Essential Utilities, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2022; filed November 9, 2022. The company provides regulated water, wastewater and natural gas services, plus smaller non-regulated businesses. Unless noted, figures below are in millions of dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $434.6 | $361.9 | $1,582.6 | $1,342.5 |
| Operating income | $125.9 | $101.5 | $491.2 | $463.1 |
| Net income | $68.6 | $50.5 | $350.3 | $315.1 |
| Diluted EPS | $0.26 | $0.19 | $1.33 | $1.23 |
| Operating cash flow | Not separately presented for the quarter | $519.2 | $561.9 |
Revenue rose 20.1% in Q3 and 17.9% year to date. Management attributed much of natural-gas revenue growth to higher commodity prices passed through to customers, which also raised purchased-gas expense; those pass-throughs generally do not increase gas gross margin. The gas segment reported a Q3 net loss of $17.1 million, reflecting seasonality, but nine-month net income of $133.8 million.
Q3 operating margin was approximately 29.0% versus 28.0%; nine-month operating margin was approximately 31.0% versus 34.5%. Net margin was 15.8% versus 14.0% in Q3 and 22.1% versus 23.5% year to date. Nine-month EPS and net income increased despite the lower reported net margin; the company reported a tax benefit for the period.
Cash flow, debt and liquidity
- Operating cash flow fell $42.7 million year over year to $519.2 million for nine months. Property-plant-equipment additions were $719.7 million and utility acquisitions used $104.4 million. Cash flow after these outlays was approximately negative $304.9 million.
- Cash was $23.4 million at September 30, 2022, up from $10.6 million at year-end 2021. Total assets were $15.28 billion and stockholders’ equity was $5.34 billion.
- Long-term debt was $6.37 billion gross, including $149.9 million current; loans payable were $213.2 million. The company reported $720.4 million available under its $1.0 billion unsecured revolver and $222.3 million available across short-term credit lines.
- Management said internal cash generation, credit facilities and future debt and equity issuance should provide adequate working capital and financing for at least the next 12 months. Short-term lines are subject to annual renewal, with no assurance of renewal or future terms.
Material changes and significant items
- Water-segment revenue rose 16.0% in Q3 and 10.0% year to date, supported by rate increases, surcharges, customer growth and higher consumption. Pennsylvania’s 2022 rate order authorized $69.3 million in annual base-revenue increases; other rate approvals and surcharges were also reported.
- Regulated natural-gas revenue increased 25.6% in Q3 and 26.3% year to date, mainly from higher gas costs passed through to customers. Average commodity prices increased 119.9% in Q3 and 109.7% over nine months versus the comparable periods.
- Operating and maintenance expense increased 8.6% in Q3 and 9.4% year to date. Drivers included employee costs, water production and maintenance costs, and insurance/legal expenses. Depreciation and amortization also increased with capital investment and acquisitions. Interest expense increased, primarily due to higher average borrowings and revolving-credit rates.
- The company acquired wastewater systems in Lower Makefield and East Whiteland townships, Pennsylvania, for $53.0 million and $54.4 million, respectively. Its proposed $885 million purchase of Bucks County Water and Sewer Authority wastewater assets was no longer being discussed after the authority’s September 2022 vote to cease discussions.
- The company recorded a $232.4 million reduction in deferred tax liabilities following Pennsylvania’s enacted corporate tax-rate reductions, with a corresponding reduction primarily to regulatory assets. The nine-month effective tax rate was negative 1.3%, versus 3.2% in 2021.
- In September, pension settlement accounting resulted in a $2.3 million loss recorded as a regulatory asset, which management considers probable of recovery in future rates; the remeasurement had no material financial-statement impact.
Outlook, risks and contingencies
Management reported inflation in materials, labor and other operating costs, supply-chain pressures, and higher natural-gas prices, and expected these pressures to continue through 2022. It said materials delays had not materially affected operations or the capital program, and that COVID-19 had not significantly disrupted service or supplies. The filing provides no specific earnings or revenue guidance.
Risks include regulation and rate-setting lag, weather, interest rates and capital-market access, acquisition approvals and integration, supply-chain conditions, and evolving geopolitical and pandemic effects. A proposed DELCORA wastewater acquisition remained subject to regulatory proceedings and ongoing Delaware County litigation; a proceeding schedule extended to June 2023, and closing was expected in 2023 subject to approvals and litigation. A University Park, Illinois water-related class action remained in discovery, with class certification not granted. The company accrued probable and estimable losses; management did not expect the matter’s final resolution to materially adversely affect financial position, results or cash flows. Total accrued loss contingencies were $20.4 million.
After quarter-end, the company established an at-the-market program permitting up to $500 million of common-stock sales; no shares had been sold as of the report date. In October 2022, Aqua Pennsylvania issued $125 million of 4.50% bonds due 2052.
Important facts for investors to verify
- How much of revenue growth reflects durable rate, customer and volume gains versus pass-through gas commodity costs.
- Whether capital spending, acquisitions and dividends can be funded while maintaining liquidity and managing higher borrowing costs and debt maturities.
- The status, timing, regulatory outcomes and financing needs of pending acquisitions, particularly DELCORA and any future water or wastewater transactions.
- Progress on rate recovery for inflationary operating costs and the effects of regulatory lag on margins and cash flow.
- Developments in the Illinois water litigation and other contingencies, including potential insurance recoveries.