Essential Utilities, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter report. The company provides regulated water, wastewater and natural gas services to approximately five million people across ten states. Natural gas results reflect the Peoples acquisition, completed March 16, 2020.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Operating revenue | $1.878 billion | $1.463 billion | +28.4% |
| Operating income | $602.7 million | $434.7 million | +38.7% |
| Net income | $431.6 million | $284.8 million | +51.5% |
| Diluted EPS | $1.67 | $1.12 | +$0.55 |
| Operating cash flow | $644.7 million | $508.0 million | +$136.7 million |
| Capital expenditures | $1.021 billion | $835.6 million | +$184.9 million |
Net margin was 23.0%, compared with 19.5% in 2020. Operations and maintenance expense was 29.3% of revenue, down from 36.1%; depreciation and amortization was 15.9%, versus 17.6%; and net interest expense was 10.9%, versus 12.9%. The reported effective tax rate was a benefit of 2.3%, mainly reflecting tax deductions for qualifying utility infrastructure investments.
Gross long-term debt was $5.947 billion at year-end, including $132.1 million current. Debt represented 53.4% of capitalization, compared with 54.6% in 2020. Cash was $10.6 million. The $1.0 billion revolving credit facility had $300 million drawn and $679.1 million available after letters of credit; short-term lines totaled $235.5 million, of which $170.5 million was available. Management said working capital needs and the next 12 months’ financing requirements could be met through operating cash, existing facilities and capital-market access. The company reported a historically negative working-capital position and compliance with debt covenants.
Common dividends paid were $258.7 million, or 59.9% of net income; the 2021 dividend was $1.0378 per share. The annualized rate rose to $1.0728 beginning in September 2021. The company reported 77 consecutive years of dividend payments.
Material changes versus 2020
- Revenue rose by $415.4 million. Regulated natural gas revenue increased $353.3 million, principally because 2021 included a full year of Peoples results versus roughly nine and a half months in 2020, alongside higher gas-cost pass-throughs. The company identified $304.6 million of first-quarter revenue variance attributable to acquisition timing.
- Regulated water revenue increased $41.7 million, primarily from rates and customer growth. Water and wastewater customers increased by 19,504; gas customers increased by 1,742.
- Net income rose by $146.8 million, but the comparison reflects both the longer inclusion of Peoples in 2021 and a 2020 customer-rate-credit expense of $23.0 million. Gas commodity costs largely pass through to customers and affect revenue and purchased-gas expense.
- Operating cash flow increased, while capital spending also rose. The company issued $400 million of long-term debt and settled a forward equity sale for $299.7 million in 2021.
Outlook, commentary and risks
- Management expected average annual customer growth of 2%–3% through acquisitions and organic growth. At year-end, eight signed water and wastewater acquisition agreements totaled approximately $471 million and were expected to add about 235,000 equivalent customers, subject to approvals and other conditions. The proposed DELCORA acquisition remained subject to litigation and regulatory proceedings.
- Planned 2022 capital investment was approximately $1.0 billion; estimated 2023–2024 utility construction was approximately $1.94 billion, excluding certain customer-financed mains. Management expected less than half of the latter amount to require external financing.
- Aqua Pennsylvania’s August 2021 rate application sought a $97.7 million annual increase, or 17.9%; a final order was anticipated by May 2022. Kentucky natural-gas rates received a $5.2 million annual increase effective January 2022. Rate approvals, timing and recovery of capital costs remain important to returns.
- Management cited inflation in materials, freight and labor costs, with further cost pressure expected in 2022; rate recovery may lag. Other significant exposures include severe weather and climate impacts, drought and water-use restrictions, water quality and emerging contaminants, pipeline safety and gas supply/pricing, cybersecurity, labor availability, acquisition integration and elevated debt.
- Hurricane Ida damaged two Pennsylvania water treatment plants in September 2021; repairs and restoration costs were $2.8 million. The company also budgeted approximately $42 million for dam improvements from 2022–2028 and estimated $107.2 million of environmental compliance capital spending over five years.
- The company set a goal to reduce Scope 1 and 2 greenhouse-gas emissions 60% by 2035 from a 2019 baseline. It reported no material financial or operational impact from COVID-19 in 2021, while noting continuing uncertainty.
- Accrued loss contingencies were $17.2 million. The Illinois water-advisory class action remained in discovery; management did not expect it to materially affect financial position, results or cash flows, but outcomes are uncertain. The auditor issued unqualified opinions on the financial statements and internal control; accounting for rate regulation was identified as a critical audit matter.
Investor facts to verify
- How much of the earnings increase reflects recurring utility performance versus Peoples acquisition timing, customer credits and tax benefits?
- What were the final outcomes and timing of the Pennsylvania water rate case and pending Ohio rate cases, and how quickly can infrastructure investment enter rate base?
- How will the $1.0 billion 2022 capital program and upcoming debt maturities be funded, and what are the implications for leverage, interest expense and dividends?
- Will the pending acquisitions close on expected terms and timelines, particularly DELCORA given its litigation and regulatory status?
- What are the ultimate costs and rate recovery prospects for lead/PFAS treatment, dam and pipeline work, and other environmental or safety obligations?