Essential Utilities, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Financial amounts are in U.S. dollars; unless stated otherwise, amounts below are converted from the filing’s presentation in thousands. This is an annual report, not a standalone fourth-quarter report.
Business context
Essential Utilities provides regulated water, wastewater, and natural gas services to an estimated 5.5 million people across nine states under its Aqua and Peoples brands. It also operates smaller market-based businesses. The company’s strategy emphasizes regulated water and wastewater operations, infrastructure investment, and acquisitions. Pennsylvania remains its largest operating concentration.
Financial and operating results
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Operating revenue | $2.054 billion | $2.288 billion | Down 10.2% |
| Operating income | $692.1 million | $661.2 million | Up $30.9 million |
| Net income | $498.2 million | $465.2 million | Up 7.1% |
| Diluted earnings per share | $1.86 | $1.77 | Up 5.1% |
| Net income margin | 24.3% | 20.3% | Up 4.0 percentage points |
| Net cash from operating activities | $933.6 million | $600.3 million | Up $333.3 million |
| Capital expenditures | $1.199 billion | $1.063 billion | Up $136.3 million |
Revenue declined mainly because lower natural-gas commodity costs flowed through to customer bills, alongside lower gas usage in warmer weather. Regulated water revenue increased $70.4 million to $1.153 billion, while regulated natural gas revenue fell $279.6 million to $863.8 million. Gas costs generally pass through to customers, so reported gas revenue changes do not by themselves indicate equivalent changes in profitability.
Net income improved despite lower revenue, aided by a $66.4 million income tax benefit in 2023 versus a $14.3 million benefit in 2022. Management attributed the increased benefit primarily to tax deductions for qualifying infrastructure investments. Interest expense rose to $283.4 million from $238.1 million, reflecting higher average borrowings and interest rates. The reported return on Essential Utilities stockholders’ equity was 8.4%, compared with 8.7% in 2022.
Operating cash flow increased substantially, principally due to lower accounts receivable, unbilled revenue, and stored gas inventory. Cash flow remained below capital expenditures: 2023 capital spending was $1.199 billion. Dividends paid were $316.8 million, or 63.6% of net income. The company reported $7.098 billion of aggregate short- and long-term debt at year-end; long-term debt represented 54.1% of capitalization. Cash and cash equivalents were $4.6 million, and management reported a historically negative working-capital position.
At December 31, 2023, estimated rate base was $10.4 billion, of which $8.2 billion had been filed with regulators and $2.2 billion had not yet been filed. The company reported 1,113,709 regulated water and wastewater customers and 743,746 regulated natural gas customers.
Material changes and transactions
- Operating revenue decreased $234.2 million year over year, while net income increased $33.0 million. Natural-gas revenue and purchased-gas expense both fell substantially as commodity prices and usage declined.
- Operating cash flow rose $333.3 million, while capital expenditures increased 12.8% to $1.199 billion.
- The company sold its West Virginia regulated natural-gas assets on October 1, 2023, for estimated proceeds of $40.0 million, ending its regulated utility operations in that state.
- The sale of three non-utility microgrid and distributed-energy projects for $165.0 million closed in January 2024. Management expects to use disposition proceeds for capital spending and water and wastewater acquisitions instead of external financing.
- Essential issued 8.94 million shares through its at-the-market offering in 2023 for net proceeds of $323.0 million; approximately $110 million remained available under the program at year-end.
Outlook, risks, and contingencies
- Investment and growth: Management expects approximately $7.2 billion of investment from 2024 through 2028. The planned 2024 capital program is approximately $1.365 billion. The company targets average annual customer growth of 2%–3% through acquisitions and organic growth. Six signed acquisition agreements were expected to add approximately 215,000 equivalent customers for an aggregate purchase price of about $380 million, subject to approvals and closing conditions.
- Regulation and rate recovery: Timely, sufficient regulatory rate decisions are important to recover rising operating costs, capital investment, and financing costs. Pending rate applications include Peoples Natural Gas in Pennsylvania, Aqua Illinois, and Aqua New Jersey; requested increases are not assured until approved.
- PFAS compliance: Based on the proposed federal drinking-water regulation, the company preliminarily estimates at least $450 million of treatment capital spending over the compliance period and annual operating costs of about 5% of installed capital. Estimates may change as requirements and site needs are clarified; recovery through rates, grants, loans, or litigation is not assured.
- Other environmental and safety obligations: Lead-service-line inventory and replacement planning were due to regulators by October 16, 2024; the proposed federal rule could require replacement within 10 years. Pipeline integrity rules, dam improvements, and potential methane-emissions charges may also add costs. Management estimated the methane charge could be $1–$2 million annually starting in 2024, subject to final implementation and asset changes.
- Financing and credit: The company was compliant with debt covenants at year-end and said available cash flows, credit facilities, and capital-market access should fund expected needs for at least 12 months. However, S&P affirmed an A issuer rating but revised its outlook to negative; Moody’s affirmed the company’s Baa2 rating and stable outlook, while revising Peoples Natural Gas’ outlook to negative. Higher interest costs and substantial capital needs could pressure liquidity and ratings.
- Legal matters: PFAS litigation and proposed settlements with certain manufacturers are ongoing; the settlements had preliminary court approval. The DELCORA acquisition remains subject to extensive litigation and regulatory proceedings. An appeal reversed approval of the East Whiteland wastewater acquisition; the matter was appealed to the Pennsylvania Supreme Court. Management said final resolution of the East Whiteland matter was not expected to materially affect the company.
- Other risks: Weather and conservation affect water and gas demand; inflation and supply constraints increase costs; and water contamination, operational failures, cybersecurity events, acquisition integration, and delayed rate relief could adversely affect results. The annual goodwill assessment found no impairment, but the filing notes sensitivity to discount rates, market multiples, and projected cash flows.
Important facts for investors to verify
- Whether regulators approve pending rate cases and how quickly allowed revenue covers the company’s higher operating, capital, and borrowing costs.
- The final PFAS drinking-water requirements, site-level treatment needs, total costs, and availability of rate recovery, grants, or manufacturer settlements.
- The company’s ability to fund its multi-year capital program and pending acquisitions while managing debt, share issuance, dividends, and credit ratings.
- Progress and final outcomes in the DELCORA and East Whiteland proceedings, and the financial terms and use of proceeds from the January 2024 project sale.
- How much of 2023’s earnings improvement reflects recurring utility performance versus tax benefits, and whether future cash flow can sustain capital spending and dividends.
The filing reports that the independent auditor gave an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded internal controls were effective as of December 31, 2023.