Essential Utilities, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results include Peoples Natural Gas from its March 16, 2020 acquisition date. Amounts below are in millions except per-share data.
Business context and performance
Essential Utilities provides regulated water and wastewater services and, following the Peoples acquisition, regulated natural gas distribution. The company estimated that its utilities served nearly five million people across ten states.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $348.6 | $243.6 | $988.7 | $663.7 |
| Operating income | $105.2 | $106.5 | $301.8 | $254.9 |
| Operating margin | 30.2% | 43.7% | 30.5% | 38.4% |
| Net income | $55.7 | $88.5 | $182.1 | $160.3 |
| Diluted EPS | $0.22 | $0.38 | $0.71 | $0.76 |
| Operating cash flow | Not separately provided | Not separately provided | $420.7 | $228.0 |
Financial position and liquidity
- At September 30, total assets were $13.40 billion, including $9.26 billion of net property, plant and equipment and $2.33 billion of goodwill. Goodwill primarily reflects the Peoples acquisition.
- Long-term debt, including current maturities and before debt issuance costs, was $5.40 billion, up from $3.08 billion at year-end 2019. Stockholders’ equity was $4.64 billion.
- Cash was $8.5 million, down from $1.87 billion at year-end; the earlier balance included acquisition-financing proceeds. The company reported $837.6 million available under its $1.0 billion revolving credit facility and $88.3 million available under short-term credit lines.
- Nine-month investing cash outflow was $4.02 billion, including $3.47 billion for utility-system acquisitions and $554.1 million of capital expenditures. Financing cash inflow was $1.74 billion.
- Regulated natural gas gross margin, a company-defined non-GAAP measure, was $74.0 million for Q3 and $205.0 million from the acquisition date through September 30.
Changes versus comparable periods
- Q3 revenue rose 43.1%, mainly due to $92.1 million of natural gas revenue from Peoples and higher water usage, partly offset by customer rate credits. Operating income was slightly lower and net income fell 37.0%; acquisition-related operating costs, higher depreciation and interest expense contributed to the decline.
- Nine-month revenue increased 49.0%, including $280.3 million from Peoples. Net income rose 13.6%, while diluted EPS declined from $0.76 to $0.71, reflecting a larger share count following equity issuance and the tangible equity units.
- Q3 operations and maintenance expense included $62.2 million of Peoples-related costs. Interest expense increased $17.2 million year over year in the quarter; nine-month interest expense rose $44.4 million.
- Cash from operations increased to $420.7 million from $228.0 million, including the effects of the acquired business and working-capital changes.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management said it expected adequate funding from internally generated funds, credit facilities and debt and equity markets to support operations and financing needs for at least the next twelve months.
- Management said it did not then anticipate a significant COVID-19 impact on financial position, results or cash flows, but reported higher bad-debt expense, customer collection constraints and pandemic-related costs. The company continued its capital program and said it was monitoring customer collections and regulatory treatment of COVID-19 costs.
- The Peoples purchase-price allocation remained preliminary, with finalization expected by Q1 2021. The parties disputed a purchase-price adjustment for utility capital expenditures; resolution could be under the purchase agreement or through court proceedings.
- Acquisition commitments include an estimated $120 million of gathering-pipe replacement over seven years, expected to be recoverable through rates, and $23 million of customer credits by year-end 2020. $4.08 million had been granted by September 30; the remaining $18.92 million was scheduled for Q4.
- The company recorded $3.7 million in Q3 for an anticipated loss on its joint-venture investment, sold in October 2020. A separate Illinois water advisory and related class-action claim remained unresolved; management could not estimate a possible loss range for a potential fine or penalty. The filing reported $16.9 million accrued for loss contingencies overall.
- Pending acquisitions included DELCORA, subject to regulatory approval and litigation, and Lower Makefield Township and New Garden Township, also subject to approvals. Timing and completion remained uncertain.
- Key risks include regulation, weather and seasonality, capital-market access, acquisition integration and completion, COVID-19 developments, and potential dilution from stock purchase contracts and the forward equity sale agreement.
Investor verification priorities
- Assess how much reported growth and the Q3 earnings decline reflect Peoples consolidation, acquisition financing and integration costs versus underlying utility performance.
- Review debt maturities, interest costs, available credit and funding needs for capital investment and pending acquisitions, given the sharp reduction in cash.
- Track the final Peoples purchase-price allocation and resolution of the capital-expenditure adjustment dispute.
- Verify delivery of the remaining customer credits, recovery of committed pipe-replacement costs through rates, and developments in the Illinois water advisory litigation.
- Monitor customer bad-debt trends, COVID-19 cost recovery, regulatory approvals and litigation affecting pending acquisitions, and potential share dilution.