Business context and reporting period
Essential Utilities, Inc. provides regulated water, wastewater and natural gas services to an estimated 5.5 million people across ten states, alongside smaller non-regulated businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; financial figures below are in millions of dollars unless stated otherwise.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $411.3 | $434.6 | $1,574.4 | $1,582.6 |
| Operating income | $137.4 | $125.9 | $518.1 | $491.2 |
| Net income | $80.1 | $68.6 | $362.8 | $350.3 |
| Diluted earnings per share | $0.30 | $0.26 | $1.37 | $1.33 |
| Operating margin | 33.4% | 29.0% | 32.9% | 31.0% |
| Net margin | 19.5% | 15.8% | 23.0% | 22.1% |
For Q3, revenue fell 5.4%, while operating income rose 9.2% and net income rose 16.7%. For the nine-month period, revenue declined 0.5%, operating income increased 5.5%, and net income increased 3.6%. Lower natural-gas commodity costs reduced reported revenue and purchased-gas expense; those costs generally pass through to customers. Higher income-tax benefits, primarily associated with qualifying infrastructure deductions, materially supported reported net income.
Cash flow: Nine-month operating cash flow was $804.6 million, up from $519.2 million. Investing cash outflow was $918.7 million, including $874.5 million of property, plant and equipment additions and $45.3 million for utility acquisitions. Financing cash inflow was $111.2 million. Cash ended the period at $8.5 million. Capital expenditures exceeded operating cash flow by approximately $69.9 million, before acquisitions and other investing items.
Debt and liquidity: Long-term debt was $6.720 billion at September 30, 2023, compared with $6.617 billion at year-end 2022; loans payable were $131.8 million, versus $228.5 million. Current assets of $409.3 million were below current liabilities of $896.6 million, consistent with management’s description of a historically negative working-capital position. The $1.0 billion revolving credit facility had $635.7 million available, and short-term credit lines had $303.7 million available. Management said internal cash generation, credit facilities and debt and equity issuance should provide adequate funding for at least the next twelve months.
Stockholders’ equity increased to $5.923 billion from $5.377 billion. The company raised $323.0 million net through its at-the-market share program during the first nine months, issuing 8.94 million shares; approximately $110 million of program capacity remained at quarter-end. Common dividends paid in the period were $232.9 million.
Material changes versus comparable periods
- Regulated Water revenue increased 3.1% in Q3 and 7.6% for nine months, supported by rate increases, surcharges, customer growth and acquisitions. Wetter weather reduced water consumption.
- Regulated Natural Gas revenue declined 20.3% in Q3 and 7.8% for nine months, primarily reflecting lower gas costs and, year to date, warmer weather and lower usage. The segment recorded a Q3 net loss of $9.8 million, narrower than its $17.1 million loss a year earlier; nine-month net income declined to $127.4 million from $133.8 million.
- Interest expense increased 14.7% in Q3 and 24.8% for nine months, mainly due to higher average borrowings and borrowing rates. Nine-month depreciation and amortization increased 6.3% amid continued investment and acquisitions.
- Operating cash flow improved substantially, largely because of working-capital movements, including lower receivables, unbilled revenue and gas inventory balances. Management cautions that gas prices and inventory timing can significantly affect cash flow.
Outlook, commentary, risks and unusual items
- No specific full-year earnings or revenue guidance is provided in the filing. Management expects inflation, higher interest rates, insurance costs and supply-chain pressures to continue increasing operating and capital spending through the remainder of 2023 and into 2024; it is pursuing regulatory mechanisms to recover costs and reduce regulatory lag.
- The proposed federal PFAS drinking-water regulation could require an estimated $450 million of capital investment over the compliance period and annual operating expenses estimated at about 5% of installed capital, in today’s dollars. These are preliminary estimates and could change. The company is pursuing litigation, grants and low-interest loans to help address the costs.
- S&P affirmed the company’s A issuer rating but revised its outlook to negative, citing weaker financial measures from inflation and significant capital spending. Moody’s affirmed the company’s Baa2 senior unsecured rating with a stable outlook; it revised Peoples Natural Gas Companies’ outlook to negative. Management identifies timely rate relief, balanced debt/equity funding and cash generation as important to maintaining ratings.
- The sale of the West Virginia regulated gas assets closed October 1, 2023, for an estimated $40.0 million, subject to adjustments. A separate agreement to sell three non-utility microgrid and distributed-energy interests for $165.0 million was signed in October, subject to approvals and conditions; completion was expected in late 2023 or early 2024. Management intends to use proceeds to fund capital spending and utility acquisitions.
- The Pennsylvania Commonwealth Court reversed approval of the East Whiteland wastewater acquisition; the company and other parties appealed to the Pennsylvania Supreme Court in October 2023. Management did not expect final resolution to have a material adverse effect. The proposed DELCORA acquisition remains subject to extensive litigation and regulatory proceedings, with timing and completion uncertain.
- Legal loss contingencies accrued were $19.1 million, with approximately $1.4 million estimated recoverable through insurance. Matters include an Illinois water advisory and related class action, for which class certification had not been granted, and PFAS claims. The company noted potential PFAS settlement opt-out deadlines in December 2023.
- The company accrued an amount for a conditional regulatory settlement related to the Illinois water advisory; court approval was pending. It also said remediation expenses were expected to continue through 2023.
Most important facts for investors to verify
- Whether rate cases and infrastructure surcharges recover rising costs quickly enough to support cash flow, margins and credit metrics.
- Actual PFAS rule requirements, compliance timing, capital and operating costs, and potential recovery from polluters or through customer rates.
- Progress and final outcomes of the East Whiteland appeal, DELCORA proceedings, Illinois water-related matters and PFAS litigation or settlements.
- Completion and net proceeds of the microgrid project sale, and the use of proceeds from asset sales and equity issuance.
- Capital spending, working-capital volatility, debt costs, available credit capacity and any further changes in credit-rating outlooks.