UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from_______________ to _______________
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
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(Address of principal executive offices) | (Zip Code) |
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(Registrant’s telephone number, including area code) |
N/A
(Former Name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No £
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.:
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Accelerated Filer £ | |
Non-Accelerated Filer £ | Smaller Reporting Company |
Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No
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Securities registered pursuant to Section 12(b) of the Act: | ||||
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 26, 2024:
TABLE OF CONTENTS
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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| June 30, |
| December 31, | ||
Assets |
| 2024 |
| 2023 | ||
Property, plant and equipment, at cost |
| $ | |
| $ | |
Less: accumulated depreciation |
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Net property, plant and equipment |
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Current assets: |
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Cash and cash equivalents |
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Accounts receivable, net |
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Unbilled revenues |
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Inventory - materials and supplies |
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Inventory - gas stored |
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Prepayments and other current assets |
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Regulatory assets |
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Total current assets |
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Regulatory assets |
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Deferred charges and other assets, net |
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Funds restricted for construction activity |
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Goodwill |
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Operating lease right-of-use assets |
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Intangible assets |
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Total assets |
| $ | |
| $ | |
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The accompanying notes are an integral part of these condensed consolidated financial statements |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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| June 30, |
| December 31, | ||
Liabilities and Equity |
| 2024 |
| 2023 | ||
Stockholders' equity: |
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Common stock at $ |
| $ | |
| $ | |
Capital in excess of par value |
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Retained earnings |
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Treasury stock, at cost, |
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Total stockholders' equity |
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Long-term debt, excluding current portion |
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Less: debt issuance costs |
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Long-term debt, excluding current portion, net of debt issuance costs |
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Commitments and contingencies (See Note 14) |
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Current liabilities: |
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Current portion of long-term debt |
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Loans payable |
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Accounts payable |
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Book overdraft |
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Accrued interest |
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Accrued taxes |
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Regulatory liabilities |
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Dividends payable |
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| - |
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Other accrued liabilities |
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Total current liabilities |
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Deferred credits and other liabilities: |
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Deferred income taxes and investment tax credits |
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Customers' advances for construction |
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Regulatory liabilities |
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Asset retirement obligations |
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Operating lease liabilities |
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Pension and other postretirement benefit liabilities |
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Other |
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Total deferred credits and other liabilities |
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Contributions in aid of construction |
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Total liabilities and equity |
| $ | |
| $ | |
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The accompanying notes are an integral part of these condensed consolidated financial statements |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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| Three Months Ended | ||||
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| June 30, | ||||
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| 2024 |
| 2023 | ||
Operating revenues |
| $ | |
| $ | |
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Operating expenses: |
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Operations and maintenance |
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Purchased gas |
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Depreciation |
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Amortization |
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Taxes other than income taxes |
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Total operating expenses |
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Operating income |
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Other expense (income): |
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Interest expense |
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Interest income |
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| ( |
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| ( |
Allowance for funds used during construction |
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| ( |
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| ( |
Gain on sale of other assets |
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| ( |
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| ( |
Other, net |
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| ( |
Income before income taxes |
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Income tax expense (benefit) |
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| ( |
Net income |
| $ | |
| $ | |
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Comprehensive income |
| $ | |
| $ | |
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Net income per common share: |
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Basic |
| $ | |
| $ | |
Diluted |
| $ | |
| $ | |
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Average common shares outstanding during the period: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements | ||||||
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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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| Six Months Ended | ||||
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| June 30, | ||||
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| 2024 |
| 2023 | ||
Operating revenues |
| $ | |
| $ | |
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Operating expenses: |
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Operations and maintenance |
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Purchased gas |
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Depreciation |
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Amortization |
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Taxes other than income taxes |
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Total operating expenses |
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Operating income |
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Other expense (income): |
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Interest expense |
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Interest income |
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| ( |
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| ( |
Allowance for funds used during construction |
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| ( |
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| ( |
Gain on sale of other assets |
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| ( |
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| ( |
Other, net |
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| ( |
Income before income taxes |
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Income tax benefit |
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| ( |
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| ( |
Net income |
| $ | |
| $ | |
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Comprehensive income |
| $ | |
| $ | |
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Net income per common share: |
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Basic |
| $ | |
| $ | |
Diluted |
| $ | |
| $ | |
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Average common shares outstanding during the period: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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| June 30, |
| December 31, | ||
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| 2024 |
| 2023 | ||
Stockholders' equity: |
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Common stock, $ |
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| $ | |
| $ | |
Capital in excess of par value |
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Retained earnings |
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Treasury stock, at cost |
|
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| ( |
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| ( |
Total stockholders' equity |
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Long-term debt of subsidiaries (substantially collateralized by utility plant): |
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Interest Rate Range | Maturity Date Range |
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Notes payable to bank under revolving credit agreement, variable rate, due |
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Unsecured notes payable: |
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Notes at |
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Notes at |
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Notes ranging from |
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Notes at |
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| - | |
Notes at |
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Notes at |
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Notes at |
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Total long-term debt |
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Current portion of long-term debt |
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Long-term debt, excluding current portion |
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Less: debt issuance costs |
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Long-term debt, excluding current portion, net of debt issuance costs |
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| | |
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Total capitalization |
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| $ | |
| $ | |
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The accompanying notes are an integral part of these condensed consolidated financial statements |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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| Capital in |
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| Common |
| Excess of |
| Retained |
| Treasury |
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| Stock |
| Par Value |
| Earnings |
| Stock |
| Total | |||||
Balance at December 31, 2023 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
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|
| - |
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Dividends of March 1, 2024 ($ |
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| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Dividends of June 1, 2024 declared ($ |
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| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
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|
| - |
|
| - |
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Repurchase of stock ( |
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| - |
|
| - |
|
| - |
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| ( |
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| ( |
Equity compensation plan ( |
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| ( |
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| - |
|
| - |
|
| - |
Exercise of stock options ( |
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| - |
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| - |
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Stock-based compensation |
|
| - |
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|
| - |
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Other |
|
| - |
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| ( |
|
| - |
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Balance at March 31, 2024 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
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|
| - |
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Dividends of June 1, 2024 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
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| |
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| - |
|
| - |
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Repurchase of stock ( |
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| - |
|
| - |
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| - |
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| ( |
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| ( |
Equity compensation plan ( |
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| ( |
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| - |
|
| - |
|
| - |
Exercise of stock options ( |
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| - |
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| - |
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Stock-based compensation |
|
| - |
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| ( |
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| - |
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Other |
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| - |
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| ( |
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| - |
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Balance at June 30, 2024 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
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The accompanying notes are an integral part of these condensed consolidated financial statements |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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| Capital in |
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| Common |
| Excess of |
| Retained |
| Treasury |
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| Stock |
| Par Value |
| Earnings |
| Stock |
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| Total | ||||
Balance at December 31, 2022 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
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| |
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| - |
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Dividends of March 1, 2023 ($ |
|
| - |
|
| - |
|
| ( |
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| - |
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| ( |
Dividends of June 1, 2023 declared ($ |
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| - |
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| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
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| - |
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| - |
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Issuance of common stock from at-the-market sale agreements ( |
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| - |
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| - |
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Repurchase of stock ( |
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| - |
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| - |
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| - |
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| ( |
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| ( |
Equity compensation plan ( |
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| ( |
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| - |
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| - |
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| - |
Exercise of stock options ( |
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| - |
|
| - |
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Stock-based compensation |
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| - |
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|
| ( |
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| - |
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Other |
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| - |
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| ( |
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| - |
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| |
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Balance at March 31, 2023 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
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| |
|
| - |
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Dividends of June 1, 2023 ($ |
|
| - |
|
| - |
|
| ( |
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| - |
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| ( |
Issuance of common stock under dividend reinvestment plan ( |
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| - |
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| - |
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Repurchase of stock ( |
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| - |
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| - |
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| - |
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| ( |
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| ( |
Equity compensation plan ( |
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| ( |
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| - |
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| - |
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| - |
Exercise of stock options ( |
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| - |
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| - |
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Stock-based compensation |
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| - |
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|
| ( |
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| - |
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Other |
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| - |
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| ( |
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| - |
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| |
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Balance at June 30, 2023 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
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The accompanying notes are an integral part of these condensed consolidated financial statements |
Click or tap here to enter text.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
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| Six Months Ended | ||||
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| June 30, | ||||
|
| 2024 |
| 2023 | ||
Cash flows from operating activities: |
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Net income |
| $ | |
| $ | |
Adjustments to reconcile net income to net cash flows from operating activities: |
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Depreciation and amortization |
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Deferred income taxes |
|
| ( |
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| ( |
Provision for doubtful accounts |
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Stock-based compensation |
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| |
Gain on sale of utility systems and other assets |
|
| ( |
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| ( |
Net change in receivables, deferred purchased gas costs, inventory and prepayments |
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| |
Net change in payables, accrued interest, accrued taxes and other accrued liabilities |
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| ( |
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| ( |
Other, net |
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| ( |
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| ( |
Net cash flows from operating activities |
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Cash flows from investing activities: |
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Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $ |
|
| ( |
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| ( |
Acquisitions of utility systems, net |
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| ( |
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| ( |
Net proceeds from the sale of utility systems and other assets |
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Other, net |
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| ( |
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Net cash flows used in investing activities |
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| ( |
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| ( |
Cash flows from financing activities: |
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Customers' advances and contributions in aid of construction |
|
| |
|
| |
Repayments of customers' advances |
|
| ( |
|
| ( |
Net repayments of short-term debt |
|
| ( |
|
| ( |
Proceeds from long-term debt |
|
| |
|
| |
Repayments of long-term debt |
|
| ( |
|
| ( |
Change in cash overdraft position |
|
| |
|
| |
Proceeds from issuance of common stock under dividend reinvestment plan |
|
| |
|
| |
Proceeds from issuance of common stock from at-the-market sale agreement |
|
| - |
|
| |
Proceeds from exercised stock options |
|
| |
|
| |
Repurchase of common stock |
|
| ( |
|
| ( |
Dividends paid on common stock |
|
| ( |
|
| ( |
Other, net |
|
| |
|
| |
Net cash flows used in financing activities |
|
| ( |
|
| ( |
Net change in cash and cash equivalents |
|
| |
|
| |
Cash and cash equivalents at beginning of period |
|
| |
|
| |
Cash and cash equivalents at end of period |
| $ | |
| $ | |
| ||||||
Non-cash investing activities: | ||||||
Property, plant and equipment additions purchased at the period end, but not yet paid for |
| $ | |
| $ | |
Non-cash utility property contributions |
|
| |
|
| |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The accompanying unaudited condensed consolidated balance sheets and statements of capitalization of Essential Utilities, Inc. and subsidiaries (collectively, the “Company”, “we”, “us” or “our”) at June 30, 2024, the unaudited condensed consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2024, and the unaudited condensed consolidated statements of cash flow and of equity for the six months ended June 30, 2024 and 2023, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim reporting and the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments, consisting of only recurring accruals, which are necessary to present a fair statement of its condensed consolidated balance sheets, condensed consolidated statements of capitalization, condensed consolidated statements of equity, condensed consolidated statements of operations and comprehensive income, and condensed consolidated statements of cash flow for the periods presented, have been made.
There have been no changes to the summary of significant accounting policies previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table presents our revenues disaggregated by major source and customer class:
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| Three Months Ended |
| Three Months Ended | ||||||||||||||||||||
| June 30, 2024 |
| June 30, 2023 | ||||||||||||||||||||
| Water Revenues |
| Wastewater Revenues |
| Natural Gas Revenues |
| Other Revenues |
| Water Revenues |
| Wastewater Revenues |
| Natural Gas Revenues |
| Other Revenues | ||||||||
Revenues from contracts with customers: |
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Residential | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
| $ | |
| $ | |
| $ | - |
Commercial |
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Fire protection |
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
Industrial |
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Gas transportation & storage |
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
Other water |
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
Other wastewater |
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
Other utility |
| - |
|
| - |
|
| |
|
| |
|
| - |
|
| - |
|
| |
|
| |
Revenues from contracts with customers |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Alternative revenue program |
| |
|
| ( |
|
| ( |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Other and eliminations |
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
Consolidated | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
| Six Months Ended |
| Six Months Ended | ||||||||||||||||||||
| June 30, 2024 |
| June 30, 2023 | ||||||||||||||||||||
| Water Revenues |
| Wastewater Revenues |
| Natural Gas Revenues |
| Other Revenues |
| Water Revenues |
| Wastewater Revenues |
| Natural Gas Revenues |
| Other Revenues | ||||||||
Revenues from contracts with customers: |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
| $ | |
| $ | |
| $ | - |
Commercial |
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Fire protection |
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
Industrial |
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Gas transportation & storage |
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
Other water |
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
Other wastewater |
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
Other utility |
| - |
|
| - |
|
| |
|
| |
|
| - |
|
| - |
|
| |
|
| |
Revenues from contracts with customers |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Alternative revenue program |
| |
|
| ( |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Other and eliminations |
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
Consolidated | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Water and Wastewater Utility Acquisitions - Completed
In May 2024, the Company acquired the wastewater utility assets of Westfield HOA, which serves approximately
In July 2023, the Company completed the following water utility asset acquisitions: Shenandoah Borough, Pennsylvania, which serves approximately
In June 2023, the Company acquired the wastewater utility assets of Union Rome, Ohio, which serves approximately
In March 2023, the Company acquired the North Heidelberg Sewer Company in Berks County, Pennsylvania, which serves approximately
The purchase price allocation for these acquisitions consisted primarily of property, plant and equipment.
The pro forma effect of the utility systems acquired is not material either individually or collectively to the Company’s results of operations.
Water and Wastewater Utility Acquisitions – Pending Completion
In June 2024, the Company entered into a purchase agreement to acquire private water and wastewater utility assets in Harris County, Texas, which serves approximately
In December 2023, the Company entered into a purchase agreement to acquire North Versailles wastewater assets in North Versailles Township, Pennsylvania which serves approximately
In September 2023, the Company entered into a purchase agreement to acquire Greenville Municipal Water Authority’s water system in Greenville, Pennsylvania which serves approximately
In April 2023, the Company entered into a purchase agreement to acquire Greenville Sanitation Authority’s wastewater utility assets, which serves approximately
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
In October 2021, the Company entered into a purchase agreement to acquire the wastewater utility assets of the City of Beaver Falls, Pennsylvania which consists of approximately
The purchase price for these pending acquisitions are subject to certain adjustments at closing, and are subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase price of these acquisitions by utilizing our revolving credit facility until permanent debt and common equity are secured. These pending acquisitions are expected to close in 2025. Closing for our utility acquisitions are subject to the timing of the respective regulatory approval processes.
East Whiteland Purchase Agreement
On July 29, 2022, the Pennsylvania Public Utility Commission issued an order (the “PUC Order”) approving the Company’s acquisition of the municipal wastewater assets of East Whiteland Township, Chester County, Pennsylvania, which serves
DELCORA Purchase Agreement
In 2019, the Company entered into a purchase agreement to acquire the wastewater utility system assets of the Delaware County Regional Water Quality Control Authority (“DELCORA”), which consists of approximately
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
On October 1, 2023, the Company sold its regulated natural gas utility assets in West Virginia, which served approximately
In October 2023, the Company entered into an agreement to sell its interest in three non-utility local microgrid and distributed energy projects for $
The following table summarizes the changes in the Company’s goodwill, by business segment:
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|
|
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|
|
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated | ||||
Balance at December 31, 2023 |
| $ | |
| $ |
| $ |
| $ | | ||
Reclassification to utility plant acquisition adjustment |
|
| ( |
|
| - |
|
| - |
|
| ( |
Balance at June 30, 2024 |
| $ | |
| $ | |
| $ | |
| $ | |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
In March 2024, the Company filed a new universal shelf registration with the Securities and Exchange Commission (SEC) to allow for the potential future offer and sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities, and other securities specified therein at indeterminate prices. This registration statement is effective for three years and replaces a similar filing that expired in the second quarter of 2024.
At-the-Market Offering
On October 14, 2022, the Company entered into at-the market sales agreements (“2022 ATM”) with third-party sales agents, under which the Company offered and sold shares of its common stock, from time to time, at its option, pursuant to the Company’s then-effective shelf registration statement on Form S-3 (File No. 333-255235) that expired in April 2024. The Company used the net proceeds from the sales of shares through the 2022 ATM for working capital, capital expenditures, water and wastewater utility acquisitions and repaying outstanding indebtedness. During the three and six months ended June 30, 2024, there were
Long-term Debt and Loans Payable
On June 12, 2024, Aqua Pennsylvania and Peoples Natural Gas Companies amended the terms of their respective $
In August 2023, the Company’s subsidiary, Aqua Pennsylvania, issued $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented. The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments. There have been no changes in the valuation techniques used to measure fair value, or asset or liability transfers between the levels of the fair value hierarchy for the six months ended June 30, 2024 and 2023.
The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of June 30, 2024 and December 31, 2023, the carrying amount of the Company’s loans payable was $
Unrealized gain and loss on equity securities held in conjunction with our non-qualified pension plan is as follows:
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|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Net gain recognized during the period on equity securities |
| $ | |
| $ | |
| $ | |
| $ | |
Less: net gain recognized during the period on equity securities sold during the period |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain recognized during the reporting period on equity securities still held at the reporting date |
| $ | |
| $ | |
| $ | |
| $ | |
The net gain recognized on equity securities is presented on the condensed consolidated statements of operations and comprehensive income on the line item “Other, net”.
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
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|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2024 |
| 2023 | ||
Carrying amount |
| $ | |
| $ | |
Estimated fair value |
|
| |
|
| |
The fair value of long-term debt has been determined by discounting the future cash flows using current market interest rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The Company’s customers’ advances for construction have a carrying value of $
Basic net income per common share is based on the weighted average number of common shares outstanding and the weighted average minimum number of shares issued upon settlement of the stock purchase contracts issued under the tangible equity units. Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share. The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise of the stock-based compensation. The treasury stock method assumes that the proceeds from stock-based compensation is used to purchase the Company’s common stock at the average market price during the period. The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share:
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|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||
|
| June 30, |
| June 30, | ||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 |
Average common shares outstanding during the period for basic computation |
| |
| |
| |
| |
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock-based compensation |
|
|
| |
| | ||
Average common shares outstanding during the period for diluted computation |
| |
| |
| |
| |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Under the Company’s Amended and Restated Equity Compensation Plan (the “Plan”) approved by the Company’s shareholders on May 2, 2019, to replace the 2004 Equity Compensation Plan, stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors. The Plan authorizes
Performance Share Units – A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the
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|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
The following table summarizes the PSU transactions for the six months ended June 30, 2024:
|
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|
| Number |
| Weighted | |
|
|
| of |
| Average | |
|
|
| Share Units |
| Fair Value | |
Nonvested share units at beginning of period |
|
| |
| $ | |
Granted |
|
| |
|
| |
Performance criteria adjustment |
|
| ( |
|
| |
Share units issued |
|
| ( |
|
| |
Forfeited |
|
| ( |
|
| |
Nonvested share units at end of period |
|
| |
|
| |
|
|
|
|
|
|
|
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions. The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied. The per unit weighted-average fair value at the date of grant for PSUs granted during the six months ended June 30, 2024 and 2023 was $
Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock. RSUs are eligible to be earned at the end of a specified restricted period, which is generally
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|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
The following table summarizes the RSU transactions for the six months ended June 30, 2024:
|
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|
| Number |
| Weighted | |
|
|
| of |
| Average | |
|
|
| Stock Units |
| Fair Value | |
Nonvested stock units at beginning of period |
|
| |
| $ | |
Granted |
|
| |
|
| |
Stock units vested and issued |
|
| ( |
|
| |
Forfeited |
|
| ( |
|
| |
Nonvested stock units at end of period |
|
| |
|
| |
The per unit weighted-average fair value at the date of grant for RSUs granted during the six months ended June 30, 2024 and 2023 was $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Stock Options – A stock option represents the option to purchase a number of shares of common stock of the Company as specified in the stock option grant agreement at the exercise price per share as determined by the closing market price of our common stock on the grant date. Stock options are exercisable in installments of
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|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
|
| June 30, | |||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model. The following assumptions were used in the application of this valuation model:
|
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|
|
| 2024 | 2023 |
| ||
Expected term (years) |
|
|
| ||
Risk-free interest rate |
|
|
| ||
Expected volatility |
|
|
| ||
Dividend yield |
|
|
| ||
Grant date fair value per option | $ | $ |
|
Historical information was the principal basis for the selection of the expected term and dividend yield. The expected volatility is based on a weighted-average combination of historical and implied volatilities over a time period that approximates the expected term of the option. The risk-free interest rate was selected based upon the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes stock option transactions for the six months ended June 30, 2024:
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|
|
| Weighted |
| Weighted |
|
|
| |
|
|
|
| Average |
| Average |
| Aggregate | ||
|
|
|
| Exercise |
| Remaining |
| Intrinsic | ||
|
| Shares |
| Price |
| Life (years) |
| Value | ||
Outstanding at beginning of period |
| |
| $ | |
|
|
|
|
|
Granted |
| |
|
| |
|
|
|
|
|
Forfeited |
| ( |
|
| |
|
|
|
|
|
Expired |
| ( |
|
| |
|
|
|
|
|
Exercised |
| ( |
|
| |
|
|
|
|
|
Outstanding at end of period |
| |
| $ | |
|
| $ | | |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
| |
| $ | |
|
| $ | |
Restricted Stock – Restricted stock awards provide the grantee with the rights of a shareholder, including the right to receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction period. Restricted stock awards result in compensation expense that is equal to the fair market value of the stock on the date of the grant and is amortized ratably over the restriction period. The Company expects forfeitures of restricted stock to be de minimis. The following table provides the compensation cost and income tax benefit for stock-based compensation related to restricted stock:
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|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
The following table summarizes restricted stock transactions for the six months ended June 30, 2024:
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|
| Number |
| Weighted | |
|
| of |
| Average | |
|
| Shares |
| Fair Value | |
Nonvested restricted stock at beginning of period |
| |
| $ | |
Granted |
|
|
|
|
|
Vested |
|
|
|
|
|
Nonvested restricted stock at end of period |
| |
| $ | |
There were restricted stock awards granted during the six months ended June 30, 2024 and 2023.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. The issuance of stock awards results in compensation expense that is equal to the fair market value of the stock on the grant date and is expensed immediately upon grant.
The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock awards:
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|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
The following table summarizes stock award transactions for the six months ended June 30, 2024:
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|
| Number |
| Weighted | |
|
| of |
| Average | |
|
| Stock Awards |
| Fair Value | |
Nonvested stock awards at beginning of period |
|
|
| $ |
|
Granted |
| |
|
| |
Vested |
| ( |
|
| |
Nonvested stock awards at end of period |
|
|
|
|
|
The Company maintains a qualified defined benefit pension plan (the “Pension Plan”), a nonqualified pension plan, and other postretirement benefit plans for certain of its employees.
The following tables provide the components of net periodic benefit cost for the Company’s pension and other postretirement benefit plans:
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| Pension Benefits | ||||||||||
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Service cost |
| $ | |
| $ | |
| $ | |
| $ | |
Interest cost |
|
| |
|
| |
|
| |
|
| |
Expected return on plan assets |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Amortization of prior service cost |
|
| |
|
| |
|
| |
|
| |
Amortization of actuarial loss |
|
| |
|
| |
|
| |
|
| |
Net periodic benefit cost |
| $ | |
| $ | |
| $ | |
| $ | |
|
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|
|
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|
|
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
| Other | ||||||||||
|
| Postretirement Benefits | ||||||||||
|
|
| Three Months Ended |
|
| Six Months Ended | ||||||
|
|
| June 30, |
|
| June 30, | ||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Service cost |
| $ | |
| $ | |
| $ | |
| $ | |
Interest cost |
|
| |
|
| |
|
| |
|
| |
Expected return on plan assets |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Amortization of actuarial gain |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Net periodic benefit cost |
| $ | |
| $ | |
| $ | |
| $ | |
The net periodic benefit cost is based on estimated values and an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover, and medical costs. The Company presents the components of net periodic benefit cost other than service cost in the condensed consolidated statements of operations and comprehensive income on the line item “Other, net”.
On May 23, 2024, Aqua Pennsylvania filed an application with the Pennsylvania Public Utility Commission designed to increase rates by $
On January 19, 2024, Aqua New Jersey filed an application with the New Jersey Board of Public Utilities designed to increase water rates by $
On January 2, 2024, Aqua Illinois filed an application with the Illinois Commerce Commission designed to increase water and wastewater rates by $
On December 29, 2023, Peoples Natural Gas filed an application with the Pennsylvania Public Utility Commission designed to increase natural gas rates by $
On December 13, 2023, the Company’s regulated water and wastewater utility operating divisions in Ohio received an order from the Public Utilities Commission of Ohio designed to increase operating revenues by $
On September 28, 2023, the Company’s regulated water and wastewater operating subsidiary in Texas, Aqua Texas, received a final order from the Public Utility Commission of Texas approving infrastructure rehabilitation surcharges designed to increase revenues by $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
authorized on March 28, 2023 and implemented on an interim basis effective April 1, 2023 did not change with the final order.
On July 27, 2023, the Company’s regulated water and wastewater operating subsidiary in Virginia, Aqua Virginia, filed an application with the State Corporation Commission designed to increase revenues by $
On June 5, 2023, the Company’s regulated water and wastewater operating subsidiary in North Carolina, Aqua North Carolina, received an order from the North Carolina Utilities Commission designed to increase rates by $
During the first six months of 2024, two of the Company’s water utility operating divisions in Ohio implemented base rate increases designed to increase total operating revenues on an annual basis by $
The following table provides the components of taxes other than income taxes:
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|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Property |
| $ | |
| $ | |
| $ | |
| $ | |
Gross receipts, excise and franchise |
|
| |
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| |
|
| |
|
| |
Payroll |
|
| |
|
| |
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| |
|
| |
Regulatory assessments |
|
| |
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| |
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| |
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| |
Pumping fees |
|
| |
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| |
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| |
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| |
Other |
|
| |
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| |
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| |
|
| |
Total taxes other than income |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
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|
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|
|
|
|
|
|
|
|
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The Company has
In addition to the Company’s
The following table presents information about the Company’s reportable segments:
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| Three Months Ended |
| Three Months Ended | ||||||||||||||||||||
|
| June 30, 2024 |
| June 30, 2023 | ||||||||||||||||||||
|
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated |
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated | ||||||||
Operating revenues |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Operations and maintenance expense |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| ( |
|
| |
Purchased gas |
|
| - |
|
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
Depreciation and amortization |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest expense, net (a) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Allowance for funds used during construction |
|
| ( |
|
| ( |
|
| - |
|
| ( |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Provision for income taxes (benefit) |
|
| |
|
| ( |
|
| ( |
|
| |
|
| |
|
| ( |
|
| ( |
|
| ( |
Net income (loss) |
|
| |
|
| ( |
|
| ( |
|
| |
|
| |
|
| |
|
| ( |
|
| |
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|
|
|
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|
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|
|
|
|
| Six Months Ended |
| Six Months Ended | ||||||||||||||||||||
|
| June 30, 2024 |
| June 30, 2023 | ||||||||||||||||||||
|
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated |
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated | ||||||||
Operating revenues |
| $ | |
|
| |
| $ | |
| $ |
| $ | |
|
| |
| $ | |
| $ | | |
Operations and maintenance expense |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| ( |
|
| |
Purchased gas |
|
| - |
|
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
Depreciation and amortization |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest expense, net (a) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Allowance for funds used during construction |
|
| ( |
|
| ( |
|
| - |
|
| ( |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Provision for income taxes (benefit) |
|
| |
|
| ( |
|
| ( |
|
| ( |
|
| |
|
| ( |
|
| ( |
|
| ( |
Net income (loss) |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| ( |
|
| |
Capital expenditures |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| |
|
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|
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|
|
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|
|
|
(a)The regulated water and regulated natural gas segments report interest expense that includes long-term debt that was pushed-down to the regulated operating subsidiaries from Essential Utilities, Inc.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2024 |
| 2023 | ||
Total assets: |
|
|
|
|
|
|
Regulated water |
| $ | |
| $ | |
Regulated natural gas |
|
| |
|
| |
Other |
|
| |
|
| |
Consolidated |
| $ | |
| $ | |
|
|
|
|
|
|
|
The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved. As of June 30, 2024, the aggregate amount of $
During a portion of 2019, the Company initiated a do not consume advisory for some of its customers in one division served by the Company’s Illinois subsidiary. The do not consume advisory was lifted in 2019 and, in 2022, the water system was determined to be in compliance with the federal Lead and Copper Rule. The Company has accrued for the penalty and other fees that will be paid as a result of a settlement that was reached with the state and local regulators and approved by the Illinois court with jurisdiction over this matter in July, 2024. In addition, on September 3, 2019,
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
expenses incurred to its insurance carrier for potential recovery of a portion of these costs and is currently in litigation with one of its carriers seeking to enforce its claims. The Company continues to assess the potential loss contingency on this matter.
A number of the Company’s subsidiaries are parties to several lawsuits against manufacturers of certain per- and polyfluoroalkyl substances or compounds (“PFAS”) for damages, contribution and reimbursement of costs incurred and continuing to be incurred to address the presence of such PFAS in public water supply systems owned and operated by these utility subsidiaries throughout its service area. One such suit to which the Company is a party is a multi-district litigation (the “MDL”) lawsuit which commenced on December 7, 2018, in the United States District Court for the District of South Carolina. Several defendants in such lawsuit have agreed to settle. In February and April 2024, the MDL court issued its final approval of the DuPont and 3M class action settlements, respectively. In April 2024 and May 2024, Tyco Fire Products LP and BASF Corp, respectively, filed similar class action settlements in the MDL court to resolve claims. In June 2024, Tyco Fire Products LP settlement was granted preliminary approval by the MDL court. The Company submitted the phase one public water system claims requirements pursuant to the Dupont and 3M settlement agreements and will submit other requirements within the time period provided by the MDL court. The amount of recovery, if any, by the Company is uncertain.
Although the results of legal proceedings cannot be predicted with certainty, other than disclosed above, there are no pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of its properties is the subject that are material or are expected to have a material effect on the Company’s financial position, results of operations, or cash flows.
In addition to the aforementioned loss contingencies, the Company self-insures a portion of its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for these claims totaled $
The statutory Federal tax rate is
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
In April 2023, the Internal Revenue Service issued Revenue Procedure 2023-15 which provides a safe harbor method of accounting that taxpayers may use to determine whether expenses to repair, maintain, replace, or improve natural gas transmission and distribution property must be capitalized for tax purposes. The Company evaluated the safe harbor and intends to adopt the methodology on its 2023 tax return. In the second quarter of 2023, based on the tax legislative guidance that was issued, the Company reevaluated the uncertain tax positions related to the Regulated Water Segment and ultimately released a portion of its historical income tax reserves. Concurrently, the Company deferred this tax benefit from the reserve release as a regulatory liability, as the accounting treatment is expected to be determined in the next rate case that was filed in May 2024.
Pronouncements to be adopted upon the effective date:
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The ASU enhances the transparency and decision usefulness of income tax disclosures and is effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements and related disclosures.
In November 2023, the FASB issued ASU 2023-07 Segment Reporting – Improving Reportable Segment Disclosures (Topic 280). The update is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The ASU requires disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker (CODM), a description of other segment items by reportable segment, and any additional measures of a segment’s profit or loss used by the CODM when deciding how to allocate resources. The ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods. The update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted and requires retrospective application to all prior periods presented in the financial statements. The Company is currently assessing the timing and impact of adopting the updated provisions.
In March 2024, the U.S. Securities and Exchange Commission (SEC) issued its final climate disclosure rule, which requires the disclosure of Scope 1 and Scope 2 greenhouse gas emissions and other climate-related topics in annual reports and registration statements, when material. A number of petitions have been filed in federal courts seeking to challenge the SEC’s climate disclosure rule. As a result, in April 2024, the SEC placed a pause on its implementation of the new rule. We are currently evaluating the impact of the new rule and, depending on the outcome of the proceedings, will include the required disclosures once it becomes effective.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: the expected timing of closing of our acquisitions; the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “estimates,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among others, the effects of regulation, abnormal weather, geopolitical forces, the impact of inflation and supply chain pressures, the threat of cyber-attacks and data breaches, changes in capital requirements and funding, our ability to close acquisitions, changes to the capital markets, impact of public health threats, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such reports. As a result, readers are cautioned not to place undue reliance on any forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
Essential Utilities, Inc. (“we”, “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or natural gas services to an estimated 5.5 million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, and Kentucky under the Aqua and Peoples brands. One of our largest operating subsidiaries, Aqua Pennsylvania, Inc. (“Aqua Pennsylvania”), provides water or wastewater services to approximately one-half of the total number of water or wastewater customers we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 27 other counties in Pennsylvania. Our other regulated water or wastewater utility subsidiaries provide similar services in seven additional states. Our Peoples subsidiaries provide natural gas distribution services to customers in western Pennsylvania and Kentucky. Approximately 95% of the total number of natural gas utility customers we serve are in western Pennsylvania. The Company also operates market-based businesses, conducted through its non-regulated subsidiaries, that provide utility service line protection solutions and repair services to households and gas marketing and production activities. Currently, the Company seeks to acquire businesses in the U.S. regulated sector, focusing on water and wastewater utilities and to opportunistically pursue growth ventures in select market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated water utility businesses.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
On October 1, 2023, the Company sold its regulated natural gas utility assets in West Virginia, which represented approximately two percent of the Company’s regulated natural gas customers. Initially the sale closed for an estimated purchase price of $39,965, subject to working capital and other adjustments. In March 2024, the Company received an additional $1,213 from the buyer. The additional proceeds were based on finalizing closing working capital and other adjustments, resulting in a final purchase price of $41,178 and a loss of an inconsequential amount. In October 2023, the Company entered into an agreement to sell its interest in three non-utility local microgrid and distributed energy projects for $165,000. The sale was completed in January 2024, and the Company recognized a gain of $91,236 in the first quarter of 2024. These transactions are consistent with the Company’s long-term strategy of focusing on its core business and will allow the Company to prioritize the growth of its utilities in states where it has scale. The Company used the proceeds from these transactions to finance its capital expenditures and water and wastewater acquisitions, in place of external funding from equity and debt issuances.
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes.
Recent Developments
Macroeconomic Factors
Our industry has been significantly impacted by inflation, higher interest rates, and other macroeconomic factors. This resulted in an increase in our operating and capital spending requirements in 2022 and 2023. As of the current period, inflation decelerated compared with the prior year, however, it is still above historical levels. Additionally, interest rates remain elevated to curb inflation. We experienced moderate macroeconomic pressures during the first half of 2024, which we expect to continue through the remainder of 2024. We continue to pursue enhancements to our regulatory practices to facilitate the efficient recovery of the increased cost of providing services and infrastructure improvements in our rates and mitigate the inherent regulatory lag associated with traditional rate making processes.
On April 10, 2024, the U.S. Environmental Protection Agency (“EPA”) announced the final National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”). The NPDWR established the maximum contaminant levels (MCLs) in drinking water and allows for a five-year window to comply. In 2023, the Company performed its initial analysis of the NPDWR and estimated an investment of at least $450,000 of capital expenditures to install additional treatment facilities over the Compliance Period in order to comply (i.e. 2029 pending no delays due to lawsuits). This figure could increase as plans for construction execution are refined or if additional sites require treatment in the future. Additionally, the Company estimated annual operating expenses of approximately five percent of the installed capital expenditures, in today’s dollars, related to testing, treatment, and disposal. These were preliminary estimates and actual capital expenditures and expenses may differ based upon a variety of factors, including supply chain issues and site-by-site
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
requirements. Capital expenditures and operating costs required as a result of water quality standards have been traditionally recognized by state utility commissions as appropriate for inclusion in establishing rates; however, we are also actively applying for grants and low interest loans, whenever possible, to reduce the overall cost to customers.
On April 19, 2024, the U.S. Environmental Protection Agency (“EPA”) announced a final rule that designated two PFAS chemicals, perfluorooctanoic acid (“PFOA”) and perfluorooctanesulfonic acid (“PFOS”), as hazardous substances under the under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), also known as Superfund. This final action will address PFOA and PFOS contamination by enabling investigation and cleanup of these harmful chemicals and ensuring that leaks, spills, and other releases are reported. In addition to the final rule, EPA issued a separate CERCLA enforcement discretion policy that makes it clear that EPA will focus enforcement on parties who significantly contributed to the release of PFAS chemicals into the environment, including parties that have manufactured PFAS or used PFAS in the manufacturing process, federal facilities, and other industrial parties. The policy identifies examples for operators of public water systems and wastewater systems or entities performing a public service role in providing safe drinking water, handling municipal solid waste, treating or managing stormwater and wastewater, disposing of pollution control residuals, or ensuring beneficial application of wastewater products as a fertilizer substitute. The potential liabilities to the Company, if any, resulting from this rule are currently being evaluated. As of July 2024, multiple lawsuits were filed by various companies and industry groups against the EPA's PFAS rule and are awaiting court action.
The Company continues to advocate for actions to hold polluters accountable and is part of the Multi-District Litigation and other legal actions against multiple PFAS manufacturers and polluters to attempt to ensure that the ultimate responsibility for the cleanup of these contaminants is attributed to the polluters and is seeking damages and other costs to address the contamination of its public water supply systems by PFAS. The Company is also monitoring ongoing litigation and settlement activity with manufacturers of PFAS in these proceedings. For more information, see Part I - Item I - Note 14 to the Company’s condensed consolidated financial statements.
Act 12 Recent Development
On June 13, 2024, the Pennsylvania Public Utility Commission approved revised guidelines and procedures designed to increase public involvement and provide a consistent process for evaluating the acquisition and valuation of municipal or authority-owned water and wastewater systems under Act 12 of 2016 (“Act 12”). The Company supports refinements to Act 12 that would provide transparency in the acquisition process and timely regulatory review in Pennsylvania.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Our regulated water and gas business is capital intensive and requires a significant level of capital spending. The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. The Company’s condensed consolidated balance sheet historically has had a negative working capital position whereby our current liabilities routinely exceed our current assets. Management believes that internally generated funds along with existing credit facilities, and the proceeds from the issuance of long-term debt and equity will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.
Our operating cash flow can be significantly affected by changes in operating working capital, especially during periods with significant changes in natural gas commodity prices and also the timing of our natural gas inventory purchases. Cash flow from operations was $426,426 for the first half of 2024, compared to $621,422 for the first half of 2023. The net change in working capital and other assets and liabilities resulted in a decrease in cash from operations of $8,617 for the first half of 2024 compared to an increase of $185,901 for the first half of 2023. The change in working capital in 2024 as compared to 2023 was primarily driven by the year over year decrease in accounts receivable, unbilled revenues and deferred purchased gas cost balances, and most significantly in gas inventory. In 2023, there was a larger decline in natural gas commodity prices as compared to in 2024.
During the first six months of 2024, we incurred $548,868 of capital expenditures, issued $789,946 of long-term debt, received $166,982 from the sale of assets, repaid short-term debt, and made sinking fund contributions and other long-term debt repayments in aggregate of $664,829. The capital expenditures were related to new and replacement water, wastewater, and natural gas mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, information technology improvements, and other enhancements and improvements. The proceeds from the issuance of long-term debt, including borrowings from our revolving credit facility, and proceeds from the sale of the non-utility energy projects were used for capital expenditures, repayment of existing indebtedness, and general corporate purposes. Cash flows used in financing activities were lower during the first half of 2024 principally as a result of the decrease in the amount of the paydown of loans payable associated with the financing of inventory.
On January 8, 2024, the Company issued $500,000 of long-term debt (the “2024 Senior Notes”), less expenses of $4,610, due in 2034 with an interest rate of 5.375%. In August 2023, the Company’s subsidiary, Aqua Pennsylvania, issued $225,000 in aggregate principal amount of first mortgage bonds. The bonds consisted of $175,000 of 5.48% first mortgage bonds due in 2053; and $50,000 of 5.56% first mortgage bonds due in 2061. In January 2023, Aqua Pennsylvania issued $75,000 of first mortgage bonds, due in 2043, and with an interest rate of 5.60%. The proceeds from these borrowings were used to repay existing indebtedness and for general corporate purposes.
On October 14, 2022, the Company entered into at-the market sales agreements (“2022 ATM”) with third-party sales agents, under which the Company offered and sold shares of its common stock, from time to time, at its option, pursuant to the Company’s then-effective shelf registration statement on Form
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
S-3 (File No. 333-255235) that expired in April 2024. During the six months ended June 30, 2024, there were no sales of common stock under the 2022 ATM. As of December 31, 2023, the Company had issued 10,260,833 shares of common stock for net proceeds of $386,023 under the 2022 ATM. The Company used the net proceeds from the sales of shares through the 2022 ATM for working capital, capital expenditures, water and wastewater utility acquisitions, and repaying outstanding indebtedness.
At June 30, 2024 our $1,000,000 unsecured revolving credit facility, which expires in December 2027, had $553,226 available for borrowing. Additionally, at June 30, 2024, we had short-term lines of credit of $435,500, primarily used for working capital, of which $342,233 was available for borrowing. On June 12, 2024, Aqua Pennsylvania and Peoples Natural Gas Companies amended the terms of its respective $100,000 and $300,000 364-day revolving credit agreements by extending the maturity dates to June 10, 2025 and revised the interest rate index from the Bloomberg Short-Term Bank Yield Index (BSBY) to the Secured Overnight Financing Rate (SOFR). Our short-term lines of credit of $435,500 are subject to renewal on an annual basis. Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be.
In March 2024, the Company filed a new universal shelf registration with the Securities and Exchange Commission (SEC) to allow for the potential future offer and sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities, and other securities specified therein at indeterminate prices. This registration statement is effective for three years and replaces a similar filing that expired in the second quarter of 2024.
As of June 30, 2024, our credit ratings remained at investment grade levels. On March 19, 2024, S&P lowered its credit rating for the Company, Aqua Pennsylvania, and Peoples Natural Gas Companies from A to A-, citing weakening financial measures as a result of inflationary pressures and our significant capital spending; and revised its outlook from negative to stable for the companies. However, as can be noted in their report, S&P continues to assess our business risk profile as excellent, considering our low-risk and rate-regulated water and gas distribution operations in credit-supportive regulatory environments, our geographic and regulatory diversity, our large and stable residential and commercial customer base, and our solid and reliable operations. On August 29, 2023, Moody’s Investors Service (“Moody’s”) affirmed the Company’s senior unsecured notes rating of Baa2 and stable outlook; and, affirmed Peoples Natural Gas Companies’ senior secured notes rating of Baa1 and revised its outlook from stable to negative. The Company’s ability to maintain its credit rating depends, among other things, on adequate and timely rate relief, its ability to fund capital expenditures in a balanced manner using both debt and equity, and its ability to generate cash flow. A material downgrade of our credit rating may result in the imposition of additional financial and/or other covenants, impact the market prices of equity and debt securities, increase our borrowing costs, and adversely affect our liquidity, among other things. Management continues to enhance our regulatory practices to address regulatory lag and recover capital
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
project costs and increases in operating costs efficiently and timely through various rate-making mechanisms.
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| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||
| 2024 | 2023 |
| 2024 | 2023 | ||||
Operating revenues | $ | 434,406 | $ | 436,700 |
| $ | 1,046,475 | $ | 1,163,150 |
Operations and maintenance expense | $ | 142,512 | $ | 133,508 |
| $ | 279,412 | $ | 271,502 |
Purchased gas | $ | 33,728 | $ | 41,933 |
| $ | 163,403 | $ | 298,248 |
Net income | $ | 75,385 | $ | 91,268 |
| $ | 341,157 | $ | 282,702 |
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Operating Statistics |
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Selected operating results as a percentage of operating revenues: |
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Operations and maintenance |
| 32.8% |
| 30.6% |
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| 26.7% |
| 23.3% |
Purchased gas |
| 7.8% |
| 9.6% |
|
| 15.6% |
| 25.6% |
Depreciation and amortization |
| 20.9% |
| 19.6% |
|
| 17.2% |
| 14.6% |
Taxes other than income taxes |
| 5.1% |
| 4.7% |
|
| 4.5% |
| 3.7% |
Interest expense, net of interest income |
| 16.8% |
| 15.6% |
|
| 13.9% |
| 12.0% |
Net income |
| 17.4% |
| 20.9% |
|
| 32.6% |
| 24.3% |
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Effective tax rate |
| 2.4% |
| -0.3% |
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| -2.6% |
| -12.7% |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
an increase in customer assistance surcharge costs of $2,563 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues;
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $1,286;
an increase in employee related costs of $625;
an increase in production costs for water and wastewater operations of $387;
lower capitalization of overhead costs of $4,391 in our Regulated Natural Gas segment; offset by
a decrease in bad debt expense of $975; and,
a decrease in operations and maintenance expense of $2,422 as a result of the sale of both the regulated natural gas utility assets in West Virginia in October 2023 and the three non-utility local microgrid and distributed energy projects in January 2024.
Depreciation and amortization expense increased by $4,985 or 5.8% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.
Allowance for funds used during construction (AFUDC) increased by $1,805 or 52.7% due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
an increase in employee related costs of $2,628, primarily resulting from higher salary, medical, and prescription costs and increased contributions to the Company’s defined contribution plan;
an increase in production costs for water and wastewater operations of $2,784, primarily due to increased purchased water, wastewater, and power costs; and
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $2,413;
lower capitalization of overhead costs of $2,046 in our Regulated Natural Gas segment;
an increase in bad debt expense of $2,249; offset by,
a decrease in operation and maintenance expense of $4,134 as a result of the sale of both the regulated natural gas utility assets in West Virginia in October 2023 and the three non-utility local microgrid and distributed energy projects in January 2024; and
a decrease in customer assistance surcharge costs of $234 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues.
Depreciation and amortization expense increased by $10,995 or 6.5% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Gain on sale of assets was $91,828 and $469 during the first half of 2024 and 2023, respectively. During the first quarter of 2024, the Company completed the sale of its interest in three non-utility local microgrid and distributed energy projects and recognized a gain of $91,236.
The following tables present selected operating results and statistics for our Regulated Water segment for the periods ended June 30, 2024 and 2023:
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| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||
| 2024 | 2023 |
| 2024 | 2023 | ||||
Operating revenues | $ | 302,479 | $ | 293,672 |
| $ | 582,372 | $ | 560,972 |
Operations and maintenance expense | $ | 95,575 | $ | 93,227 |
| $ | 186,258 | $ | 176,029 |
Segment net income | $ | 87,679 | $ | 90,027 |
| $ | 151,583 | $ | 167,429 |
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Operating Statistics |
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Selected operating results as a percentage of operating revenues: |
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Operations and maintenance |
| 31.6% |
| 31.7% |
|
| 32.0% |
| 31.4% |
Depreciation and amortization |
| 19.1% |
| 18.1% |
|
| 19.7% |
| 19.0% |
Taxes other than income taxes |
| 5.4% |
| 4.8% |
|
| 5.6% |
| 5.3% |
Interest expense, net of interest income |
| 11.4% |
| 10.4% |
|
| 11.9% |
| 10.7% |
Segment net income |
| 29.0% |
| 30.7% |
|
| 26.0% |
| 29.8% |
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Effective tax rate |
| 14.2% |
| 15.0% |
|
| 18.9% |
| 14.9% |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
a decrease in volume consumption of $9,681.
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $1,286;
an increase in employee related costs of $998 primarily resulting from higher medical and prescription expenses;
an increase in production costs for water and wastewater operations of $387; offset by
a decrease in bad debt expense of $772.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $26,460;
additional water and wastewater revenues of $6,103 associated with a larger customer base due to utility acquisitions and organic growth; offset by
a decrease in non-utility revenue of $2,622, primarily due to higher developer fees earned during the first quarter of 2023; and
a decrease in volume consumption of $8,589.
an increase in employee related costs of $2,813 primarily resulting from higher salary, medical, and prescription costs and increased contributions to the Company’s defined contribution plan;
an increase in production costs for water and wastewater operations of $2,784, primarily due to increased purchased water, wastewater, and power costs;
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $2,413; and,
an increase in bad debt expense of $3,686.
Our effective income tax rate for our Regulated Water Segment was an expense of 18.9% in the first six months of 2024 and an expense of 14.9% in the first six months of 2023. The increase in effective tax rate is primarily the result of changes in the jurisdictional earnings mix, decrease in the amortization of certain regulatory liabilities associated with deferred taxes and decrease in the income tax benefit associated with the tax deduction for qualifying infrastructure.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
The following tables present selected operating results and statistics for our Regulated Natural Gas segment, for the periods ended June 30, 2024 and 2023:
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| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||
| 2024 | 2023 |
| 2024 | 2023 | ||||
Operating revenues | $ | 128,188 | $ | 138,983 |
| $ | 452,519 | $ | 580,278 |
Operations and maintenance expense | $ | 49,709 | $ | 41,114 |
| $ | 95,626 | $ | 98,264 |
Purchased gas | $ | 32,680 | $ | 39,665 |
| $ | 158,222 | $ | 281,521 |
Segment net income (loss) | $ | (1,717) | $ | 13,630 |
| $ | 208,223 | $ | 137,176 |
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Operating Statistics |
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Selected operating results as a percentage of operating revenues: |
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Operations and maintenance |
| 38.8% |
| 29.6% |
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| 21.1% |
| 16.9% |
Purchased gas |
| 25.5% |
| 28.5% |
|
| 35.0% |
| 48.5% |
Depreciation and amortization |
| 25.5% |
| 23.2% |
|
| 14.4% |
| 10.7% |
Taxes other than income taxes |
| 4.0% |
| 3.9% |
|
| 2.7% |
| 1.9% |
Interest expense, net of interest income |
| 16.3% |
| 15.1% |
|
| 10.2% |
| 8.4% |
Segment net income (loss) |
| -1.3% |
| 9.8% |
|
| 46.0% |
| 23.6% |
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Effective tax rate |
| 85.1% |
| -4213.3% |
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| -23.0% |
| -70.7% |
a decrease in purchased gas costs of $6,985; refer to purchased gas costs discussion below for further information;
impact of lower volumes of $726 due to the sale of Peoples West Virginia in 2023 and $5,567 primarily due to warmer weather conditions in 2024 compared to prior period;
decrease in other utility revenues of $2,013 resulting from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects; offset by
an increase of $3,267 due to higher rates and other surcharges, and
an increase in customer assistance surcharge of $2,563, which has an equivalent offsetting amount in operations and maintenance expense.
an increase in customer assistance surcharge costs of $2,563, which has an equivalent offsetting amount in revenues;
lower capitalization of overhead costs of $4,391; offset by
a decrease in operation and maintenance expense of $2,422 as a result of the sale of both the regulated natural gas utility assets in West Virginia in October 2023 and the three non-utility local microgrid and distributed energy projects in January 2024.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
AFUDC increased by $783 or by 161.8% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Our effective income tax benefit decreased in the second quarter of 2024 compared to second quarter of 2023. The decrease in the income tax benefit is primarily attributed to the decrease in income tax benefit associated with the tax deduction for continued qualifying infrastructure investment.
an increase of $5,746 due to higher rates and other surcharges.
The Regulated Natural Gas segment is subject to seasonal fluctuations with the peak usage period occurring in the heating season which generally runs from October to March. A heating degree day (HDD) is each degree that the average of the high and low temperatures for a day is below 65 degrees Fahrenheit in a specific geographic location. Particularly during the heating season, this measure is used to reflect the demand for natural gas needed for heating based on the extent to which the average temperature falls below a reference temperature above which no heating is required (65 degrees Fahrenheit). During the first half of 2024, we experienced actual HDDs of 2,616 days, which was warmer by 10.7% than the actual HDDs of 2,931 days in the first six months of 2023 for Pittsburgh Pennsylvania, which we use as a proxy for our western Pennsylvania service territory.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
a decrease in bad debt expense of $1,464;
lower capitalization of overhead costs of $2,046;
a decrease in operation and maintenance expense of $4,134 as a result of the sale of both the regulated natural gas utility assets in West Virginia in October 2023 and the three non-utility local microgrid and distributed energy projects in January 2024;
a decrease in customer assistance surcharge costs of $234, which has an equivalent offsetting amount in revenues; offset by
an increase in materials and supplies of $1,422.
Purchased gas decreased by $123,299 or 43.8% during the second half of 2024 compared with the same period in 2023 as a result of the impact of: (1) a decrease in the average cost of gas of $105,353; and (2) lower gas usage of $13,181 due to warmer weather conditions and $4,765 due to the sale of Peoples West Virginia in October 2023.
Interest expense, net, decreased by $2,264 or 4.7% due to interest incurred in the first quarter of 2023 on refunded gas cost collections, partially offset by an increase in interest expense resulting from higher push down debt borrowings of the Regulated Natural Gas segment with Essential Utilities, Inc.
Gain on sale of assets was $91,581 and $0 during the first half of 2024 and 2023, respectively. During the first quarter of 2024, the Company completed the sale of its interest in three non-utility local microgrid and distributed energy projects and recognized a gain of $91,236.
Impact of Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note 16, Recent Accounting Pronouncements, to the condensed consolidated financial statements in this report.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed February 29, 2024, for additional information on market risks.
Item 4 – Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
(b)Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1 – Legal Proceedings
For a discussion of the Company’s legal proceedings, see Part I – Item I – Note 14 to the Company’s condensed consolidated financial statements.
Item 1A – Risk Factors
Please review the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, under “Part 1, Item 1A – Risk Factors”.
Item 5 - Other Information
Security Trading Plans of Directors and Executive Officers
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Name & Title | Character of Trading Arrangement | Date of Adoption/ Termination | Aggregate Number of Shares of Common Stock to be Purchased/Sold Pursuant to Trading Arrangement | Duration of Plan |
| Rule 10b5-1(c) Trading Arrangement | Up to | 3/5/2024 - 3/31/2025 |
Item 6 – Exhibits
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Exhibit No. |
| Description |
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10.1* |
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10.2* |
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31.1* |
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31.2* |
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32.1* |
| Certification of Chief Executive Officer, furnished pursuant to 18 U.S.C. Section 1350 |
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32.2* |
| Certification of Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350 |
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101.INS |
| Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRES |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
| The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, formatted in Inline XBRL (included in Exhibit 101) |
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be executed on its behalf by the undersigned thereunto duly authorized.
August 6, 2024
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| Essential Utilities, Inc. | |
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| Registrant | |
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| /s/ Christopher H. Franklin | |
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| Christopher H. Franklin | |
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| Chairman, President and | |
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| Chief Executive Officer | |
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| /s/ Daniel J. Schuller | |
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| Daniel J. Schuller | |
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| Executive Vice President and | |
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| Chief Financial Officer |