Essential Utilities, Inc. — 2021 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company provides regulated water, wastewater and natural gas services to approximately five million people across ten states. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
- Third quarter: Revenue was $361.9, up 3.8% year over year. Operating income was $101.5, down from $105.2; net income was $50.5, down 9.4% from $55.7. Diluted EPS was $0.19 versus $0.22.
- First nine months: Revenue was $1,342.5, up 35.8%; operating income was $463.1 versus $301.8; net income was $315.1 versus $182.1. Diluted EPS was $1.23 versus $0.71. Comparability is substantially affected by the March 2020 Peoples natural gas acquisition, which contributed only 16 days of results in the 2020 first quarter.
- Margins: Consolidated operating margin, calculated as operating income divided by revenue, was approximately 28.0% in Q3 2021 versus 30.2% in Q3 2020, and 34.5% for the first nine months versus 30.5%. Regulated gas gross margin, a company-defined non-GAAP measure, was $74.4 in Q3 versus $74.0 and $396.4 year to date versus $205.0.
- Cash flow and investment: Nine-month operating cash flow was $561.9, compared with $420.7. Capital expenditures were $675.8; acquisitions used $36.3, versus $3,467.0 in 2020, largely reflecting the Peoples acquisition. Operating cash flow less capital expenditures was negative $114.0 before acquisitions and financing.
- Debt and liquidity: September 30 cash was $9.7. Gross debt was approximately $5,702.4, including current maturities; long-term debt fair value was estimated at $6,299.2. Current assets of $352.5 were below current liabilities of $516.0. The company reported $966.7 available under its $1.0 billion revolving facility and $188.9 available under short-term credit lines.
- Equity and financing: Stockholders’ equity was $5,127.9, up from $4,683.9 at year-end 2020. In August, the company settled a forward equity sale, issuing 6.7 million shares for $299.7 in proceeds. It also issued $400.0 of 2.40% notes due 2031 and $100.0 of subsidiary first mortgage bonds.
Material changes and drivers
- Q3 water and wastewater revenue increased $4.1, supported by rate changes, surcharges, customer growth and the prior-year effect of customer credits. Lower customer volumes partly offset those gains.
- Q3 regulated natural gas revenue rose $5.9, but gas commodity costs increased as well; these costs are generally passed through to customers. Gas gross margin was nearly flat year over year.
- Q3 operating expenses increased, including higher depreciation, employee and insurance costs, and $2.2 of Hurricane Ida restoration expenses. Lower pandemic-related costs partly offset increases. Net income declined despite higher revenue.
- Year-to-date revenue and earnings growth chiefly reflect having a full nine months of Peoples results in 2021 versus the post-acquisition period in 2020. Revenue also reflects higher natural gas costs that largely pass through to customers.
- Year-to-date capital expenditures rose to $675.8 from $554.1. Debt issuance and repayment activity included $795.2 of long-term debt proceeds and $717.8 of long-term debt repayments.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the supplied filing text. Management says available credit, internally generated funds, and future debt and equity issuance are expected to meet working-capital and financing needs for at least the next 12 months.
- Aqua Pennsylvania filed for a proposed annual rate increase of $97.7, or 17.9%; a final order was anticipated by May 2022. Rate cases were also underway in Ohio water/wastewater and Kentucky natural gas. Approved rate increases and infrastructure surcharges were expected to raise annual revenue.
- Hurricane Ida temporarily shut down two Pennsylvania water treatment plants. By September 30, costs to restore operations were about $3.8, of which $2.2 was expensed; total repair or replacement costs remained under assessment. The company was considering recovery options.
- An Illinois water advisory resulted in remediation costs and foregone revenue; the company expected related impacts to continue in Q4. A related class-action case remained in discovery, and class certification had not been granted. Management did not expect the matter to have a material adverse effect, while noting the outcome was uncertain.
- COVID-19 had not caused material financial or operational impacts as of the report date, according to management. The company cited continuing uncertainty, possible collection and supplier effects, and deferred recovery of certain pandemic-related costs as risks.
- The company committed to replace gathering pipe over seven years at an estimated cost of $120.0, recoverable through customer rates. Tax benefits from qualifying infrastructure are being returned to customers over five years; a five-year customer surcredit began in August 2021. A further $5.0 in relief for eligible past-due natural gas accounts was planned for December 2021.
- Several utility acquisitions were pending and subject to regulatory approvals. The proposed DELCORA wastewater acquisition faced continuing litigation and a stayed regulatory proceeding; its anticipated closing was in 2022, subject to those processes.
- Management reported an effective income tax rate of 3.2% for the first nine months, affected by tax deductions for qualifying utility infrastructure and other tax timing differences. The company accrued $18.1 for loss contingencies, with estimated insurance recovery of $3.0.
Important facts for investors to verify
- Separate underlying operating growth from the acquisition-driven comparison, especially for year-to-date natural gas results.
- Track water volumes, gas gross margin, cost recovery mechanisms and the outcome and timing of pending rate cases.
- Assess capital spending against operating cash generation, debt maturities, available credit and the company’s continuing equity and debt financing needs.
- Monitor Hurricane Ida repair costs and recovery, the Illinois water advisory and litigation, and the status of pending acquisitions, particularly DELCORA.
- Review customer surcredits and other regulatory commitments, including their effects on reported revenue, cash flow and future rates.