Essential Utilities, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; comparison is with the corresponding 2021 periods. Essential Utilities provides regulated water, wastewater and natural gas services, primarily through its Aqua and Peoples businesses, to about five million people. Figures below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $448.8 | $397.0 | $1,148.0 | $980.6 |
| Operating income | $137.7 | $129.3 | $365.4 | $361.7 |
| Net income | $82.3 | $80.9 | $281.7 | $264.6 |
| Diluted EPS | $0.31 | $0.32 | $1.07 | $1.04 |
| Operating cash flow | Not presented quarterly | $416.3 | $412.9 |
- Revenue increased 13.0% in Q2 and 17.1% in the first half. Natural gas revenue growth included higher commodity costs passed through to customers; management said these pass-through costs affect revenue and purchased-gas expense but not natural-gas gross margin. First-half natural-gas gross margin, a non-GAAP measure, was $332.2 million versus $322.0 million.
- Operating income rose 6.5% in Q2 and 1.0% in the first half. Net income increased 1.7% in Q2, while diluted EPS declined from $0.32 to $0.31. First-half net income rose despite pretax income declining to $272.5 million from $273.2 million; the period included a $9.1 million income-tax benefit versus an $8.6 million tax provision in 2021.
- Q2 operating margin was approximately 30.7%, versus 32.6% a year earlier; first-half operating margin was approximately 31.8%, versus 36.9%. Purchased gas rose 67.4% in Q2 and 71.1% in the first half, largely due to higher commodity prices.
- First-half capital expenditures were $424.6 million and utility acquisitions used $50.0 million. Operating cash flow less property additions was negative $8.3 million, before acquisition spending and other investing activity.
- At June 30, cash was $13.0 million; current assets were $413.3 million and current liabilities $544.1 million. Total long-term debt, including current maturities, was $6,256.3 million, up from $5,947.4 million at year-end. Stockholders’ equity was $5,342.0 million.
- Available borrowing was $840.1 million under the $1.0 billion unsecured revolver and $430.8 million under short-term credit lines. Management said internal funds, credit facilities, and debt and equity issuance should cover operating and financing needs for at least 12 months.
Changes, outlook and notable items
- Pennsylvania Aqua’s new rates took effect May 19, 2022, allowing a $69.3 million annual base-revenue increase; DSIC charges were reset to zero. Additional rate increases were approved in Kentucky and Ohio, while North Carolina had a rate application pending and an Ohio case remained subject to approval.
- The company acquired Lower Makefield Township’s wastewater system in March for $53.0 million. Several other utility acquisitions were pending regulatory approval. A proposed purchase of Bucks County Water and Sewer Authority wastewater assets was priced at $885.0 million plus adjustments and remained subject to approvals and a definitive agreement. DELCORA’s proposed acquisition remained subject to regulatory proceedings and ongoing litigation.
- In May, the company issued $500.0 million of 5.30% senior notes due 2052, using proceeds principally to repay revolving-credit borrowings and for general purposes. Tangible equity unit settlements resulted in issuance of about 9.0 million shares during the first half; the units’ amortizing notes were paid off.
- Management reported inflation in materials, labor and other operating costs, supply-chain pressures, and substantially higher natural-gas prices, and expected these pressures to continue through 2022. It reported some materials delays but said purchasing adjustments had avoided material effects on operations or its capital program. No specific earnings or revenue guidance was provided.
- Risks include regulatory lag in recovering costs, interest-rate and capital-market changes, weather, geopolitical uncertainty, pandemic-related effects, and the timing, approval and financing of acquisitions. Management said COVID-19 and geopolitical uncertainty had not materially affected financial estimates to date, but outcomes remain uncertain.
- Legal matters included an Illinois water-related class action, for which class certification had not been granted; management did not expect a material adverse effect. Loss-contingency accruals totaled $16.9 million, with an estimated $2.3 million probable insurance recovery. The company also expected costs related to remediation of a customer water advisory to continue through 2022.
Key facts for investors to verify
- How much of revenue growth reflects regulated volume, rates and customer growth versus pass-through gas costs, and whether underlying margins keep pace with inflation.
- Whether rate-case outcomes and infrastructure surcharges recover rising operating costs in a timely manner.
- Funding requirements and potential dilution associated with pending acquisitions, especially the proposed $885 million Bucks County transaction and DELCORA.
- Debt, refinancing and interest-cost trends, including renewal terms for short-term credit facilities and financing for the capital program.
- Developments in the Illinois water-related litigation and remediation costs, along with the status of regulatory approvals and acquisition contingencies.