Essential Utilities, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The company provides regulated water, wastewater and natural gas services to approximately 5.5 million people in nine states, with additional nonregulated businesses. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / prior date | Change |
|---|---|---|---|
| Operating revenue | $612.1 | $726.5 | Down 15.7% |
| Operating income | $230.7 | $225.5 | Up 2.3% |
| Net income | $265.8 | $191.4 | Up 38.8% |
| Diluted EPS | $0.97 | $0.72 | Up $0.25 |
| Operating cash flow | $240.7 | $401.6 | Down $160.9 |
| Capital expenditures | $253.0 | $243.7 | Up $9.3 |
| Cash and cash equivalents | $35.2 | $4.6 at Dec. 31, 2023 | Up $30.6 |
| Long-term debt, gross | $6,970.8 | $6,938.0 at Dec. 31, 2023 | Up $32.8 |
- Net income included a $91.2 million gain from selling the company’s interests in three non-utility microgrid and distributed-energy projects. The filing does not provide an adjusted earnings measure excluding this gain.
- Revenue fell mainly because lower natural-gas commodity costs are passed through to customers and reduced reported gas revenue; warmer weather and the sale of the West Virginia gas utility also reduced gas usage and revenue. Purchased-gas expense declined 49.4%, largely reflecting lower gas prices and usage.
- Regulated water revenue rose 4.7% to $279.9 million, supported by rate increases, surcharges, customer growth and acquisitions. Water-segment net income declined 17.4% to $63.9 million as operating costs, depreciation and interest expense increased.
- Regulated natural-gas revenue declined 26.5% to $324.3 million, while segment net income rose 69.9% to $209.9 million; the project-sale gain was a major contributor to the increase.
- Net cash from operations decreased as working-capital movements were less favorable than in Q1 2023, including changes in gas inventory and other balances. Investing cash flow included $166.6 million of proceeds from asset sales. Financing cash flow included $83.9 million of dividends paid.
- At March 31, 2024, current assets were $419.5 million and current liabilities were $678.6 million. Management notes that negative working capital is customary for the company and believes internal cash generation, credit facilities and debt and equity financing will meet needs for at least the next 12 months.
- The company issued $500 million of 5.375% senior notes due 2034 in January. At quarter-end, $725.2 million was available under its $1 billion revolving credit facility and $348.0 million under short-term credit lines. The company also had approximately $110 million of capacity remaining under its ATM equity program.
Changes, outlook and management commentary
- Management reported moderate macroeconomic pressure in Q1 and expects it to continue through the rest of 2024; inflation remained above historical levels and interest rates remained elevated. The company is pursuing regulatory mechanisms to recover infrastructure and operating costs and reduce regulatory lag.
- Management expects several pending water and wastewater acquisitions to close in 2024, subject to regulatory approvals and, in some cases, litigation. These include North Versailles, Greenville Municipal Water Authority, Westfield HOA, Greenville Sanitation Authority and Beaver Falls. The much larger DELCORA acquisition remains subject to regulatory approval and ongoing litigation.
- Rate cases are pending in New Jersey, Illinois and Pennsylvania, with anticipated final orders in 2024. Interim rates implemented in Virginia may be subject to refund. These are requested increases, not guaranteed outcomes.
- The company estimates at least $450 million of capital investment for PFAS treatment to meet the EPA drinking-water rule over the compliance period, currently expected through 2029 absent delays. Estimated annual operating costs are approximately 5% of installed capital expenditures in today’s dollars. These are preliminary estimates and may change.
- The company is evaluating potential liability under the EPA’s April 2024 designation of PFOA and PFOS as hazardous substances. It is also pursuing claims against PFAS manufacturers; final court approval of the 3M and DuPont settlements occurred in 2024.
- S&P lowered the company and certain subsidiaries from A to A- in March 2024, citing weaker financial measures amid inflation and significant capital spending, while revising the outlook to stable. Moody’s had affirmed the company’s Baa2 rating with stable outlook; Peoples Natural Gas had a Baa1 rating with negative outlook.
- Legal matters include the East Whiteland acquisition appeal and Illinois water-quality litigation. The company reported $23.8 million accrued for loss contingencies and stated that some potential losses cannot be estimated. Management does not currently expect the disclosed matters to have a material adverse effect, but outcomes remain uncertain.
Important facts for investors to verify
- How much of the earnings increase is attributable to the $91.2 million project-sale gain, and how underlying results perform in subsequent quarters.
- Whether cash flow, capital spending and financing remain aligned, particularly given higher interest rates, substantial investment needs and the recent credit-rating downgrade.
- Whether pending rate cases and infrastructure surcharges are approved, and whether acquisition approvals, litigation and financing affect expected 2024 closings.
- How PFAS treatment capital and operating-cost estimates evolve, and how much may be recovered through rates, grants, loans or manufacturer settlements.
- Developments in the East Whiteland and DELCORA matters, the Illinois water-quality claims and other contingencies.