Essential Utilities, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 28, 2020. Unless noted, amounts are in U.S. dollars. The company was named Aqua America, Inc. during the reporting period and changed its name to Essential Utilities, Inc. on February 3, 2020. This is an annual filing, not a standalone fourth-quarter report.
Business context
The company primarily operates regulated water and wastewater utilities in eight states, serving 1,026,704 utility customers and an estimated three million people. Pennsylvania contributed 53.9% of 2019 revenue; Aqua Pennsylvania alone generated approximately 54% of consolidated revenue. The Peoples natural gas acquisition was pending at year-end and was expected to close March 16, 2020; its results are not included in 2019 results.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $889.7 million | $838.1 million |
| Operating income | $340.2 million | $323.2 million |
| Net income | $224.5 million | $192.0 million |
| Diluted EPS | $1.04 | $1.08 |
| Operating cash flow | $338.5 million | $368.5 million |
| Capital expenditures | $550.3 million | $495.7 million |
| Total debt, excluding issuance costs | $3.103 billion | $2.579 billion |
| Cash and cash equivalents | $1.869 billion | $3.6 million |
Operating margin was approximately 38.2% and net margin 25.2% in 2019. The reported cash balance largely reflects funds raised for the pending Peoples acquisition, rather than recurring operating liquidity. The company reported $532.9 million available under its $550 million revolving credit facility and $109.8 million available under short-term credit lines. Management said available funding and internally generated cash were expected to meet normal operating and financing needs for at least the next 12 months.
Cash flow from operations did not cover capital expenditures: the difference was approximately negative $211.8 million before acquisitions, dividends, and other financing needs. Dividends paid were $188.5 million, or $0.9066 per share. The company reported positive working capital at year-end, primarily due to acquisition financing proceeds held in cash.
Changes versus comparable periods
- Revenue increased 6.2%, with growth from rate increases, customer growth, and acquisitions. The customer base grew 2.1% during 2019.
- Net income rose 17.0%, but diluted EPS declined from $1.08 to $1.04, reflecting, among other factors, the increased share count following equity financing.
- Operating cash flow fell $30.0 million, primarily because of the $83.5 million cash settlement of interest-rate swaps, partly offset by higher net income.
- Debt increased by approximately $524 million; year-end equity increased substantially following common-stock and tangible-equity-unit issuances for the pending acquisition.
- Fourth-quarter revenue was $226.0 million versus $205.7 million; operating income was $85.3 million versus $62.8 million. Net income was $64.2 million, compared with a $3.7 million loss in fourth-quarter 2018, when a $59.8 million swap fair-value expense was recorded.
Outlook, unusual items, and risks
- Peoples acquisition: The announced cash purchase price was $4.275 billion, subject to adjustments; the company expected to assume approximately $1.106 billion of Peoples debt, reducing the cash amount payable. The transaction remained subject to closing conditions. A $120 million reverse termination fee could apply in specified circumstances.
- Planned investment: The 2020 capital program, including planned Peoples expenditures after the anticipated closing, was estimated at approximately $921 million. Capital expenditures for 2021–2022 were estimated at $1.806 billion, with more than half expected to require external financing.
- Unusual expenses: 2019 included $22.9 million of Peoples transaction-related operating costs, $23.7 million of swap fair-value expense, and an $18.5 million loss on debt extinguishment. The swaps were settled in April 2019 for $83.5 million cash; they did not qualify for hedge accounting.
- Illinois water advisory: A do-not-consume advisory reduced 2019 revenue by $1.4 million and added $4.5 million of remediation expense. Further costs were expected into the second quarter of 2020. A possible fine or penalty was considered reasonably possible, but the company could not estimate a loss range and accrued no liability for future penalties. It had filed an insurance claim but had not recognized an insurance recovery.
- Water quality and environment: The company planned capital spending in the tens of millions of dollars over several years to address PFAS at affected treatment facilities. It estimated $75.7 million of environmental compliance capital expenditures over five years. Recovery of these costs in customer rates is subject to regulatory approval.
- Key business risks: Regulatory delays or inadequate rate increases, acquisition integration and financing, higher leverage and interest costs, water contamination, infrastructure or dam failures, cyber incidents, weather and drought, conservation-driven usage declines, and environmental compliance costs. The company noted substantial Pennsylvania concentration.
- Audit and controls: The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Rate regulation and regulatory accounting were identified as a critical audit matter because of judgment involved in assessing regulatory asset recovery and customer refunds.
Important facts for investors to verify
- Whether Peoples closed on the expected date, final consideration and assumed debt, funding mix, integration costs, and resulting leverage.
- How much of the $1.869 billion year-end cash balance was applied to the acquisition, and the post-closing liquidity and debt profile.
- Progress on the Illinois advisory, insurance recovery, remediation costs, and any penalties or claims.
- Rate-case outcomes and the recoverability of regulatory assets, environmental spending, and planned capital investments.
- Whether operating cash flow can support the capital program and dividends while maintaining financing access and debt-covenant compliance.