Essential Utilities, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Essential Utilities provides regulated water, wastewater and natural gas services, alongside smaller non-regulated businesses. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior period |
|---|---|---|
| Operating revenue | $699.3 | $583.6; up 19.8% |
| Operating income | $227.6 | $232.4 |
| Net income | $199.4 | $183.7; up 8.5% |
| Diluted earnings per share | $0.76 | $0.72 |
| Net income as a share of revenue | 28.5% | 31.5% |
| Operating cash flow | $310.6 | $255.5 |
| Cash capital expenditures | $183.3 | $178.0 |
Natural gas drove most of the revenue increase: regulated natural gas revenue rose $102.1 million to $445.2 million, while regulated water revenue increased $10.8 million to $239.2 million. Higher gas commodity costs lifted both sales revenue and purchased-gas expense; management says those costs are passed through to customers and do not affect gross margin. Regulated gas gross margin, a non-GAAP measure, increased to $227.9 million from $220.2 million. Consolidated purchased-gas expense rose 72.3% to $227.7 million. Operating and maintenance expense increased 14.0% to $142.6 million.
Net income benefited from an income-tax provision benefit of $17.2 million, compared with a $4.8 million provision expense in Q1 2021. The effective tax rate was (9.5)% versus 2.5%; the filing attributes the change mainly to tax deductions for qualifying infrastructure and amortization of customer tax-repair surcredits. Interest expense was $53.6 million, up from $50.8 million.
At March 31, 2022, cash was $58.3 million, compared with $10.6 million at year-end 2021. Total assets were $14.88 billion and stockholders’ equity was $5.26 billion. Long-term debt, including current maturities and before debt issuance costs, was $6.04 billion, versus $5.95 billion at year-end. Current assets of $443.5 million were below current liabilities of $678.2 million; management notes the company historically operates with negative working capital. The $1.0 billion revolving facility had $570.3 million available, and short-term credit lines had $155.8 million available.
Cash used in investing was $233.2 million, including $183.3 million of property, plant and equipment additions and $50.0 million for a wastewater acquisition. Financing cash outflow was $29.6 million, including $67.8 million of dividends paid. Net cash increased $47.7 million during the quarter.
Material changes and management commentary
- Revenue growth largely reflected higher natural gas commodity prices, which management said increased average gas prices 46.9%, and colder weather that increased gas usage. The commodity-cost increase substantially passes through to customers.
- Regulated water revenue grew 4.7%, supported by rate increases, infrastructure surcharges, acquisitions and customer growth; water-segment net income fell 5.4% to $60.5 million, as operating costs and depreciation rose.
- Regulated natural gas net income increased 17.0% to $139.5 million. Gas gross margin rose more modestly than reported revenue because purchased gas is passed through.
- Management reported inflation in materials, labor and other operating costs, and supply-chain pressures associated with the pandemic and geopolitical uncertainty. It expected these pressures to continue through 2022, while reporting no material operational impact from materials delays to date.
- Capital spending was $183.3 million in the quarter. The company acquired Lower Makefield Township’s wastewater system for $53.0 million, serving approximately 11,000 connections.
Outlook, risks and contingencies
- Management believes internally generated funds, credit facilities and future debt and equity issuances will provide adequate working capital and financing for at least the next 12 months. Short-term credit facilities renew annually; renewal and terms are not assured.
- A Pennsylvania water and wastewater rate application seeks a $97.7 million annual revenue increase (17.9%); a final order was anticipated by May 2022. Other rate activity included a $5.2 million annual increase in Kentucky gas rates, $1.4 million in Ohio water rate increases, and approval of $6.8 million in annual infrastructure rehabilitation surcharges. These are stated annualized amounts, not Q1 revenue.
- Several water and wastewater acquisitions remained pending, subject to regulatory approval. The proposed $276.5 million DELCORA acquisition faced ongoing litigation and regulatory proceedings; closing was expected in late 2022 or early 2023, subject to those processes. Other pending acquisitions had anticipated closings in the second half of 2022 or Q1 2023.
- The company had accrued $16.6 million for loss contingencies and estimated $2.4 million of the accrued amount was recoverable through insurance. A class-action matter concerning a water advisory in Illinois remained in discovery; management said the ultimate outcome could not be predicted but was not expected to materially adversely affect financial position, results or cash flows.
- Management said COVID-19 had not materially affected financial-statement estimates to date, but continues to monitor effects. Other stated uncertainties include regulation, weather, capital-market conditions, acquisition execution and integration, and inflation and supply chains.
- Disclosure controls were assessed as effective. An ERP implementation for the regulated water business is underway; the customer-information and billing-system phase was expected to go live in the second half of 2023.
Important facts for investors to verify
- Whether the reported earnings increase is sustainable given the unusual tax benefit and the difference between revenue growth and operating-income performance.
- How gas commodity prices, weather, and pass-through mechanisms affect future reported revenue and gross margin.
- The outcome and timing of the Pennsylvania rate case and other rate proceedings, and how quickly approved rates offset inflationary costs.
- Financing needs, borrowing costs and dilution from pending acquisitions, including DELCORA; confirm regulatory and litigation developments.
- Progress on capital investment, short-term credit-line renewals, and the ERP customer billing-system implementation.
- Developments in the Illinois water-advisory litigation and related remediation costs.