Essential Utilities, Inc. — Q1 2023 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Essential Utilities operates regulated water, wastewater and natural gas utilities and smaller non-regulated businesses, serving an estimated five million people across ten states.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $726.5 million | $699.3 million | +3.9% |
| Operating income | $225.5 million | $227.6 million | −0.9% |
| Net income | $191.4 million | $199.4 million | −4.0% |
| Diluted EPS | $0.72 | $0.76 | −5.3% |
| Operating cash flow | $401.6 million | $310.6 million | +$91.0 million |
| Capital expenditures | $243.7 million | $183.3 million | +$60.4 million |
Operating expenses rose 6.2% to $501.0 million, including purchased gas costs up 12.6% to $256.3 million and depreciation and amortization up 7.0% to $83.8 million. Operations and maintenance fell 3.2% to $138.0 million. Operating margin was approximately 31.0% of revenue versus 32.6% a year earlier; net income margin was 26.4% versus 28.5%.
Segments: Regulated Water revenue rose 11.7% to $267.3 million and segment net income increased 27.8% to $77.4 million. Regulated Natural Gas revenue declined 0.9% to $441.3 million, while segment net income fell 11.4% to $123.5 million. Other revenue was $17.9 million; Other reported a $9.5 million net loss.
Cash, debt and liquidity
- Cash and cash equivalents were $20.1 million at March 31, 2023, up from $11.4 million at year-end 2022. Operating cash flow benefited from working-capital movements; management attributed the year-over-year change chiefly to a larger change in stored gas inventory, partly reflecting higher gas costs.
- Gross long-term debt was $6.729 billion, including $198.7 million current; loans payable were $22.5 million. Total assets were $15.818 billion and stockholders’ equity was $5.516 billion.
- Current assets of $509.8 million were below current liabilities of $803.3 million. Management noted the company typically operates with negative working capital and believes internal cash generation and financing sources will meet needs for at least twelve months.
- The $1.0 billion revolving credit facility, due December 2027, had $440.4 million available to borrow. Short-term lines of credit totaled $435.5 million, with $413.0 million available; these facilities renew annually and renewal is not assured.
- Cash dividends paid were $75.8 million. The company issued $19.3 million net through its at-the-market equity program in January and had $500 million of aggregate gross offering capacity under that program.
Changes, outlook and notable matters
- Water-segment revenue growth reflected $19.3 million from rate increases and infrastructure surcharges, $4.9 million from acquired systems and customer growth, and $3.6 million from non-utility revenue, primarily developer fees. Rate actions also took effect in Ohio and Indiana; certain Texas surcharges implemented April 1 are subject to refund pending a final order.
- Natural gas results were affected by warmer weather: Pittsburgh-area heating degree days were 19% lower year over year, and lower gas usage reduced revenue by $30.5 million. Higher gas costs increased revenue and purchased-gas expense, which management says generally offset dollar for dollar and do not affect gross margin.
- Interest expense increased $19.0 million, primarily due to higher average borrowings and interest rates. Inflation, elevated interest rates and supply-chain pressures increased operating and capital spending needs; management expects these pressures to continue through 2023 and is pursuing regulatory recovery of costs. The filing provides no quantified earnings or revenue guidance.
- Capital investment remains significant. Q1 capital expenditures were $243.7 million, directed to utility mains, treatment facilities and other system improvements. Proposed EPA federal PFAS drinking-water limits could require additional treatment investment and operating costs; the company was evaluating the proposal and expected to submit comments.
- The company agreed to sell its West Virginia regulated gas assets for $37.0 million cash at closing, subject to adjustments and regulatory approval; closing was expected in mid-2023. The assets remain classified as held for sale, with no impairment anticipated.
- The proposed $276.5 million DELCORA wastewater acquisition remains subject to regulatory approval, litigation and procedural delays. The regulatory proceeding was stayed in February 2023; the company’s expected closing timing remains uncertain. Willistown Township terminated its acquisition agreement in April 2023.
- Management reported $19.5 million accrued for loss contingencies, with approximately $1.5 million estimated as recoverable through insurance. An Illinois water-advisory class action remains in discovery; class certification had not been granted. Management did not expect its resolution to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Net income included a $31.6 million income-tax benefit, versus a $17.2 million benefit in Q1 2022. The effective tax benefit rate was 19.8%, primarily reflecting tax deductions associated with qualifying infrastructure.
Important facts for investors to verify
- Whether rate cases and surcharges allow timely recovery of higher operating, financing and environmental-compliance costs, including the Texas refund exposure.
- Progress and final requirements for PFAS regulation, and resulting capital spending, operating costs and rate recovery.
- Available credit, refinancing and equity-funding needs as capital expenditures and acquisition plans continue; annual renewal risk for short-term credit lines.
- Regulatory and litigation outcomes affecting DELCORA, the West Virginia asset sale and other pending utility acquisitions.
- Developments in the Illinois water-related claims, accrued contingencies and insurance recoveries.