Essential Utilities, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Unless noted otherwise, financial amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions for readability.
Business context
Essential Utilities operates regulated water and wastewater utilities and natural gas distribution businesses under the Aqua and Peoples brands, serving an estimated five million people across ten states. The company reported two segments: Regulated Water and Regulated Natural Gas. Pennsylvania remains its largest operating concentration. The gas segment’s results include Peoples, acquired in March 2020.
Financial and operating performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Operating revenue | $2,288.0 million | $1,878.1 million | +21.8% |
| Operating income | $661.2 million | $602.7 million | +9.7% |
| Net income | $465.2 million | $431.6 million | +7.8% |
| Diluted earnings per share | $1.77 | $1.67 | +6.0% |
| Net cash from operating activities | $600.3 million | $644.7 million | −6.9% |
| Capital expenditures | $1,062.8 million | $1,020.5 million | +4.1% |
Consolidated operating margin was approximately 28.9% and net margin was 20.3%, compared with 32.1% and 23.0%, respectively, in 2021. The operations-and-maintenance expense ratio improved to 26.8% from 29.3%. The company recorded an income tax benefit of $14.3 million; its effective tax rate was negative 3.2%, primarily reflecting tax deductions for qualifying utility infrastructure investments.
Segment results: Regulated Water revenue rose 10.5% to $1,083.0 million and segment net income increased 7.0% to $314.4 million. Regulated Natural Gas revenue rose 33.0% to $1,143.4 million and segment net income increased 25.0% to $185.3 million. The gas revenue increase largely reflected higher commodity costs passed through to customers, as well as higher usage and rates; purchased gas expense rose $237.6 million. The filing cautions that gas-cost changes generally flow through revenue and expense, so headline gas revenue growth does not by itself indicate comparable margin growth.
Operating cash flow was below capital expenditures by approximately $462.5 million before acquisitions and other investing activity. Management attributed the year-over-year operating cash flow decline mainly to higher accounts receivable, unbilled revenue, and gas stored in inventory.
Debt, liquidity and capital
Long-term debt totaled $6,617.4 million at year-end, up from $5,947.4 million; loans payable were an additional $228.5 million. Debt represented 55.2% of capitalization, versus 53.4% a year earlier. Net property, plant and equipment was $11,130.9 million, and estimated rate base was $9.3 billion ($6.4 billion water and $2.9 billion gas). Cash and cash equivalents were $11.4 million. Current assets were $658.2 million against current liabilities of $1,021.9 million; management noted its historically negative working-capital position.
The company had a $1.0 billion revolving credit facility, with $490.0 million drawn and $490.959 million available after letter-of-credit usage at year-end. It also reported $435.5 million of short-term credit lines, with $207.0 million available. Management said operating cash flow, credit facilities, and future debt and equity issuance were expected to fund normal operations and requirements for at least the next twelve months; this expectation depends on estimates and access to financing. The company was in compliance with debt covenants during 2022.
Dividends paid were $288.6 million, or 62.0% of net income. The declared annual dividend was $1.3974 per share, including a December 2022 declaration payable in March 2023. The company reported 78 consecutive years of dividend payments.
Changes, outlook and material developments
- Revenue growth reflected higher gas prices, water and wastewater rate increases, customer growth, and acquisitions. Net income rose more slowly than revenue, while interest expense increased to $238.1 million from $207.7 million due to higher average borrowings and rates.
- Rate awards provided estimated annualized revenue increases of $81.6 million in 2022, compared with $3.4 million in 2021. Pennsylvania water rates, in particular, were reset in May 2022; new rates included an annual base revenue increase of $69.3 million, with prior infrastructure surcharge amounts reset to zero.
- Management expects inflationary pressure on materials, labor, and other operating costs, higher interest rates, and supply-chain pressures to continue through 2023. It reported some material delays but no material disruption to operations or its capital program to date.
- Planned 2023 capital expenditures were approximately $1.123 billion, including about $747 million for infrastructure-surcharge-qualified projects. The company estimated approximately $2.115 billion of utility construction expenditures for 2024–2025 and expected about half to require external financing. Management targets average annual customer growth of 2%–3% from acquisitions and organic growth; it did not provide explicit earnings or EPS guidance.
- Eight signed water and wastewater acquisition agreements represented approximately $380 million in purchase price and 218,600 equivalent retail customers or dwelling units, subject to regulatory approvals and other conditions. The proposed $276.5 million DELCORA wastewater acquisition remained subject to ongoing litigation and regulatory proceedings; the regulatory case was stayed in February 2023.
- The company agreed to sell its West Virginia regulated gas assets for $37 million cash at closing, subject to adjustments and regulatory approval, with closing expected in mid-2023. The assets served approximately 13,000 customers and were classified as held for sale; management anticipated no impairment from the sale.
- Goodwill was $2,340.8 million, including $2,277.4 million in the Regulated Natural Gas reporting unit. No impairment was recorded in 2022; management reported 15% headroom in that unit’s latest fair-value assessment and warned that further market deterioration or higher rates could lead to a material non-cash impairment charge.
- The company is planning PFAS treatment investment in the tens of millions of dollars over several years, while noting uncertainty over regulatory cost recovery. It estimated $119.0 million of water and wastewater environmental compliance capital spending over 2023–2027. A 2024 methane emissions charge under the Inflation Reduction Act could apply to some gathering assets; the company was still assessing the impact.
Risks, contingencies and unusual items
Key exposures include regulatory lag and the timing or adequacy of rate approvals; inflation and borrowing costs; weather-related changes in water and gas demand; gas supply, commodity-price, and seasonal liquidity needs; environmental and water-quality requirements, including PFAS and lead; pipeline and dam safety; cyber and operational disruption; acquisition execution and litigation; and substantial debt and ongoing capital requirements. The company’s 2019 Illinois water advisory led to accrued costs and a class-action lawsuit; class certification had not been granted, and management said final resolution was not expected to materially affect financial position, results, or cash flows. Total accrued loss contingencies were $19.7 million, with estimated insurance recoveries of $1.5 million. The filing states that no other pending legal proceedings were considered material.
Most important facts for investors to verify
- How much 2022 earnings and revenue growth came from regulated rate increases, customer growth, and acquisitions versus pass-through gas commodity costs and tax benefits.
- Whether rate cases and surcharge mechanisms recover rising operating, capital, and financing costs promptly enough to limit regulatory lag.
- Funding plans for the 2023–2025 capital program, pending acquisitions, debt maturities, and dividends, given operating cash flow below capital spending and increased leverage.
- Regulatory and litigation outcomes for DELCORA and the timing, proceeds, and completion of the West Virginia asset sale.
- Potential costs and rate recovery for PFAS treatment, environmental compliance, pipeline and dam work, and possible methane emissions charges.
- Goodwill valuation assumptions and sensitivity to discount rates, market multiples, and projected performance of the gas reporting unit.