rehabilitation surcharge for natural gas utility systems. The surcharge for infrastructure system replacements and rehabilitations is typically adjusted periodically based on additional qualified capital expenditures completed or anticipated in a future period, is capped as a percentage of base rates, generally at
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On March 16, 2020, the Company completed the Peoples Gas Acquisition, marking the Company’s entrance into the regulated natural gas business. The operating results of Peoples are included in the consolidated financial statements for the period since the acquisition date. As a result, the Company now has
In addition to the Company’s
The following table presents information about the Company’s reportable segments, including the operating results and capital expenditures of the Regulated Natural Gas segment for the period since the completion of the Peoples Gas Acquisition on March 16, 2020:
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2021 |
| Regulated Water |
| Regulated Natural Gas |
| Other and Eliminations |
| Consolidated |
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Operating revenues | $ | | $ | | $ | | $ | |
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Operations and maintenance expense |
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Purchased gas |
| - |
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Depreciation and amortization |
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Taxes other than income taxes |
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Operating income |
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Interest expense, net (a) |
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Allowance for funds used during construction |
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| ( |
| - |
| ( |
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Other |
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| ( |
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Income before income taxes |
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| ( |
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Provision for income taxes (benefit) |
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| ( |
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| ( |
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Net income (loss) | $ | | $ | | $ | ( | $ | |
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Capital expenditures | $ | | $ | | $ | | $ | |
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Total assets | $ | | $ | |
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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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2020 |
| Regulated Water |
| Regulated Natural Gas |
| Other and Eliminations |
| Consolidated |
Operating revenues | $ | | $ | | $ | | $ | |
Operations and maintenance expense |
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Purchased gas |
| - |
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Depreciation and amortization |
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Taxes other than income taxes |
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Operating income (loss) |
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Interest expense, net (a) |
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Allowance for funds used during construction |
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| ( |
| - |
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Equity loss in joint venture |
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| - |
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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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| ( |
| ( |
Net income (loss) | $ | | $ | | $ | ( | $ | |
Capital expenditures | $ | | $ | | $ | | $ | |
Total assets | $ | | $ | | $ | | $ | |
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2019 |
| Regulated Water |
| Other and Eliminations |
| Consolidated |
Operating revenues | $ | | $ | | $ | |
Operations and maintenance expense |
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Depreciation and amortization |
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Taxes other than income taxes |
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Operating income (loss) |
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Interest expense, net (a) |
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Allowance for funds used during construction |
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| - |
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Change in fair value of interest rate swap agreements |
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Equity earnings in joint venture |
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Other |
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Income before income taxes |
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Income tax benefit |
| ( |
| ( |
| ( |
Net income (loss) | $ | | $ | ( | $ | |
Capital expenditures | $ | | $ | - | $ | |
Total assets | $ | | $ | | $ | |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||
None.
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Item 9A. | Controls and Procedures | |
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 Annual 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 Annual Report are effective to provide reasonable assurance 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 SEC’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. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In assessing the effectiveness of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). As a result of management’s assessment and based on the criteria in the framework, management has concluded that, as of December 31, 2021, the Company’s internal control over financial reporting was effective.
Attestation Report of the Registered Public Accounting Firm – The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting – No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Item 9B. | Other Information |
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
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Item 10. | Directors, Executive Officers and Corporate Governance | ||
The information appearing in the sections captioned Information Regarding Nominees, Corporate Governance – Code of Ethics, – Board and Board Committees, and Section 16(a) Beneficial Ownership Reporting Compliance of the definitive Proxy Statement relating to our 2022 annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by this Annual Report is incorporated by reference herein.
We make available free of charge within the Corporate Governance portion of the investor relations section of our web site, at www.essential.co, our Corporate Governance Guidelines, the Charters of each Committee of our Board of Directors, and our Code of Ethical Business Conduct (the Code of Ethics). Amendments to the Code of Ethics, and any grant of a waiver from a provision of the Code requiring disclosure under applicable rules of the SEC, will be disclosed on our web site. The reference to our web site is intended to be an inactive textual reference only, and the contents of such web site are not incorporated by reference herein and should not be considered part of this or any other report that we file with or furnish to the SEC.
Information About Our Executive Officers
The following table and the notes thereto set forth information with respect to our executive officers, including their names, ages, positions with Essential Utilities and business experience during the last five years:
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Name | Age | Position with Essential Utilities (1) |
Christopher H. Franklin | 56 | Chairman (January 2018 to present); President and Chief Executive Officer (July 2015 to present); Executive Vice President and President and Chief Operating Officer, Regulated Operations (January 2012 to July 2015); Regional President – Midwest and Southern Operations and Senior Vice President, Corporate and Public Affairs (January 2010 to January 2012); Regional President – Southern Operations and Senior Vice President, Public Affairs and Customer Operations (February 2007 to January 2010); Vice President, Public Affairs and Customer Operations (May 2005 to February 2007); Vice President, Corporate and Public Affairs (February 1997 to May 2005); Manager Corporate and Public Affairs (December 1992 to February 1997) |
Daniel J. Schuller | 52 | Executive Vice President and Chief Financial Officer (October 2018 to present); Executive Vice President, Strategy and Corporate Development (July 2015 to October 2018); Investment Principal – J.P. Morgan Asset Management – Infrastructure Investments Group (2007 to 2015) |
Richard S. Fox | 60 | Executive Vice President and Chief Operating Officer (July 2015 to present); Regional President, Regulated Utilities (January 2012 to July 2015); President Aqua Utilities, Florida, Inc. (August 2011 to January 2012); Vice President, Customer Service (June 2002 to August 2011) |
Christopher P. Luning | 54 | Executive Vice President, General Counsel, and Secretary (February 2019 to present; Senior Vice President, General Counsel, and Secretary (April 2012 to February 2019); Vice President Corporate Development and Corporate Counsel (June 2008 to April 2012); Vice President and Deputy General Counsel (May 2005 to June 2008); Assistant General Counsel (March 2003 to May 2005) |
Matthew R. Rhodes | 44 | Executive Vice President, Strategy and Corporate Development (June 2018 to present); Managing Director - Goldman Sachs, Global Natural Resources (July 2007 to April 2018) |
Robert A. Rubin | 59 | Senior Vice President, Controller and Chief Accounting Officer (January 2012 to present); Vice President, Controller and Chief Accounting Officer (May 2005 to January 2012); Controller and Chief Accounting Officer (March 2004 to May 2005); Controller (March 1999 to March 2004); Assistant Controller (June 1994 to March 1999); Accounting Manager (June 1989 to June 1994) |
(1)In addition to the capacities indicated, the individuals named in the above table hold other offices or directorships with subsidiaries of the Company. Officers serve at the discretion of the Board of Directors.
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Item 11. | Executive Compensation | ||
The information responsive to this item will be included in the definitive Proxy Statement relating to our 2022 annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by this Annual Report, is incorporated by reference herein.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Ownership of Common Stock - The information responsive to this item will be included in the definitive Proxy Statement relating to our 2022 annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by this Annual Report, and is incorporated by reference herein.
Securities Authorized for Issuance under Equity Compensation Plans - The following table provides information for our equity compensation plans as of December 31, 2021:
Equity Compensation Plan Information
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| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||
Plan Category | (a) | (b) | (c) | |||
Equity compensation plans approved by security holders | 1,362,564 | (1) | $ | 35.37 | (2) | 2,099,761 |
Equity compensation plans not approved by security holders | - |
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| - |
| - |
Total | 1,362,564 |
| $ | 35.37 |
| 2,099,761 |
(1)Consists of 813,492 shares issuable upon exercise of outstanding options, 355,384 shares issuable upon conversion of outstanding performance share units, and 193,687 shares issuable upon conversion of outstanding restricted share units.
(2)Calculated based upon outstanding options of 813,492 shares to acquire our common stock.
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information responsive to this item will be included in the definitive Proxy Statement relating to our 2022 annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by this Annual Report, and is incorporated by reference herein.
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Item 14. | Principal Accountant Fees and Services | |
The information responsive to this item will be included in the definitive Proxy Statement relating to our 2022 annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by this Annual Report, and is incorporated by reference herein.
PART IV
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Item 15. | Exhibits and Financial Statement Schedules | |
Financial Statements. The consolidated financial statements and supplementary data included in Part II, Item 8 are hereby incorporated by reference herein.
Financial Statement Schedules.
Schedule 1. – Condensed Parent Company Financial Statements. All other schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
Exhibits, Including Those Incorporated by Reference. A list of exhibits filed as part of this Annual Report is set forth in the Exhibit Index hereto which is incorporated by reference herein. Where so indicated, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in the exhibit index.
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Item 16. | Form 10-K Summary |
Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. The Company has elected not to include such summary information in this Annual Report.
EXHIBIT INDEX
Exhibit Number | Exhibit Description | Incorporated by Reference to | |||
Form | File No. | Exhibit(s) | Filing Date | ||
2.1 | 8-K | 001-06659 | 2.1 | October 23, 2018 | |
3.1 | Utilities, Inc. Amended and Restated Articles of Incorporation Essential as of May 12, 2020 | 8-K | 001-06659 | 3.1 | May 18, 2020 |
3.2 | Amended and Restated Bylaws of Essential Utilities, Inc. dated February 16, 2022 | 8-K | 001-06659 | 3.1 | February 18, 2022 |
4.1 | 10-K | 001-06659 | 4.1 | March 1, 2021 | |
4.2 | 10-K | 001-06659 | 4.1.1 | February 26, 2016 | |
4.2.1 | Twenty-sixth Supplemental Indenture dated as of November 1, 1991 | 10-K | 001-06659 | 4.1.3 | February 26, 2016 |
4.2.2 | Twenty-ninth Supplemental Indenture dated as of March 30, 1995 | 10-Q | 001-06659 | 4.17 | May 10, 1995 |
4.2.3 | Thirty-third Supplemental Indenture, dated as of November 15, 1999 | 10-K | 001-06659 | 4.27 | March 29, 2000 |
4.2.4 | Thirty-fifth Supplemental Indenture, dated as of January 1, 2002 | 10-K | 001-06659 | 4.22 | March 20, 2002 |
4.2.5 | Forty-seventh Supplemental Indenture, dated as of October 15, 2012 | 10-K | 001-06659 | 4.24 | February 28, 2013 |
4.2.6 | Forty-eighth Supplemental Indenture, dated as of October 1, 2013 | 10-K | 001-06659 | 4.1.17 | March 3, 2014 |
4.2.7 | 10-K | 001-06659 | 4.1.15 | February 26, 2016 | |
4.2.7.1 | Schedule of Outstanding Supplemental Indentures during and after 2014 | 10-K | 001-06659 | 4.2.7.1 | March 1, 2021 |
4.3 | 10-K | 001-06659 | 10.54 | February 28, 2013 | |
4.4 | 10-K | 001-06659 | 10.45 | March 3, 2014 | |
4.5 | 10-K | 001-06659 | 10.58 | February 27, 2015 | |
4.6 | 10-K | 001-06659 | 4.12 | February 26, 2016 | |
4.7 | 10-K | 001-06659 | 4.13 | February 24, 2017 | |
4.8 | 10-K | 001-06659 | 4.14 | February 24, 2017 | |
4.9 | 10-Q | 001-06659 | 4.1 | November 2, 2017 | |
4.10 | 10-Q | 001-06659 | 4.2 | November 2, 2017 | |
4.11 | 10-Q | 001-06659 | 4.1 | August 3, 2018 | |
4.12 | 10-K | 001-06659 | 4.15 | February 26, 2019 |
4.13 | 8-K | 001-06659 | 4.1 | April 23, 2019 | |
4.13.1 | 8-K | 001-06659 | 4.1 | April 23, 2019 | |
4.13.2 | Form of Purchase Contract (included with Exhibit 4.13 above) | 8-K | 001-06659 | 4.1 | April 23, 2019 |
4.14 | Indenture, dated as of April 23, 2019, between the Registrant and U.S. Bank N.A., as trustee | 8-K | 001-06659 | 4.4 | April 23, 2019 |
4.14.1 | 8-K | 001-06659 | 4.5 | April 23, 2019 | |
4.14.2 | 8-K | 001-06659 | 4.6 | April 23, 2019 | |
4.14.3 | Form of Amortizing Note (included with Exhibit 4.14.2 above) | 8-K | 001-06659 | 4.7 | April 23, 2019 |
4.14.4 | 8-K | 001-06659 | 4.3 | April 26, 2019 | |
4.14.5 | Form of Global Note for the 2029 Notes (included in Exhibit 4.14.4 above) | 8-K | 001-06659 | 4.4 | April 26, 2019 |
4.14.6 | Form of Global Note for the 2049 Notes (included in Exhibit 4.14.4 above) | 8-K | 001-06659 | 4.5 | April 26, 2019 |
4.14.7 | 8-K | 001-06659 | 4.3 | April 15, 2020 | |
4.15 | 10-Q | 001-06659 | 4.11 | August 8, 2019 | |
4.16 | 10-K | 001-06659 | 4.18 | February 28, 2020 | |
4.17 | 10-Q | 001-06659 | 4.4 | May 8, 2020 |
4.18 | 10-K | 001-06659 | 4.18 | March 1, 2021 | |
4.19 | ^ | ^ | ^ | ^ | |
10.1 | 10-K | 001-06659 | 10.1 | February 26, 2019 | |
10.2.1 | 10-K | 001-06659 | 10.1.5 | February 28, 2018 | |
10.2.2 | 10-K | 001-06659 | 10.2.2 | February 26, 2019 | |
10.2.3 | 10-Q | 001-06659 | 10.1 | May 8, 2020 | |
10.2.4 | ^ | ^ | ^ | ^ | |
10.2.5 | ^ | ^ | ^ | ^ | |
10.3 | 10-K | 001-06659 | 10.24 | March 25, 1997 | |
10.3.1 | 10-K | 001-06659 | 10.50 | February 27, 2009 | |
10.4 | The Registrant’s 2009 Executive Deferral Plan (as amended and restated effective January 1, 2009)* | S-8 | 333-156047 | 4.1 | December 10, 2008 |
10.5 | 10-K | 001-06659 | 10.58 | February 27, 2012 | |
10.6 | The Registrant’s Dividend Reinvestment and Direct Stock Purchase Plan | S-3ASR | 333-240088 | N/A | July 24, 2020 |
10.7 | Form of Incentive Stock Option and Dividend Equivalent Grant Agreement* | 10-K | 001-06659 | 10.49 | February 27, 2009 |
10.7.1 | 10-K | 001-06659 | 10.8.2 | February 26, 2016 | |
10.8.1 | 10-Q | 001-06659 | 10.1 | May 4, 2017 | |
10.8.2 | Restricted Stock Unit Grant Terms and Conditions for Chief Executive Officer* | 10-Q | 001-06659 | 10.2 | May 4, 2017 |
10.8.3 | Restricted Stock Unit Grant Terms and Conditions for all other executive officers* | 10-Q | 001-06659 | 10.3 | May 4, 2017 |
10.8.4 | 10-Q | 001-06659 | 10.4 | May 4, 2017 | |
10.9 | 10-K | 001-06659 | 10.10 | February 26, 2016 | |
10.10 | The Registrant’s Annual Cash Incentive Compensation Plan (adopted February 26, 2013)* | 10-K | 001-06659 | 10.56 | February 28, 2013 |
10.11 | Form of Change in Control Agreement between the Company and executive officers* | 10-Q | 001-06659 | 10.1 | November 6, 2015 |
10.11.1 | Schedule of Change in Control Agreement between the Company and executive officers* | 10-K | 001-06659 | 10.11.1 | February 26, 2019 |
10.12 | 10-K | 001-06659 | 10.46 | February 27, 2009 | |
10.13 | Non-Employee Directors’ Compensation effective January 1, 2022* | 8-K | 001-06659 | 10.1 | December 8, 2021 |
10.14 | Employment Agreement dated July 1, 2021, between the Registrant and Christopher Franklin* | 8-K | 001-06659 | 10.1 | June 25, 2021 |
10.15 | 8-K | 001-06659 | 10.1 | March 29, 2019 | |
10.16 | The Registrant Amended and Restated Omnibus Equity Compensation Plan | 8-K | 001-06659 | 10.1 | May 3, 2019 |
10.17 | Essential Utilities, Inc. Stock Award Grant Instrument dated as of March 16, 2020* | 10-Q | 001-06659 | 10.4 | May 8, 2020 |
10.18 | 8-K | 001-06659 | 10.1 | March 16, 2020 | |
10.19 | 8-K | 001-06659 | 10.2 | March 16, 2020 | |
10.20 | 8-K | 001-06659 | 10.1 | April 3, 2020 | |
10.21 | 8-K/A | 001-06659 | 10.1 | April 13, 2020 | |
10.21.1 | 8-K/A | 001-06659 | 10.1.1 | April 13, 2020 | |
10.21.2 | 8-K/A | 001-06659 | 10.1.2 | April 13, 2020 |
10.21.3 | 8-K/A | 001-06659 | 10.1.3 | April 13, 2020 | |
10.21.4 | 8-K/A | 001-06659 | 10.1.4 | April 13, 2020 | |
10.21.5 | 8-K/A | 001-06659 | 10.1.5 | April 13, 2020 | |
10.21.6 | 8-K/A | 001-06659 | 10.1.6 | April 13, 2020 | |
10.21.7 | 8-K/A | 001-06659 | 10.1.7 | April 13, 2020 | |
10.21.8 | 8-K/A | 001-06659 | 10.1.8 | April 13, 2020 | |
10.21.9 | ^ | ^ | ^ | ^ | |
10.21.10 | ^ | ^ | ^ | ^ | |
21.1 | ^ | ^ | ^ | ^ | |
23.1 | Consent of Independent Registered Public Accounting Firm – PricewaterhouseCoopers LLP | ^ | ^ | ^ | ^ |
31.1 | ^ | ^ | ^ | ^ | |
31.2 | ^ | ^ | ^ | ^ | |
32.1 | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 | ^^ | ^^ | ^^ | ^^ |
32.2 | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 | ^^ | ^^ | ^^ | ^^ |
101.INS | Inline XBRL Instance Document | ^ | ^ | ^ | ^ |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | ^ | ^ | ^ | ^ |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ^ | ^ | ^ | ^ |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ^ | ^ | ^ | ^ |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ^ | ^ | ^ | ^ |
101.PRES | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ^ | ^ | ^ | ^ |
104 | The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 formatted in Inline XBRL (included in Exhibit 101) | ^ | ^ | ^ | ^ |
In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, copies of specific instruments defining the rights of holders of long-term debt of the Company or its subsidiaries are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.
*Indicates management contract or compensatory plan or arrangement
^ Filed herewith
^^Furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ESSENTIAL UTILITIES, INC.
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/s/ Christopher H. Franklin |
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Christopher H. Franklin |
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Chairman, President and Chief Executive Officer |
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Date: March 1, 2022
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant on March 1, 2022 in the capacities indicated below.
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Signature |
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/s/ Christopher H. Franklin |
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Christopher H. Franklin |
| Chairman, President and Chief Executive Officer, Director (Principal Executive Officer) | ||||||
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/s/ Daniel J. Schuller |
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Daniel J. Schuller |
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||
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/s/ Robert A. Rubin |
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Robert A. Rubin |
| Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | ||||||
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/s/ Elizabeth B. Amato |
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Elizabeth B. Amato |
| Director |
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/s/ David Ciesinski |
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David Ciesinski |
| Director |
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/s/ Daniel J. Hilferty |
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Daniel J. Hilferty |
| Director |
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/s/ Francis O. Idehen |
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Francis O. Idehen |
| Director |
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/s/ Edwina Kelly |
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Edwina Kelly |
| Director |
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/s/ Ellen T. Ruff |
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Ellen T. Ruff |
| Director |
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/s/ Lee C. Stewart |
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Lee C. Stewart |
| Director |
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/s/ Christopher C. Womack |
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Christopher C. Womack |
| Director |
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Essential Utilities, Inc.
Schedule 1 – Condensed Parent Company Financial Statements
Condensed Balance Sheets
(In thousands of dollars)
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| December 31, | |||
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| 2021 |
| 2020 |
Assets |
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Current assets: |
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Accounts receivable, net | $ | | $ | |
Accounts receivable - affiliates |
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Prepayments and other current assets |
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Total current assets |
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Deferred charges and other assets, net |
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Notes receivable - affiliates |
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Deferred income tax asset |
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Investment in subsidiaries |
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Total assets | $ | | $ | |
Liabilities and Equity |
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Stockholders equity | $ | | $ | |
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Long-term debt, excluding current portion, net of debt issuance costs |
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Current liabilities: |
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Current portion of long-term debt |
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Accrued interest |
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Accounts payable - affiliates |
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Other accrued liabilities |
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Total current liabilities |
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Other liabilities |
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Total liabilities and equity | $ | | $ | |
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The accompanying condensed notes are an integral part of these condensed financial statements. | ||||
Essential Utilities, Inc.
Schedule 1 – Condensed Parent Company Financial Statements
Condensed Statements of Income and Comprehensive Income
(In thousands, except per share amounts)
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| Years ended December 31, | |||||
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| 2021 |
| 2020 |
| 2019 |
Other income | $ | | $ | | $ | |
Operating expense and other expenses |
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Operating income (loss) |
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Interest expense |
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Interest income |
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Change in fair value of interest rate swap agreements |
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Other (income) expense |
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Loss before equity in earnings of subsidiaries and income taxes |
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Equity in earnings of subsidiaries |
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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 condensed notes are an integral part of these condensed financial statements. | ||||||
Essential Utilities, Inc.
Schedule 1 – Condensed Parent Company Financial Statements
Condensed Statements of Cash Flows
(In thousands of dollars)
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| Years ended December 31, | |||||
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| 2021 |
| 2020 |
| 2019 |
Net cash flows used in operating activities | $ | ( | $ | ( | $ | ( |
Cash flows from investing activities: |
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Acquisitions of utility systems and other, net |
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Acquisition of natural gas system and other, net |
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Decrease (increase) in investment of subsidiary |
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Other |
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Net cash flows used in investing activities |
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Cash flows from financing activities: |
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Net repayments of short-term debt |
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Proceeds from long-term debt |
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Repayments of long-term debt |
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Extinguishment of long-term debt |
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Proceeds from stock issued to finance acquisition |
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Proceeds from tangible equity unit issuance |
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Proceeds from issuance of common stock under dividend reinvestment plan |
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Proceeds from exercised stock options |
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Proceeds from issuance of common stock from forward equity sale agreement |
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Repurchase of common stock |
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Dividends paid on common stock |
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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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Cash and cash equivalents at beginning of year |
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Cash and cash equivalents at end of year | $ |
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| $ | |
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See Note 1 - Basis of Presentation |
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The accompanying condensed notes are an integral part of these condensed financial statements. | ||||||
Note 1 – Basis of Presentation – The accompanying condensed financial statements of Essential Utilities, Inc. (the “Parent”) should be read in conjunction with the consolidated financial statements and notes thereto of Essential Utilities, Inc. and subsidiaries (collectively, the “Registrant”) included in Part II, Item 8 of the Annual Report. The Parent’s significant accounting policies are consistent with those of the Registrant.
The Parent borrows from third parties and provides funds to its subsidiaries, in support of their operations. Amounts owed to the Parent for borrowings under this facility are reflected as inter-company receivables on the condensed balance sheets. The interest rate charged to the subsidiaries is sufficient to cover the Parent’s interest costs under its associated borrowings.
As of December 31, 2021 and 2020, the Parent had a current accounts receivable – affiliates balance of $
In the ordinary course of business, the Parent indemnifies a third-party for surety bonds issued on behalf of subsidiary companies, guarantees the performance of one of its regulated utilities in a jurisdiction that requires such guarantees, and guarantees several projects associated with the treatment of water in a jurisdiction.
Note 2 – Dividends from subsidiaries – Dividends in the amount of $
Note 3 – Long-term debt – the Parent has long-term debt under unsecured note purchase agreements with investors in addition to its $
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Year |
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| Debt Maturity |
2022 |
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2023 |
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2024 |
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2025 |
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2026 |
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Thereafter |
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