Essential Utilities, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2021. Essential Utilities provides regulated water, wastewater and natural gas services to approximately five million people across ten states. The 2020 acquisition of Peoples Natural Gas expanded the company into regulated gas distribution; consequently, year-over-year first-half comparisons are materially affected by 2020 including Peoples only from March 16 onward.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $397.0m | $384.5m | $980.6m | $640.1m |
| Operating income | $129.3m | $123.1m | $361.7m | $196.6m |
| Net income | $80.9m | $74.6m | $264.6m | $126.4m |
| Diluted EPS | $0.32 | $0.29 | $1.04 | $0.50 |
| Net cash from operations | Not separately reported for quarter | Not separately reported for quarter | $412.9m | $245.2m |
| Capital expenditures | Not separately reported for quarter | Not separately reported for quarter | $404.6m | $293.1m |
Q2 revenue increased 3.3% and net income increased 8.4%. Six-month revenue rose 53.2% and net income rose 109.3%, but those comparisons are substantially influenced by the Peoples acquisition timing. Calculated operating margin was approximately 32.6% in Q2 2021 versus 32.0% in Q2 2020, and 36.9% versus 30.7% for the six-month periods. The six-month margin comparison is likewise affected by acquisition timing.
At June 30, 2021, total assets were $13.9bn and stockholders’ equity was $4.8bn. Long-term debt carrying amount, including current maturities, was $5.77bn, compared with $5.63bn at year-end 2020; loans payable were $71.8m. Cash was $8.4m. The company reported $916.7m available under its $1.0bn unsecured revolver and $163.7m available under short-term credit lines. Current assets of $304.7m were below current liabilities of $469.2m; management said internally generated funds, credit facilities and debt and equity issuance should cover working capital and financing needs for at least twelve months.
Changes and management commentary
- Q2 regulated water revenue increased $14.1m, driven by rate increases and surcharges, customer growth, and higher usage, partly offset by an Illinois water advisory. Regulated natural gas revenue fell $5.3m, primarily due to warmer weather and lower volumes; gas gross margin, a non-GAAP measure, was $101.8m versus $105.3m.
- For the first half, regulated water revenue rose $26.2m. The large increase in regulated gas revenue reflects the acquisition comparison; Peoples contributed $501.9m of revenue in the 2021 first half versus $188.2m in the 2020 post-acquisition period.
- Operating cash flow was below capital expenditures by $-?; specifically, operating cash flow of $412.9m exceeded reported capital expenditures of $404.6m by $8.3m. Investing cash outflow was $403.8m, while financing cash outflow was $5.5m.
- The company issued $400m of 2.40% notes due 2031 and its Ohio subsidiary issued $100m of first mortgage bonds. Proceeds were used for corporate purposes and debt repayment. Management expects to settle a forward equity sale agreement for 6.7m shares on August 9, 2021; proceeds are intended for general purposes, including acquisitions and capital spending.
- Management reported no material financial or operational impact from COVID-19 to date, while noting uncertainty, potential collection effects and continuing monitoring. Materials delays had not materially affected operations or the capital program.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management describes continued capital investment and acquisition-led growth, subject to financing and regulatory approvals.
- The company agreed to refund $160.7m of Pennsylvania tax benefits to utility customers over five years beginning August 2021, and to provide $5.0m of relief for eligible past-due gas accounts plus a $0.5m contribution to bill-payment assistance. A separate commitment requires an estimated $120m of gathering-pipe replacement over seven years, recoverable through customer rates.
- The Illinois water advisory reduced first-half water revenue by $0.6m; the company expects related revenue effects and remediation expenses to continue in Q3 2021. A related class-action case remains in discovery and class certification has not been granted. Management does not currently expect the matter to have a material adverse effect, but outcome is uncertain.
- DELCORA’s proposed wastewater acquisition remains subject to regulatory proceedings and litigation with Delaware County; closing was expected in 2022, subject to approvals and litigation. Other pending utility acquisitions also depend on regulatory approval and closing schedules.
- Loss-contingency accruals totaled $17.5m, with approximately $3.3m estimated recoverable through insurance. The Peoples purchase-price adjustment for seller capital expenditures remains disputed. The company also identifies weather, regulation, capital-market access, acquisition execution, COVID-19 and interest-rate changes as risks.
Important facts for investors to verify
- Assess reported growth and margins in light of the Peoples acquisition’s differing inclusion periods, and distinguish regulated gas revenue changes from purchased-gas pass-through costs.
- Review the settlement and timing of the 6.7m-share forward equity sale, including dilution and proceeds received.
- Track debt, credit-facility availability, capital spending and funding needs alongside planned acquisitions.
- Monitor the Illinois water advisory and related litigation, the DELCORA proceedings, and regulatory approval and timing for pending acquisitions.
- Confirm customer-refund and assistance commitments, including the five-year tax-benefit refund and gathering-pipe replacement program.