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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from_______________ to _______________
Commission File Number
(Exact name of registrant as specified in its charter)
|
|
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
|
|
(Address of principal executive offices) | (Zip Code) |
|
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( | |
(Registrant’s telephone number, including area code) | |
N/A
(Former Name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No £
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.:
|
|
Accelerated Filer £ | |
Non-Accelerated Filer £ | Smaller Reporting Company |
Emerging Growth Company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No
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Securities registered pursuant to Section 12(b) of the Act: | ||||
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
|
| |||
|
|
|
|
|
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of July 22, 2022:
TABLE OF CONTENTS
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
Assets |
| 2022 |
| 2021 | ||
Property, plant and equipment, at cost |
| $ | |
| $ | |
Less: accumulated depreciation |
|
| |
|
| |
Net property, plant and equipment |
|
| |
|
| |
|
|
|
|
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|
|
Current assets: |
|
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|
|
|
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 |
|
| |
|
| |
|
|
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|
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|
|
Regulatory assets |
|
| |
|
| |
Deferred charges and other assets, net |
|
| |
|
| |
Funds restricted for construction activity |
|
| |
|
| |
Goodwill |
|
| |
|
| |
Operating lease right-of-use assets |
|
| |
|
| |
Intangible assets |
|
| |
|
| |
Total assets |
| $ | |
| $ | |
|
|
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|
|
The accompanying notes are an integral part of these consolidated financial statements | ||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|
|
|
|
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|
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| June 30, |
| December 31, | ||
Liabilities and Equity |
| 2022 |
| 2021 | ||
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 13) |
|
|
|
| ||
|
|
|
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|
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Current liabilities: |
|
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|
|
|
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Current portion of long-term debt |
|
| |
|
| |
Loans payable |
|
| |
|
| |
Accounts payable |
|
| |
|
| |
Book overdraft |
|
| |
|
| |
Accrued interest |
|
| |
|
| |
Accrued taxes |
|
| |
|
| |
Regulatory liabilities |
|
| |
|
| |
Other accrued liabilities |
|
| |
|
| |
Total current liabilities |
|
| |
|
| |
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Deferred credits and other liabilities: |
|
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|
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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 |
| $ | |
| $ | |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements | ||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|
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|
|
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|
|
| Three Months Ended | ||||
|
| June 30, | ||||
|
| 2022 |
| 2021 | ||
Operating revenues |
| $ | |
| $ | |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Operations and maintenance |
|
| |
|
| |
Purchased gas |
|
| |
|
| |
Depreciation |
|
| |
|
| |
Amortization |
|
| |
|
| |
Taxes other than income taxes |
|
| |
|
| |
Total operating expenses |
|
| |
|
| |
|
|
|
|
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|
|
Operating income |
|
| |
|
| |
|
|
|
|
|
|
|
Other expense (income): |
|
|
|
|
|
|
Interest expense |
|
| |
|
| |
Interest income |
|
| ( |
|
| ( |
Allowance for funds used during construction |
|
| ( |
|
| ( |
Gain on sale of other assets |
|
| ( |
|
| ( |
Other |
|
| ( |
|
| ( |
Income before income taxes |
|
| |
|
| |
Provision for income taxes |
|
| |
|
| |
Net income |
| $ | |
| $ | |
|
|
|
|
|
|
|
Comprehensive income |
| $ | |
| $ | |
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
Basic |
| $ | |
| $ | |
Diluted |
| $ | |
| $ | |
|
|
|
|
|
|
|
Average common shares outstanding during the period: |
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|
|
Basic |
|
|
|
| ||
Diluted |
|
|
|
| ||
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements | ||||||
|
|
|
|
|
|
|
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended | ||||
|
| June 30, | ||||
|
| 2022 |
| 2021 | ||
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 |
|
| ( |
|
| ( |
Gain on sale of other assets |
|
| ( |
|
| ( |
Other |
|
| ( |
|
| ( |
Income before income taxes |
|
| |
|
| |
Provision for income taxes (benefit) |
|
| ( |
|
| |
Net income |
| $ | |
| $ | |
|
|
|
|
|
|
|
Comprehensive income |
| $ | |
| $ | |
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
Basic |
| $ | |
| $ | |
Diluted |
| $ | |
| $ | |
|
|
|
|
|
|
|
Average common shares outstanding during the period: |
|
|
|
|
|
|
Basic |
|
| |
|
| |
Diluted |
|
| |
|
| |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements | ||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| June 30, |
| December 31, | ||
|
|
| 2022 |
| 2021 | ||
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 |
|
|
| |
|
| |
Notes at |
|
|
| |
|
| |
Notes ranging from |
|
| |
|
| | |
Notes at |
|
| |
|
| | |
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 |
|
| $ | |
| $ | |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements | |||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital in |
|
|
|
|
|
|
|
|
| |
|
| Common |
| Excess of |
| Retained |
| Treasury |
|
|
| ||||
|
| Stock |
| Par Value |
| Earnings |
| Stock |
| Total | |||||
Balance at December 31, 2021 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
|
| |
|
| - |
|
| |
Dividends of March 1, 2022 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Dividends of June 1, 2022 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
|
| |
|
| |
|
| - |
|
| - |
|
| |
Repurchase of stock ( |
|
| - |
|
| - |
|
| - |
|
| ( |
|
| ( |
Equity compensation plan ( |
|
| |
|
| ( |
|
| - |
|
| - |
|
| - |
Exercise of stock options ( |
|
| |
|
| |
|
| - |
|
| - |
|
| |
Stock-based compensation |
|
| - |
|
| |
|
| ( |
|
| - |
|
| |
Other |
|
| - |
|
| ( |
|
| - |
|
| |
|
| |
Balance at March 31, 2022 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
|
| |
|
| - |
|
| |
Dividends of June 1, 2022 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
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 June 30, 2022 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements | |||||||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital in |
|
|
|
|
|
|
|
|
| |
|
| Common |
| Excess of |
| Retained |
| Treasury |
|
|
| ||||
|
| Stock |
| Par Value |
| Earnings |
| Stock |
|
| Total | ||||
Balance at December 31, 2020 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
|
| |
|
| - |
|
| |
Dividends of March 1, 2021 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
|
| |
|
| |
|
| - |
|
| - |
|
| |
Repurchase of stock ( |
|
| - |
|
| - |
|
| - |
|
| ( |
|
| ( |
Equity compensation plan ( |
|
| |
|
| ( |
|
| - |
|
| - |
|
| - |
Exercise of stock options ( |
|
| |
|
| |
|
| - |
|
| - |
|
| |
Stock-based compensation |
|
| - |
|
| |
|
| ( |
|
| - |
|
| |
Other |
|
| - |
|
| ( |
|
| - |
|
| |
|
| |
Balance at March 31, 2021 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
|
| |
|
| - |
|
| |
Dividends of June 1, 2021 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
|
| |
|
| |
|
| - |
|
| - |
|
| |
Repurchase of stock ( |
|
| - |
|
| - |
|
| - |
|
| ( |
|
| ( |
Equity compensation plan ( |
|
| |
|
| ( |
|
| - |
|
| - |
|
| - |
Exercise of stock options ( |
|
| |
|
| |
|
| - |
|
| - |
|
| |
Stock-based compensation |
|
| - |
|
| |
|
| ( |
|
| - |
|
| |
Other |
|
| - |
|
| ( |
|
| - |
|
| |
|
| |
Balance at June 30, 2021 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements | |||||||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
|
|
|
|
|
|
|
|
| Six Months Ended | ||||
|
| June 30, | ||||
|
| 2022 |
| 2021 | ||
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 other assets |
|
| ( |
|
| ( |
Net change in receivables, inventory 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, net |
|
| ( |
|
|
|
Net proceeds from the sale of other assets |
|
| |
|
| |
Other |
|
| |
|
| ( |
Net cash flows used in investing activities |
|
| ( |
|
| ( |
Cash flows from financing activities: |
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|
Customers advances and contributions in aid of construction |
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| |
|
| |
Repayments of customers advances |
|
| ( |
|
| ( |
Net repayments of short-term debt |
|
| ( |
|
| ( |
Proceeds from long-term debt |
|
| |
|
| |
Repayments of long-term debt |
|
| ( |
|
| ( |
Change in cash overdraft position |
|
| ( |
|
| ( |
Proceeds from issuance of common stock under dividend reinvestment plan |
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| |
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| |
Proceeds from exercised stock options |
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| |
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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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| |
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| |
Net cash flows from (used in) financing activities |
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| |
|
| ( |
Net change in cash and cash equivalents |
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| |
Cash and cash equivalents at beginning of period |
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| |
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| |
Cash and cash equivalents at end of period |
| $ | |
| $ | |
| ||||||
Non-cash investing activities: | ||||||
Property, plant and equipment additions purchased at the period end, but not yet paid for |
| $ | |
| $ | |
Non-cash customer advances and contributions in aid of construction |
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| |
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| |
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The accompanying notes are an integral part of these consolidated financial statements | ||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The accompanying unaudited consolidated balance sheets and statements of capitalization of Essential Utilities, Inc. and subsidiaries (collectively, the “Company”, “we”, “us” or “our”) at June 30, 2022, the unaudited consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2022 and 2021, and the consolidated statements of cash flows and of equity for the six months ended June 30, 2022 and 2021, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim reporting and the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments, consisting of only recurring accruals, which are necessary to present a fair statement of its consolidated balance sheets, consolidated statements of equity, consolidated statements of operations and comprehensive income, and consolidated cash flow for the periods presented, have been made.
The preparation of financial statements often requires the selection of specific accounting methods and policies. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in its consolidated balance sheets, the revenues and expenses in its consolidated statements of operations and comprehensive income, and the information that is contained in its summary of significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that the Company includes currently in its consolidated financial statements, summary of significant accounting policies, and notes.
In the preparation of these financial statements and related disclosures, we have assessed the impact that the COVID-19 pandemic and the global geopolitical uncertainties (“major events”) has had on our estimates, assumptions, forecasts, and accounting policies. Because of the essential nature of our business, we do not believe these major events had a material impact on our estimates, assumptions and forecasts used in the preparation of our financial statements, although we continue to monitor this closely. As these major events are continuing to evolve, future events and effects related to these major events cannot be determined with precision, and actual results could significantly differ from our estimates or forecasts.
There have been no changes to the summary of significant accounting policies previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table presents our revenues disaggregated by major source and customer class:
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| Three Months Ended |
| Three Months Ended | ||||||||||||||||||||
| June 30, 2022 |
| June 30, 2021 | ||||||||||||||||||||
| Water Revenues |
| Wastewater Revenues |
| Natural Gas Revenues |
| Other Revenues |
| Water Revenues |
| Wastewater Revenues |
| Natural Gas Revenues |
| Other Revenues | ||||||||
Revenues from contracts with customers: |
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Residential | $ | |
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| |
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| |
|
| - |
| $ | |
| $ | |
| $ | |
| $ | - |
Commercial |
| |
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| |
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| |
|
| - |
|
| |
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| |
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| |
|
| - |
Fire protection |
| |
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| - |
|
| - |
|
| - |
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| |
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| - |
|
| - |
|
| - |
Industrial |
| |
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| |
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| |
|
| - |
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| |
|
| |
|
| - |
Gas transportation storage |
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
Other water |
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
Other wastewater |
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
Other utility |
| - |
|
| - |
|
| |
|
| |
|
| - |
|
| - |
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Revenues from contracts with customers |
| |
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Alternative revenue program |
| |
|
| ( |
|
| |
|
| - |
|
| |
|
| ( |
|
| ( |
|
| - |
Other and eliminations |
| ( |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
Consolidated | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
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| Six Months Ended |
| Six Months Ended | ||||||||||||||||||||
| June 30, 2022 |
| June 30, 2021 | ||||||||||||||||||||
| Water Revenues |
| Wastewater Revenues |
| Natural Gas Revenues |
| Other Revenues |
| Water Revenues |
| Wastewater Revenues |
| Natural Gas Revenues |
| Other Revenues | ||||||||
Revenues from contracts with customers: |
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Residential | $ | |
| $ | |
|
| |
| $ | - |
| $ | |
| $ | |
| $ | |
| $ | - |
Commercial |
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Fire protection |
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
Industrial |
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Gas transportation storage |
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
Other water |
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
Other wastewater |
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
Other utility |
| - |
|
| - |
|
| |
|
| |
|
| - |
|
| - |
|
| |
|
| |
Revenues from contracts with customers |
| |
|
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| |
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| |
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| |
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| |
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Alternative revenue program |
| |
|
| ( |
|
| - |
|
| - |
|
| |
|
| ( |
|
| |
|
| - |
Other and eliminations |
| ( |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
Consolidated | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
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Water and Wastewater Utility Acquisitions - Completed
In March 2022, the Company acquired the wastewater system of Lower Makefield Township, which serves approximately
In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The purchase price allocation for these acquisitions consisted primarily of acquired property, plant and equipment.
The pro forma effect of the utility systems acquired is not material either individually or collectively to the Company’s results of operations.
Water and Wastewater Utility Acquisitions – Pending Completion
In July 2022, the Company’s subsidiary, Aqua Pennsylvania Wastewater, was granted a one-year exclusivity agreement by the board of the Bucks County Water and Sewer Authority (“BCWSA”) regarding the sale of the county’s wastewater assets. Aqua Pennsylvania Wastewater made an offer to purchase the BCWSA’s wastewater assets for a purchase price of $
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
The purchase price for these pending acquisitions are subject to certain adjustments at closing, and are subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase price of these acquisitions by utilizing our revolving credit facility until permanent debt and common equity are secured. The closings of our acquisitions of East Whiteland Township and Willistown Township are expected to occur during the third quarter of 2022, while the Oak Brook acquisition is expected to occur during the fourth quarter of 2022. The closings of our Shenandoah Borough, Beaver Falls, and Southern Oaks acquisitions are expected to occur in the first half of 2023. Closing for our utility acquisitions are subject to the timing of the respective regulatory approval processes.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
DELCORA Purchase Agreement
In September 2019, the Company entered into a purchase agreement to acquire the wastewater utility system assets of the Delaware County Regional Water Quality Control Authority (“DELCORA”), which consists of approximately
The administrative law judges in the regulatory approval process recommended that the Company’s application be denied, and subsequently, the Company provided exceptions to the recommended decision. On March 30, 2021, the Pennsylvania Public Utility Commission (“PUC”) ruled that the case be remanded back to the Office of Administrative Law Judge (“ALJ”) and vacated the original administrative law judges’ recommended decision (“2021 Order”). This 2021 Order was also appealed to the Commonwealth Court by Delaware County, and a decision is expected in the next several months.
After the PUC issued the 2021 Order, on April 16, 2021, the administrative law judge issued an order staying the proceeding until the Delaware County Court lawsuit is final and unappealable. On March 25, 2022, the Company sent a letter notifying the PUC of the March 3, 2022 Commonwealth Court decision and requested that the PUC move forward with processing the application. Several parties responded to the Company’s letter and referenced the issues in the second appeal before Commonwealth Court regarding the 2021 Order. On July 14, 2022, the Commission moved to lift the stay imposed by the ALJ, and required the ALJ to establish a schedule on remand for the proceeding.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes the changes in the Company’s goodwill, by business segment:
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| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated | ||||
Balance at December 31, 2021 |
| $ | |
| $ |
| $ |
| $ | | ||
Reclassification to utility plant acquisition adjustment |
|
| ( |
|
| - |
|
| - |
|
| ( |
Balance at June 30, 2022 |
| $ | |
| $ | |
| $ | |
| $ | |
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
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Tangible Equity Units
On April 23, 2019, the Company issued $
Certain holders of the tangible equity units had early settled their prepaid stock purchase contracts prior to the due date, and, in exchange, the Company issued shares of its common stock. During April 2022,
Long-term Debt and Loans Payable
On May 20, 2022, the Company issued $500,000 of long-term debt (the “Senior Notes”), less expenses of $5,815 , due in 2052 with an interest rate of 5.30 %. The Company used the net proceeds from the issuance of Senior Notes to (1) to repay $49,700 of borrowings under the Aqua Pennsylvania’s 364-day revolving credit facility and $410,000 of borrowings under the Company’s existing -year unsecured revolving credit facility, and (2) for general corporate purposes.
On June 30, 2022, the following debt amendments were executed: (1) Peoples Natural Gas Companies amended its 364-day revolving credit agreement primarily to increase the amount of the facility from $
On April 15, 2021, the Company’s operating subsidiary, Aqua Ohio, Inc., issued $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented. The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments. There have been no changes in the valuation techniques used to measure fair value, or asset or liability transfers between the levels of the fair value hierarchy for the three and six months ended June 30, 2022 and 2021.
The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of June 30, 2022 and December 31, 2021, the carrying amount of the Company’s loans payable was $
Unrealized gain and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net gain (loss) recognized during the period on equity securities |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
Less: net gain / loss recognized during the period on equity securities sold during the period |
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Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
The net gain (loss) recognized on equity securities is presented on the consolidated statements of operations and comprehensive income on the line item “Other.”
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
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| June 30, |
| December 31, | ||
|
| 2022 |
| 2021 | ||
Carrying amount |
| $ | |
| $ | |
Estimated fair value |
|
| |
|
| |
The fair value of long-term debt has been determined by discounting the future cash flows using current market interest rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The Company’s customers’ advances for construction have a carrying value of $
Basic net income per common share is based on the weighted average number of common shares outstanding and the weighted average minimum number of shares issued upon settlement of the stock purchase contracts issued under the tangible equity units. Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The dilutive effect of employee stock-based compensation 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 common share. The dilutive effect of stock-based compensation and shares issuable under the forward equity sale agreement are calculated 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 common share:
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| Three Months Ended |
| Six Months Ended | ||||
|
| June 30, |
| June 30, | ||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
Average common shares outstanding during the period for basic computation |
| |
| |
| |
| |
Effect of dilutive securities: |
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Forward equity sale agreement |
| - |
| |
| - |
| |
Tangible equity units |
| - |
| - |
| - |
| - |
Employee stock-based compensation |
|
|
| |
| | ||
Average common shares outstanding during the period for diluted computation |
| |
| |
| |
| |
For the three and six months ended June 30, 2022, the weighted average impact of
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Under the Company’s Amended and Restated Equity Compensation Plan (the “Plan”) approved by the Company’s shareholders on May 2, 2019, to replace the 2004 Equity Compensation Plan, stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors. The Plan authorizes
Performance Share Units – A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes the PSU transactions for the six months ended June 30, 2022:
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| Number |
| Weighted | |
|
|
| of |
| Average | |
|
|
| Share Units |
| Fair Value | |
Nonvested share units at beginning of period |
|
|
| $ | ||
Granted |
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| |
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| |
Forfeited |
|
| ( |
|
| |
Nonvested share units at end of period |
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A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions. The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied. The per unit weighted-average fair value at the date of grant for PSUs granted during the six months ended June 30, 2022 and 2021 was $
Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock. RSUs are eligible to be earned at the end of a specified restricted period, which is generally
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
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| |
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| |
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| |
|
| |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes the RSU transactions for the six months ended June 30, 2022:
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| Number |
| Weighted | |
|
|
| of |
| Average | |
|
|
| Stock Units |
| Fair Value | |
Nonvested stock units at beginning of period |
|
|
| $ | ||
Granted |
|
| |
|
| |
Stock units vested and issued |
|
| ( |
|
| |
Forfeited |
|
| ( |
|
| |
Nonvested stock units at end of period |
|
| |
|
| |
The per unit weighted-average fair value at the date of grant for RSUs granted during the six months ended June 30, 2022 and 2021 was $
Stock Options – A stock option represents the option to purchase a number of shares of common stock of the Company as specified in the stock option grant agreement at the exercise price per share as determined by the closing market price of our common stock on the grant date. Stock options are exercisable in installments of
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
|
| June 30, | |||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
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| |
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| |
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The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model. The following assumptions were used in the application of this valuation model:
|
|
|
| 2022 | |
Expected term (years) |
| |
Risk-free interest rate |
| |
Expected volatility |
| |
Dividend yield |
| |
Grant date fair value per option | $ | |
The Company did
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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 following table summarizes stock option transactions for the six months ended June 30, 2022:
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|
|
|
|
|
|
|
|
|
|
|
| Weighted |
| Weighted |
|
|
| |
|
|
|
| Average |
| Average |
| Aggregate | ||
|
|
|
| Exercise |
| Remaining |
| Intrinsic | ||
|
| Shares |
| Price |
| Life (years) |
| Value | ||
Outstanding at beginning of period |
| |
| $ | |
|
|
|
|
|
Granted |
| |
|
| |
|
|
|
|
|
Forfeited |
| ( |
|
| |
|
|
|
|
|
Expired |
| ( |
|
| |
|
|
|
|
|
Exercised |
| ( |
|
| |
|
|
|
|
|
Outstanding at end of period |
| |
| $ | |
|
| $ | | |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
| |
| $ | |
|
| $ | | |
Restricted Stock – Restricted stock awards provide the grantee with the rights of a shareholder, including the right to receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction period. Restricted stock awards result in compensation expense that is equal to the fair market value of the stock on the date of the grant and is amortized ratably over the restriction period. The Company expects forfeitures of restricted stock to be de minimis. The following table provides the compensation cost and income tax benefit for stock-based compensation related to restricted stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes restricted stock transactions for the six months ended June 30, 2022:
|
|
|
|
|
|
|
| Number |
| Weighted | |
|
| of |
| Average | |
|
| Shares |
| Fair Value | |
Nonvested restricted stock at beginning of period |
| |
| $ | |
Granted |
|
|
| ||
Vested |
|
|
| ||
Nonvested restricted stock at end of period |
| |
| $ | |
The Company did
Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. The issuance of stock awards results in compensation expense that is equal to the fair market value of the stock on the grant date and is expensed immediately upon grant. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
The following table summarizes stock award transactions for the six months ended June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number |
| Weighted | |
|
| of |
| Average | |
|
| Stock Awards |
| Fair Value | |
Nonvested stock awards at beginning of period |
|
| $ | ||
Granted |
| |
|
| |
Vested |
| ( |
|
| ( |
Nonvested stock awards at end of period |
|
|
|
| |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The Company maintains a qualified defined benefit pension plan (the “Pension Plan”), a nonqualified pension plan, and other postretirement benefit plans for certain of its employees.
The following tables provide the components of net periodic benefit (credit) cost for the Company’s pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Benefits | ||||||||||
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost |
| $ | |
| $ | |
| $ | |
| $ | |
Interest cost |
|
| |
|
| |
|
| |
|
| |
Expected return on plan assets |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Amortization of prior service cost |
|
| |
|
| |
|
| |
|
| |
Amortization of actuarial loss |
|
| |
|
| |
|
| |
|
| |
Net periodic benefit cost (credit) |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other | ||||||||||
|
| Postretirement Benefits | ||||||||||
|
|
| Three Months Ended |
|
| Six Months Ended | ||||||
|
|
| June 30, |
|
| June 30, | ||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost |
| $ | |
| $ | |
| $ | |
| $ | |
Interest cost |
|
| |
|
| |
|
| |
|
| |
Expected return on plan assets |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Amortization of prior service credit |
|
| - |
|
| ( |
|
| - |
|
| ( |
Amortization of actuarial loss |
|
| ( |
|
| |
|
| ( |
|
| |
Net periodic benefit cost |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
The net periodic benefit (credit) cost is based on estimated values and an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover, and medical costs. The Company presents the components of net periodic benefit (credit) cost other than service cost in the consolidated statements of operations and comprehensive income on the line item “Other”.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 10 – Rate Activity
On May 16, 2022, the Company’s regulated water and wastewater operating subsidiary in Pennsylvania, Aqua Pennsylvania, received an order from the Pennsylvania Public Utility Commission that allowed base rate increases that would increase total annual operating revenues by $
On January 3, 2022, the Company’s natural gas operating division in Kentucky received an order from the Kentucky Public Service Commission resulting in an increase of $
On June 30, 2022, the Company’s regulated water and wastewater operating subsidiary in North Carolina, Aqua North Carolina, filed an application with the North Carolina Utilities Commission designed to increase rates by $
A base rate case is also underway for our water and wastewater utility operating divisions in Ohio which is expected to increase operating revenues by $
During the first six months of 2022, the Company’s two other water utility operating divisions in Ohio were granted base rate increases designed to increase total operating revenues on an annual basis by $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table provides the components of taxes other than income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Property |
| $ | |
| $ | |
| $ | |
| $ | |
Gross receipts, excise and franchise |
|
| |
|
| |
|
| |
|
| |
Payroll |
|
| |
|
| |
|
| |
|
| |
Regulatory assessments |
|
| |
|
| |
|
| |
|
| |
Pumping fees |
|
| |
|
| |
|
| |
|
| |
Other |
|
| |
|
| |
|
| |
|
| |
Total taxes other than income |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has
In addition to the Company’s
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table presents information about the Company’s reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||||||||||||||||||||
|
| June 30, 2022 |
| June 30, 2021 | ||||||||||||||||||||
|
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated |
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated | ||||||||
Operating revenues |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Operations and maintenance expense |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| ( |
|
| |
Purchased gas |
|
| - |
|
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
Depreciation and amortization |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| |
|
| |
Taxes other than income taxes |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest expense, net (a) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Allowance for funds used during construction |
|
| ( |
|
| ( |
|
| - |
|
| ( |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Other |
|
| ( |
|
| |
|
| |
|
| ( |
|
| ( |
|
| ( |
|
| |
|
| ( |
Income before income taxes |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| ( |
|
| ( |
|
| |
Provision for income taxes (benefit) |
|
| |
|
| ( |
|
| ( |
|
| |
|
| |
|
| ( |
|
| ( |
|
| |
Net income (loss) |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| Six Months Ended | ||||||||||||||||||||
|
| June 30, 2022 |
| June 30, 2021 | ||||||||||||||||||||
|
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated |
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated | ||||||||
Operating revenues |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Operations and maintenance expense |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| ( |
|
| |
Purchased gas |
|
| - |
|
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
Depreciation and amortization |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| |
|
| |
Taxes other than income taxes |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating income (loss) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest expense, net |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Allowance for funds used during construction |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Other |
|
| ( |
|
| ( |
|
| |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Income before income taxes |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| |
|
| |
Provision for income taxes (benefit) |
|
| |
|
| ( |
|
| |
|
| ( |
|
| |
|
| ( |
|
| |
|
| |
Net income (loss) |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Capital expenditures |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The regulated water and regulated natural gas segments report interest expense that includes long-term debt that was pushed-down to the regulated operating subsidiaries from Essential Utilities, Inc.
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2022 |
| 2021 | ||
Total assets: |
|
|
|
|
|
|
Regulated water |
| $ | |
| $ | |
Regulated natural gas |
|
| |
|
| |
Other |
|
| |
|
| |
Consolidated |
| $ | |
| $ | |
|
|
|
|
|
|
|
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 13 – Commitments and Contingencies
The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved. As of June 30, 2022, the aggregate amount of $
During a portion of 2019, the Company initiated a do not consume advisory for some of its water customers in one division served by the Company’s Illinois subsidiary. The do not consume advisory was lifted in 2019 and, in 2022, the water system was determined to be in compliance with the federal Lead and Copper Rule. During the 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 other 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 its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for these claims totaled $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The Company’s effective tax rate was
The Company uses a method of tax accounting for certain qualifying infrastructure investments at its Peoples Natural Gas subsidiary, its largest natural gas subsidiary in Pennsylvania that allows a tax deduction for qualifying utility asset improvement costs. Consistent with the Company’s accounting for differences between book and tax expenditures in Pennsylvania in its other regulated subsidiaries, the Company uses the flow-through method to account for this timing difference. In addition, the Company calculated the income tax benefits for qualifying capital expenditures made prior to the date of its acquisition in March 16, 2020 (“catch-up adjustment”) and recognized a regulatory liability for $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Pronouncements to be adopted upon the effective date:
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.
Pronouncement adopted during the year:
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: the expected timing of closing of our acquisitions; the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “estimates,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among others, the effects of the COVID-19 pandemic, the effects of regulation, abnormal weather, geopolitical forces, changes in capital requirements and funding, our ability to close acquisitions, changes to the capital markets, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such report and those included under the captions “Risk Factors” and this Quarterly Report. As a result, readers are cautioned not to place undue reliance on any forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
General Information
Essential Utilities, Inc. (formerly known as Aqua America, Inc.) (“we”, “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or natural gas services to an estimated 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, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 27 other counties in Pennsylvania. Our other regulated water or wastewater utility subsidiaries provide similar services in seven additional states. Additionally, 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. The Company also operates market-based businesses, conducted through its non-regulated subsidiaries, that provide utility service line protection solutions and repair services to households and gas marketing and production activities.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
For many years, starting in the early 1990s, our business strategy has been 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 in seven other states. On March 16, 2020, the Company completed the Peoples Gas Acquisition, a natural gas distribution utility, marking its entrance into the regulated natural gas business. The Company seeks to acquire businesses in the U.S. regulated sector, focusing on water and wastewater utilities and to opportunistically pursue growth ventures in select market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated utility businesses.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes.
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 take steps to mitigate the potential risks to our business. Since the start of the COVID-19 pandemic, we have implemented protective measures in the field, our plants, and within our offices, which we continuously update for changes in conditions and emerging trends and align with the recommendations of the Centers for Disease Control and Prevention and Federal, State and local health authorities. Our office employees returned to the workplace safely in 2021 and remain working in a hybrid flex schedule as positions allow. We also encouraged employees to become vaccinated. In addition, we are monitoring collections of customer utility accounts, risks present in our supply chain, and increased expenses for costs associated with workforce-related supplies, security and cleaning of company offices and operating facilities, as well as other one-time expenses above the expense amounts included in general rates.
Inflationary Cost Environment
During the six months ended June 30, 2022, we experienced inflationary cost increases in our materials, labor and other operating costs, as well as supply chain pressures as a result of the COVID-19 pandemic and global uncertainties associated with the current conflict in Ukraine and sanctions imposed in response to this conflict. The price of natural gas substantially increased and resulted in the significant increase in the revenue and expenses of our Regulated Natural Gas business during the six month period ended June 30, 2022, as compared to the same period a year earlier. We expect these pressures to continue throughout 2022. We continue to 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. We also 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
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
able to adjust our purchasing procedures to secure and stock the necessary materials without materially impacting our operations or capital investment program.
Financial Condition
The Company’s consolidated balance sheet historically has had a negative working capital position whereby our current liabilities routinely exceed our current assets. Management believes that internally generated funds along with existing credit facilities, and the proceeds from the issuance of long-term debt and equity will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.
During the first six months of 2022, we incurred $424,645 of capital expenditures, expended $50,010 for the acquisition of a wastewater utility system, issued $770,376 of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of $524,882. The capital expenditures were related to new and replacement water, wastewater, and natural gas mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, information technology improvements, and other enhancements and improvements. The issuance of long-term debt was for funds borrowed under our revolving credit facility and used for capital expenditures and general corporate purposes, including a municipal acquisition.
On May 20, 2022, the Company issued $500,000 of long-term debt (the “Senior Notes”), less expenses of $5,815, due in 2052 with an interest rate of 5.30%. The Company used the net proceeds from the issuance of Senior Notes to (1) to repay $49,700 of borrowings under the Aqua Pennsylvania’s 364-day revolving credit facility and $410,000 of borrowings under the Company’s existing five-year unsecured revolving credit facility, and (2) for general corporate purposes.
On April 15, 2021, the Company’s 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, less 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 our Aqua Pennsylvania five- year revolving credit facility, and the balance was used to repay in full the borrowings under its existing five-year unsecured revolving credit agreement.
At June 30, 2022, we had $12,976 of cash and cash equivalents compared to $10,567 at December 31, 2021. During the first six months of 2022, we used the proceeds from long-term debt and internally generated funds to fund the cash requirements discussed above and to pay dividends.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
At June 30, 2022 our $1,000,000 unsecured revolving credit facility, which expires in December 2023, had $840,117 available for borrowing. Additionally, at June 30, 2022, we had short-term lines of credit of $435,500, primarily used for working capital, of which $430,797 was available for borrowing. One of our short-term lines of credit is a Peoples Natural Gas Companies’ 364-day unsecured revolving credit facility, which as of June 30, 2022, was amended to increase the amount available on the facility from $100,000 to $300,000 and to update the termination date to June 29, 2023. Another one of our short-term lines of credit is an Aqua Pennsylvania $100,000 364-day unsecured revolving credit facility, which was also amended on June 30, 2022, to update its termination date to June 29, 2023 to coincide with the Peoples Natural Gas Companies revolving credit facility. As of June 30, 2022, $300,000 and $95,297 were available for borrowing from the Peoples Natural Gas Companies and Aqua Pennsylvania 364-day revolving credit facilities, respectively. Our short-term lines of credit of $435,500 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.
Results of Operations
Consolidated Results of Operations
Consolidated financial and operational highlights for the periods ended June 30, 2022 and 2021 are presented below.
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| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||||||||||
Operating revenues | $ | 448,756 |
| $ | 397,032 |
| $ | 1,148,031 |
| $ | 980,597 | ||||||||||||
Operations and maintenance expense | $ | 134,981 |
| $ | 127,515 |
| $ | 277,562 |
| $ | 252,590 | ||||||||||||
Purchased gas | $ | 75,143 |
| $ | 44,897 |
| $ | 302,855 |
| $ | 177,050 | ||||||||||||
Net income | $ | 82,291 |
| $ | 80,914 |
| $ | 281,667 |
| $ | 264,603 | ||||||||||||
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Operating Statistics |
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Selected operating results as a percentage of operating revenues: |
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Operations and maintenance |
| 30.1% |
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| 32.1% |
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| 24.2% |
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| 25.8% | ||||||||||||
Purchased gas |
| 16.7% |
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| 11.3% |
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| 26.4% |
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| 18.1% | ||||||||||||
Depreciation and amortization |
| 17.6% |
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| 18.7% |
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| 13.7% |
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| 15.0% | ||||||||||||
Taxes other than income taxes |
| 4.8% |
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| 5.3% |
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| 3.9% |
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| 4.3% | ||||||||||||
Interest expense, net of interest income |
| 12.1% |
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| 13.0% |
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| 9.4% |
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| 10.4% | ||||||||||||
Net income |
| 18.3% |
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| 20.4% |
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| 24.5% |
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| 27.0% | ||||||||||||
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Effective tax rate |
| 9.0% |
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| 4.5% |
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| -3.4% |
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| 3.1% | ||||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Three months ended June 30, 2022 compared with three months ended June 30, 2021
For the three months ended June 30, 2022, consolidated operating revenues increased by $51,724 or 13.0% as compared to the same period in 2021. Revenues from our Regulated Water segment, Regulated Natural Gas segment and Other business segment increased by $21,178, $26,167 and $4,379, respectively. Refer below for further details on the changes on Regulated Water and Regulated Natural Gas segment revenues. The increase in our Other business segment revenue is due to higher revenues from our non-regulated natural gas operations.
Consolidated operations and maintenance increased by $7,466 or 5.9%, primarily due to:
increase in production costs for water and wastewater operations of $1,475;
increase in customer assistance surcharge costs of $606 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues. These revenues and offsetting expenses increased mainly due to the increase in average gas prices as compared to the prior period;
additional operating costs associated with acquired and pending acquisitions of water and wastewater utility systems of $2,239;
increase in insurance expense of $1,424 due to higher insurance claims;
increase in legal expenses of $1,467;
increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment; and,
expenses of $164, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;
offset by the decrease in bad debt expense of $788; and,
a decrease in expenses of $6,149 in our Regulated Gas Segment primarily driven by higher capitalization of general and administrative costs as a result of greater capital spend in the current period.
Purchased gas increased by $30,246 or 67.4%. 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. The expense increased primarily due to the 190.7% increase in the average gas commodity prices in the second quarter of 2022 as compared to the same period in the prior year.
Depreciation and amortization expense increased by $5,004 or 6.7% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Interest expense, net of interest income increased by $2,699 or 5.2% for the quarter primarily due to the increase in average borrowings.
Allowance for funds used during construction (“AFUDC”) increased by $1,245 or by 25.4% due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Other income, inclusive of gain on sale of other assets, decreased by $1,263 or by 58.4% due to lower credits recognized from postretirement benefits as compared with the same period in the prior year.
Our effective income tax rate was 9.0% in the second quarter of 2022 and 4.5% in the second quarter of 2021. The increase is primarily attributed to a decrease in the amortization of certain regulatory liabilities associated with deferred taxes.
Six months ended June 30, 2022 compared with six months ended June 30, 2021
Consolidated operating revenues increased by $167,434 or 17.1% for the six months ended June 30, 2022, as compared to the same period in 2021. Revenues from our Regulated Water segment, Regulated Natural Gas segment and Other business segment increased by $32,023, $128,235 and $7,176, respectively. A detailed discussion of the factors contributing to the changes in segment net revenue is included below under the section, Segment Results of Operations. The increase in our Other business segment revenue is due to higher revenues from our non-regulated natural gas operations.
Consolidated operations and maintenance increased by $24,972 or 9.9%, primarily due to:
increase in employee related costs of $9,002;
increase in production costs for water and wastewater operations of $3,001;
increase in customer assistance surcharge costs of $7,367 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues. These revenues and offsetting expenses increased mainly due to the increase in average gas prices during the first six months of 2022 compared to the prior period;
additional operating costs associated with acquired and pending acquisitions of water and wastewater utility systems of $3,582;
increase in insurance expense of $4,685, which includes the impact of a favorable insurance reserve adjustment of $2,426 during the first quarter of 2021;
increase in legal expenses of $1,280,
increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment;
and,
expenses of $376, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;
offset by the decrease in bad debt expense of $3,718; and,
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
a decrease in expenses of $6,149 in our Regulated Gas Segment due to higher capitalization as a result of greater capital spend in the current period.
Purchased gas increased by $125,805 or 71.1%. 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. The expense increased primarily due to the 103.7% increase in the average gas commodity prices during the first six months of 2022 as compared to the same period in the prior year.
Depreciation and amortization expense increased by $10,406 or 7.1% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.
Taxes other than income taxes increased by $2,566 or 6.1% largely due to an increase in sales and use taxes and regulatory fees in our Regulated Natural Gas segment and pumping fees in our Aqua Texas subsidiary, offset by the decrease in property taxes during the period as compared with prior period.
Interest expense, net of interest income, increased by $5,344 or 5.2% for the quarter primarily due to the increase in average borrowings.
Allowance for funds used during construction (“AFUDC”) increased by $4,150 or by 52.9% due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Other income, inclusive of gain on sale of assets, decreased by $3,112 or by 54.5% compared to the same period in the prior year. The first quarter of 2021 included a recovery of a previously incurred cost of $1,917 that resulted in a recognition of a regulatory asset in the prior period. Additionally, during the first half of 2022, there were lower credits recognized from postretirement benefits as compared with the same period in the prior year.
Our effective income tax rate was (3.4)% in the first six months of 2022 and 3.1% in the first six months of 2021. The decrease in the effective tax rate for the first half of the year is primarily attributed to an increase in our income tax benefit associated with the tax deduction for qualifying infrastructure and the amortization of the customer surcredit tax repair catch-up adjustment during the first six months of 2022 in our Regulated Natural Gas segment.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Segment Results of Operations
Regulated Water Segment
Our Regulated Water segment is comprised of eight operating segments representing its water and wastewater regulated utility companies which are organized by the states where the Company provides water and wastewater services. The Regulated Water segment is aggregated into one reportable segment.
The following tables present selected operating results and statistics for our Regulated Water segment:
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| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||
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| 2022 |
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| 2021 |
| 2022 |
| 2021 | ||
Operating revenues | $ | 269,355 |
| $ | 248,177 |
| $ | 508,553 |
| $ | 476,530 |
Operations and maintenance expense | $ | 92,815 |
| $ | 77,801 |
| $ | 178,903 |
| $ | 156,148 |
Net income | $ | 76,342 |
| $ | 78,849 |
| $ | 136,885 |
| $ | 142,879 |
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Operating Statistics |
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Selected operating results as a percentage of operating revenues: |
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Operations and maintenance |
| 34.5% |
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| 31.3% |
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| 35.2% |
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| 32.8% |
Depreciation and amortization |
| 18.7% |
|
| 18.4% |
|
| 19.5% |
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| 19.0% |
Taxes other than income taxes |
| 5.8% |
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| 6.5% |
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| 6.2% |
|
| 6.6% |
Interest expense, net of interest income |
| 10.2% |
|
| 10.9% |
|
| 10.8% |
|
| 11.2% |
Net income |
| 28.3% |
|
| 31.8% |
|
| 26.9% |
|
| 30.0% |
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Effective tax rate |
| 15.4% |
|
| 10.4% |
|
| 13.5% |
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| 8.2% |
Three months ended June 30, 2022 compared with three months ended June 30, 2021
Revenues from our Regulated Water segment increased by $21,178 or 8.5% for the second quarter of 2022 as compared to the same period in 2021, mainly due to the following:
an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $10,044;
increase in volume consumption of $3,943, and,
additional water and wastewater revenues of $6,215 associated with a larger customer base due to utility acquisitions and organic growth.
Operations and maintenance expense for the three months ended June 30, 2022 increased by $15,014 or 19.3% was primarily due to the following:
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $2,239;
increase in production costs for water and wastewater operations of $1,475;
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
expenses of $164, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;
increase in legal expense of $1,266; and,
increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment
Depreciation and amortization increased by $4,714 or 10.3% primarily due to continued capital spend.
AFUDC increased by $909 or by 20.5% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Our effective income tax rate for our Regulated Water Segment was 15.4% in the second quarter of 2022 and 10.4% in the second quarter of 2021. The increase in the effective tax rate is primarily the result of lower income tax benefit associated with the tax deduction for qualifying infrastructure in the second quarter of 2022 as compared to 2021.
Six months ended June 30, 2022 compared with six months ended June 30, 2021
Revenues increased by $32,023 or 6.7%% for the first six months of 2022 as compared to the same period in 2021, mainly due to the following:
an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $15,904;
increase in volume consumption of $4,226, and,
additional water and wastewater revenues of $10,557 associated with a larger customer base due to utility acquisitions and organic growth.
Operations and maintenance expense for the six months ended June 30, 2022 increased by $22,755 or 14.6% was primarily due to the following:
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $3,582;
increase in employee related costs of $3,781;
increase in production costs for water and wastewater operations of $3,001;
expenses of $376, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2022;
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
increase in legal expenses of $1,073; and,
increase in outside services and maintenance expenses of $7,962 in our Regulated Water segment during the second quarter of 2022 as compared with the prior period.
Depreciation and amortization increased by $8,292 or 9.1% primarily due to continued capital spend, offset by a change in the amortization of a regulated liability in 2022.
Interest expense, net, increased by $1,576 or 2.9% for the quarter primarily due to an increase in average borrowings.
AFUDC increased by $2,811 or 36.6% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Our effective income tax rate for our Regulated Water Segment was 13.5% in the first six months of 2022 and 8.2% in the first six months of 2021. The increase in the effective tax rate is primarily the result of lower income tax benefit associated with the tax deduction for qualifying infrastructure in the first six months of 2022 as compared to 2021.
Regulated Natural Gas Segment
Our Regulated Natural Gas segment recognizes revenues by selling gas directly to customers at approved rates or by transporting gas through our pipelines at approved rates to customers that have purchased gas directly from other producers, brokers, or marketers. Natural gas sales to residential, commercial and industrial customers are seasonal, which results in higher demand for natural gas for heating purposes during the colder months.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
The following tables present selected operating results and statistics for our Regulated Natural Gas segment:
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| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||
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| 2022 |
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| 2021 |
| 2022 |
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| 2021 | |
Operating revenues | $ | 167,729 |
| $ | 141,562 |
| $ | 612,912 |
| $ | 484,677 |
Operations and maintenance expense | $ | 44,907 |
| $ | 52,334 |
| $ | 104,359 |
| $ | 103,660 |
Purchased gas | $ | 63,392 |
| $ | 39,788 |
| $ | 280,698 |
| $ | 162,676 |
Net income | $ | 11,478 |
| $ | 1,905 |
| $ | 150,964 |
| $ | 121,155 |
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Operating Statistics |
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Selected operating results as a percentage of operating revenues: |
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Operations and maintenance |
| 26.8% |
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| 37.0% |
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| 17.0% |
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| 21.4% |
Purchased gas |
| 37.8% |
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| 28.1% |
|
| 45.8% |
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| 33.6% |
Depreciation and amortization |
| 17.4% |
|
| 19.9% |
|
| 9.6% |
|
| 11.5% |
Taxes other than income taxes |
| 3.3% |
|
| 3.3% |
|
| 1.9% |
|
| 1.9% |
Interest expense, net of interest income |
| 11.4% |
|
| 14.4% |
|
| 6.5% |
|
| 7.8% |
Net income |
| 6.8% |
|
| 1.3% |
|
| 24.6% |
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| 25.0% |
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Effective tax rate |
| -82.0% |
|
| 167.2% |
|
| -26.5% |
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| -3.7% |
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 a dollar-for-dollar basis, but do 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. The following table shows the reconciliation of gross margin (non-GAAP) to operating revenues (GAAP):
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| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Operating revenues (GAAP) | $ | 167,729 |
| $ | 141,562 |
| $ | 612,912 |
| $ | 484,677 |
Purchased gas |
| 63,392 |
|
| 39,788 |
|
| 280,698 |
|
| 162,676 |
Gross margin (non-GAAP) | $ | 104,337 |
|
| 101,774 |
| $ | 332,214 |
| $ | 322,001 |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
The 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.
Three months ended June 30, 2022 compared with three months ended June 30, 2021
Operating revenues from the Regulated Natural Gas segment increased by $26,167 or 18.5% due to:
impact of higher gas cost of $23,604 during the quarter as compared to the prior period;
higher gas consumption of $2,332;
increase in customer assistance surcharge of $606, which has an equivalent offsetting amount in operations and maintenance expense. These revenues and offsetting expenses increased mainly due to the increase in average gas prices during the second quarter of 2022 compared to the prior period; and,
increase of $2,601 due to higher rates and other surcharges;
offset by the tax repair surcredits to customers of $4,751.
Operations and maintenance expense for the three months ended June 30, 2022 decreased by $7,427 or 14.2% primarily due to the following:
increase in customer assistance surcharge costs of $606, which has an equivalent offsetting amount in revenues;
offset by a decrease in bad debt expense of $1,156; and,
a decrease in expenses of $6,149 in our Regulated Gas Segment primarily driven by higher capitalization as a result of greater capital spend in the current period.
Purchased gas increased by $23,604 or 59.3%. The increase is largely due to the 190.7% increase in the average gas commodity prices in the second quarter of 2022 as compared to the prior period.
Depreciation and amortization increased by $1,010 or 3.6% primarily due to continued capital spend.
Taxes other than income taxes increased by $976 or 21.0% largely due to increase in sales and use taxes and regulatory fees.
Interest expense, net, decreased by $1,251 or 6.1% for the quarter due to higher interest expense during the second quarter in 2021 that did not continue in 2022.
Our effective income tax rate was (82.0)% in the second quarter of 2022 and 167.2% in the second quarter of 2021. The decrease in the effective tax rate is primarily attributed to the increase in the income tax benefit associated with the tax deduction for qualifying infrastructure and the amortization of the catch-up adjustment during the second quarter of 2022 in our Regulated Natural Gas segment.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Six months ended June 30, 2022 compared with six months ended June 30, 2021
Operating revenues from the Regulated Natural Gas segment increased by $128,235 or 26.5% due to:
impact of higher gas cost of $118,023 during the period compared to the prior period;
higher usage of $10,990 due to colder than normal weather during the first half of 2022 as compared to the same period in 2021;
increase in customer assistance surcharge of $7,367, which has an equivalent offsetting amount in operations and maintenance expense. These revenues and offsetting expenses increased mainly due to the increase in average gas prices during the first half of 2022 compared to the prior period; and,
increase of $5,968 due to higher rates and other surcharges;
offset by the tax repair surcredits to customers of $17,238.
Operations and maintenance expense for the six months ended June 30, 2022 increased by $699 or 0.7% primarily due to the following:
increase in employee related costs of $4,259; and,
increase in customer assistance surcharge costs of $7,367, which has an equivalent offsetting amount in revenues;
offset by a decrease in bad debt expense of $1,785; and,
a decrease in expenses of $6,149 during the second quarter of 2022 in our Regulated Gas Segment primarily driven by higher capitalization as a result of greater capital spend in the current period.
Purchased gas increased by $118,022 or 72.6%. The increase is largely due to the 103.7% increase in the average gas commodity prices in the first six months of 2022 as compared to the prior period.
Depreciation and amortization increased by $3,124 or 5.6% primarily due to continued capital spend.
Taxes other than income taxes increased by $2,720 or 29.9% mainly due to an increase in sales and use taxes and regulatory fees during the first quarter of 2022 as compared to the same period in 2021.
Interest expense, net, increased by $2,104 or 5.6% due to additional borrowings pushed down by Essential Utilities, Inc.
AFUDC increased by $1,339 due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Our effective income tax rate was (26.5)% in the first half of 2022 and (3.7)% in the first half of 2021. The decrease in the effective tax rate is primarily attributed to the increase in the income tax benefit associated with the tax deduction for qualifying infrastructure and the amortization of the catch-up adjustment during the first half of 2022 in our Regulated Natural Gas segment.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Impact of Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note 15, Recent Accounting Pronouncements, to the consolidated financial statements in this report.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed March 1, 2022, for additional information on market risks.
Item 4 – Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
(b)Changes in Internal Control over Financial Reporting
We have implemented a new enterprise resource planning (ERP) system for our Regulated Water business segment that enhances our business and financial processes and standardizes some of our information technology systems with our other segments. In connection with this new ERP implementation, we have updated our internal controls over financial reporting, as necessary, to accommodate modifications in our Regulated Water business processes and accounting procedures.
Except as described above, there were no changes in our internal control over financial reporting, during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1 – Legal Proceedings
We are party to various legal proceedings in the ordinary course of business. Although the results of these legal proceedings cannot be predicted with certainty, 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 have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A – Risk Factors
Please review the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, under “Part 1, Item 1A – Risk Factors.”
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the Company’s purchases of its common stock for the quarter ended June 30, 2022:
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| Number of |
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| Publicly |
| Purchased |
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| Average |
| Announced |
| Under the | |
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| of Shares |
| Price Paid |
| Plans or |
| Plan or | |
Period |
| Purchased (1) |
| per Share |
| Programs |
| Programs | |
April 1 - 30, 2022 |
| 47 |
| $ | 51.75 |
| - |
| - |
May 1 -31, 2022 |
| 66 |
| $ | 49.31 |
| - |
| - |
June 1 - 30, 2022 |
| 192 |
| $ | 47.01 |
| - |
| - |
Total |
| 305 |
| $ | 48.24 |
| - |
| - |
(1)These amounts consist of 305 shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of stock-based compensation. This feature of our equity compensation plan is available to all employees who receive stock-based compensation under the plan. We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day prior to the award vesting.
Item 6 – Exhibits
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Exhibit No. |
| Description |
4.1
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4.2
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10.1* |
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10.2* |
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31.1* |
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31.2* |
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32.1* |
| Certification of Chief Executive Officer, furnished pursuant to 18 U.S.C. Section 1350 |
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32.2* |
| Certification of Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350 |
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101.INS |
| Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRES |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
| The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included in Exhibit 101) |
*Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be executed on its behalf by the undersigned thereunto duly authorized.
August 9, 2022
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| Essential Utilities, Inc. | |
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| Registrant | |
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| /s/ Christopher H. Franklin | |
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| Christopher H. Franklin | |
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| Chairman, President and | |
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| Chief Executive Officer | |
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| /s/ Daniel J. Schuller | |
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| Daniel J. Schuller | |
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| Executive Vice President and | |
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| Chief Financial Officer | |