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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

FORM 10-Q

(Mark One) 

S QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. 

For the quarterly period ended June 30, 2024

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 

For the transition period from_______________ to _______________

Commission File Number 1-6659 

ESSENTIAL UTILITIES, INC. 

(Exact name of registrant as specified in its charter) 

Pennsylvania

23-1702594

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania

19010 -3489

(Address of principal executive offices)

(Zip Code)

 

(610) 527-8000

(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 S  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 S  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.:  

Large Accelerated Filer S

Accelerated Filer £

Non-Accelerated Filer £

Smaller Reporting Company £

Emerging Growth Company £

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 S

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.50 par value

WTRG

New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 26, 2024: 273,672,080


Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page

Part I – Financial Information

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets (unaudited) – June 30, 2024 and December 31, 2023

2

Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited) – Three Months Ended June 30, 2024 and 2023

4

Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited) – Six Months Ended June 30, 2024 and 2023

5

Condensed Consolidated Statements of Capitalization (unaudited) - June 30, 2024 and December 31, 2023

6

Condensed Consolidated Statements of Equity (unaudited) – Six Months Ended June 30, 2024

7

Condensed Consolidated Statements of Equity (unaudited) – Six Months Ended June 30, 2023

8

Condensed Consolidated Statements of Cash Flow (unaudited) – Six Months Ended June 30, 2024 and 2023

9

Notes to Condensed Consolidated Financial Statements (unaudited)

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

43

Item 4. Controls and Procedures

43

 

Part II – Other Information

 

Item 1. Legal Proceedings

43

Item 1A. Risk Factors

43

Item 5. Other Information

43

Item 6. Exhibits

45

Signatures

46

1


Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)

 

June 30,

December 31,

Assets

2024

2023

Property, plant and equipment, at cost

$

15,519,111 

$

14,977,021 

Less: accumulated depreciation

2,999,982 

2,879,949 

Net property, plant and equipment

12,519,129 

12,097,072 

Current assets:

Cash and cash equivalents

18,819 

4,612 

Accounts receivable, net

139,768 

144,300 

Unbilled revenues

74,941 

101,436 

Inventory - materials and supplies

50,117 

47,494 

Inventory - gas stored

34,424 

65,173 

Prepayments and other current assets

28,712 

99,884 

Regulatory assets

15,952 

29,080 

Total current assets

362,733 

491,979 

Regulatory assets

1,895,512 

1,766,892 

Deferred charges and other assets, net

94,385 

102,388 

Funds restricted for construction activity

1,402 

1,381 

Goodwill

2,340,731 

2,340,738 

Operating lease right-of-use assets

34,791 

37,416 

Intangible assets

3,433 

3,593 

Total assets

$

17,252,116 

$

16,841,459 

The accompanying notes are an integral part of these condensed consolidated financial statements

2


Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(In thousands of dollars, except per share amounts) 

(UNAUDITED)

 

June 30,

December 31,

Liabilities and Equity

2024

2023

Stockholders' equity:

Common stock at $0.50 par value, authorized 600,000,000 shares, issued 277,016,906 and 276,595,228 as of June 30, 2024 and December 31, 2023

$

138,508 

$

138,297 

Capital in excess of par value

4,149,208 

4,137,696 

Retained earnings

1,963,716 

1,706,675 

Treasury stock, at cost, 3,348,009 and 3,299,191 shares as of June 30, 2024 and December 31, 2023

(88,198)

(86,485)

Total stockholders' equity

6,163,234 

5,896,183 

Long-term debt, excluding current portion

7,057,623 

6,870,593 

Less: debt issuance costs

46,736 

44,508 

Long-term debt, excluding current portion, net of debt issuance costs

7,010,887 

6,826,085 

Commitments and contingencies (See Note 14)

 

 

Current liabilities:

Current portion of long-term debt

71,787 

67,415 

Loans payable

93,267 

160,123 

Accounts payable

204,772 

221,191 

Book overdraft

15,500 

13,358 

Accrued interest

64,430 

53,084 

Accrued taxes

29,464 

40,641 

Regulatory liabilities

6,250 

31,270 

Dividends payable

-

83,929 

Other accrued liabilities

143,680 

126,916 

Total current liabilities

629,150 

797,927 

Deferred credits and other liabilities:

Deferred income taxes and investment tax credits

1,764,108 

1,628,324 

Customers' advances for construction

118,121 

128,755 

Regulatory liabilities

809,399 

820,910 

Asset retirement obligations

854 

848 

Operating lease liabilities

31,051 

34,425 

Pension and other postretirement benefit liabilities

37,948 

38,850 

Other

23,719 

24,086 

Total deferred credits and other liabilities

2,785,200 

2,676,198 

Contributions in aid of construction

663,645 

645,066 

Total liabilities and equity

$

17,252,116 

$

16,841,459 

The accompanying notes are an integral part of these condensed consolidated financial statements

3


Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands of dollars, except per share amounts) 

(UNAUDITED)

 

Three Months Ended

June 30,

2024

2023

Operating revenues

$

434,406

$

436,700

Operating expenses:

Operations and maintenance

142,512

133,508

Purchased gas

33,728

41,933

Depreciation

89,578

84,937

Amortization

1,068

724

Taxes other than income taxes

22,233

20,348

Total operating expenses

289,119

281,450

Operating income

145,287

155,250

Other expense (income):

Interest expense

73,045

69,182

Interest income

(276)

(970)

Allowance for funds used during construction

(5,229)

(3,424)

Gain on sale of other assets

(203)

(220)

Other, net

701

(323)

Income before income taxes

77,249

91,005

Income tax expense (benefit)

1,864

(263)

Net income

$

75,385

$

91,268

Comprehensive income

$

75,385

$

91,268

Net income per common share:

Basic

$

0.28

$

0.35

Diluted

$

0.28

$

0.34

Average common shares outstanding during the period:

Basic

273,567

264,418

Diluted

273,953

264,818

The accompanying notes are an integral part of these condensed consolidated financial statements


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Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands of dollars, except per share amounts) 

(UNAUDITED)

Six Months Ended

June 30,

2024

2023

Operating revenues

$

1,046,475

$

1,163,150

Operating expenses:

Operations and maintenance

279,412

271,502

Purchased gas

163,403

298,248

Depreciation

178,294

167,860

Amortization

2,156

1,595

Taxes other than income taxes

47,257

43,226

Total operating expenses

670,522

782,431

Operating income

375,953

380,719

Other expense (income):

Interest expense

146,318

141,850

Interest income

(1,265)

(1,789)

Allowance for funds used during construction

(9,910)

(9,112)

Gain on sale of other assets

(91,828)

(469)

Other, net

259

(563)

Income before income taxes

332,379

250,802

Income tax benefit

(8,778)

(31,900)

Net income

$

341,157

$

282,702

Comprehensive income

$

341,157

$

282,702

Net income per common share:

Basic

$

1.25

$

1.07

Diluted

$

1.25

$

1.07

Average common shares outstanding during the period:

Basic

273,472

264,306

Diluted

273,869

264,840

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 CAPITALIZATION 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)

 

 

June 30,

December 31,

2024

2023

Stockholders' equity:

Common stock, $0.50 par value

$

138,508

$

138,297

Capital in excess of par value

4,149,208

4,137,696

Retained earnings

1,963,716

1,706,675

Treasury stock, at cost

(88,198)

(86,485)

Total stockholders' equity

6,163,234

5,896,183

Long-term debt of subsidiaries (substantially collateralized by utility plant):

Interest Rate Range

Maturity Date Range

0.00% to 0.99%

2024 to 2033

2,821

2,935

1.00% to 1.99%

2024 to 2039

7,165

7,538

2.00% to 2.99%

2024 to 2058

207,025

207,917

3.00% to 3.99%

2024 to 2056

1,310,212

1,313,932

4.00% to 4.99%

2024 to 2059

1,242,197

1,245,727

5.00% to 5.99%

2024 to 2061

313,306

312,745

6.00% to 6.99%

2026 to 2036

31,000

31,000

7.00% to 7.99%

2025 to 2027

28,007

28,125

8.00% to 8.99%

2025

877

1,289

9.00% to 9.99%

2026

11,800

11,800

3,154,410

3,163,008

Notes payable to bank under revolving credit agreement, variable rate, due 2027

430,000

720,000

Unsecured notes payable:

Notes at 2.40% due 2031

400,000

400,000

Notes at 2.704% due 2030

500,000

500,000

Notes ranging from 3.01% to 3.59% due 2029 through 2050

1,125,000

1,125,000

Notes at 5.375%, due 2034

500,000

-

Notes at 4.276%, due 2049

500,000

500,000

Notes at 5.30%, due 2052

500,000

500,000

Notes at 5.95%, due 2024 through 2034

20,000

30,000

Total long-term debt

7,129,410

6,938,008

Current portion of long-term debt

71,787

67,415

Long-term debt, excluding current portion

7,057,623

6,870,593

Less: debt issuance costs

46,736

44,508

Long-term debt, excluding current portion, net of debt issuance costs

7,010,887

6,826,085

Total capitalization

$

13,174,121

$

12,722,268

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 EQUITY 

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

Capital in

Common

Excess of

Retained

Treasury

Stock

Par Value

Earnings

Stock

Total

Balance at December 31, 2023

$

138,297 

$

4,137,696 

$

1,706,675 

$

(86,485)

$

5,896,183 

Net income

-

-

265,772 

-

265,772 

Dividends of March 1, 2024 ($0.3071 per share)

-

-

(1)

-

(1)

Dividends of June 1, 2024 declared ($0.3071 per share)

-

-

(83,998)

-

(83,998)

Issuance of common stock under dividend reinvestment plan (117,210 shares)

59 

3,823 

-

-

3,882 

Repurchase of stock (62,872 shares)

-

-

-

(2,231)

(2,231)

Equity compensation plan (160,694 shares)

80 

(80)

-

-

-

Exercise of stock options (4,971 shares)

2 

173 

-

-

175 

Stock-based compensation

-

1,049 

73 

-

1,122 

Other

-

(51)

-

274 

223 

Balance at March 31, 2024

$

138,438 

$

4,142,610 

$

1,888,521 

$

(88,442)

$

6,081,127 

Net income

-

-

75,385 

-

75,385 

Dividends of June 1, 2024 ($0.3071 per share)

-

-

(1)

-

(1)

Issuance of common stock under dividend reinvestment plan (108,544 shares)

54 

3,736 

-

-

3,790 

Repurchase of stock (30 shares)

-

-

-

(1)

(1)

Equity compensation plan (23,142 shares)

12 

(12)

-

-

-

Exercise of stock options (7,117 shares)

4 

244 

-

-

248 

Stock-based compensation

-

2,751 

(189)

-

2,562 

Other

-

(121)

-

245 

124 

Balance at June 30, 2024

$

138,508 

$

4,149,208 

$

1,963,716 

$

(88,198)

$

6,163,234 

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 EQUITY 

(In thousands of dollars, except per share amounts)

(UNAUDITED)

   

Capital in

Common

Excess of

Retained

Treasury

Stock

Par Value

Earnings

Stock

Total

Balance at December 31, 2022

$

133,486 

$

3,793,262 

$

1,534,331 

$

(83,693)

$

5,377,386 

Net income

-

-

191,434 

-

191,434 

Dividends of March 1, 2023 ($0.287 per share)

-

-

(1)

-

(1)

Dividends of June 1, 2023 declared ($0.287 per share)

-

-

(75,876)

-

(75,876)

Issuance of common stock under dividend reinvestment plan (97,315 shares)

49 

4,068 

-

-

4,117 

Issuance of common stock from at-the-market sale agreements (399,128 shares)

200 

19,094 

-

-

19,294 

Repurchase of stock (88,051 shares)

-

-

-

(3,911)

(3,911)

Equity compensation plan (222,782 shares)

111 

(111)

-

-

-

Exercise of stock options (2,917 shares)

2 

101 

-

-

103 

Stock-based compensation

-

3,410 

(267)

-

3,143 

Other

-

(20)

-

273 

253 

Balance at March 31, 2023

$

133,848 

$

3,819,804 

$

1,649,621 

$

(87,331)

$

5,515,942 

Net income

-

-

91,268 

-

91,268 

Dividends of June 1, 2023 ($0.287 per share)

-

-

(1)

-

(1)

Issuance of common stock under dividend reinvestment plan (102,676 shares)

51 

3,901 

-

-

3,952 

Repurchase of stock (971 shares)

-

-

-

(42)

(42)

Equity compensation plan (17,054 shares)

9 

(9)

-

-

-

Exercise of stock options (3,026 shares)

1 

105 

-

-

106 

Stock-based compensation

-

3,515 

(206)

-

3,309 

Other

-

(117)

-

281 

164 

Balance at June 30, 2023

$

133,909 

$

3,827,199 

$

1,740,682 

$

(87,092)

$

5,614,698 

The accompanying notes are an integral part of these condensed consolidated financial statements

Click or tap here to enter text. 

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW 

(In thousands of dollars) 

(UNAUDITED)

 

Six Months Ended

June 30,

2024

2023

Cash flows from operating activities:

Net income

$

341,157 

$

282,702 

Adjustments to reconcile net income to net cash flows from operating activities:

Depreciation and amortization

180,450 

169,455 

Deferred income taxes

(12,404)

(34,711)

Provision for doubtful accounts

13,843 

11,594 

Stock-based compensation

3,825 

6,950 

Gain on sale of utility systems and other assets

(91,828)

(469)

Net change in receivables, deferred purchased gas costs, inventory and prepayments

21,222 

300,648 

Net change in payables, accrued interest, accrued taxes and other accrued liabilities

(24,245)

(90,739)

Other, net

(5,594)

(24,008)

Net cash flows from operating activities

426,426 

621,422 

Cash flows from investing activities:

Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $3,482 and $2,587

(548,868)

(547,600)

Acquisitions of utility systems, net

(67)

(25,793)

Net proceeds from the sale of utility systems and other assets

166,982 

613 

Other, net

(158)

386 

Net cash flows used in investing activities

(382,111)

(572,394)

Cash flows from financing activities:

Customers' advances and contributions in aid of construction

7,361 

9,375 

Repayments of customers' advances

(3,009)

(1,958)

Net repayments of short-term debt

(66,857)

(180,457)

Proceeds from long-term debt

789,946 

384,715 

Repayments of long-term debt

(597,972)

(136,604)

Change in cash overdraft position

2,143 

3,795 

Proceeds from issuance of common stock under dividend reinvestment plan

7,672 

8,069 

Proceeds from issuance of common stock from at-the-market sale agreement

-

19,294 

Proceeds from exercised stock options

423 

209 

Repurchase of common stock

(2,232)

(3,953)

Dividends paid on common stock

(167,930)

(151,686)

Other, net

347 

417 

Net cash flows used in financing activities

(30,108)

(48,784)

Net change in cash and cash equivalents

14,207 

244 

Cash and cash equivalents at beginning of period

4,612 

11,398 

Cash and cash equivalents at end of period

$

18,819 

$

11,642 

Non-cash investing activities:

Property, plant and equipment additions purchased at the period end, but not yet paid for

$

131,189 

$

124,503 

Non-cash utility property contributions

18,791 

25,980 

The accompanying notes are an integral part of these condensed consolidated financial statements

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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

Note 1Basis of Presentation

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.

The preparation of financial statements often requires the selection of specific accounting methods and policies. Significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in its condensed consolidated balance sheets, the revenues and expenses in its condensed consolidated statements of operations and comprehensive income, and the information that is contained in its summary of significant accounting policies and notes to condensed consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Furthermore, we are exposed to the uncertain state of the economy and macroeconomic conditions, including inflation and rising interest rates. As these continue to evolve, future events and effects related to these conditions cannot be determined with precision. Accordingly, actual amounts or future results can differ materially from those estimates that the Company includes currently in its condensed consolidated financial statements, summary of significant accounting policies, and notes.

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.

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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)

 

Note 2 – Revenue Recognition

The following table presents our revenues disaggregated by major source and customer class:

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:

Residential

$

165,412 

$

36,053 

$

70,597 

$

-

$

167,121 

$

34,046 

$

76,476 

$

-

Commercial

45,796 

8,808 

14,408 

-

46,774 

8,656 

16,297 

-

Fire protection

10,742 

-

-

-

10,185 

-

-

-

Industrial

8,638 

564 

357 

-

8,289 

509 

471 

-

Gas transportation & storage

-

-

35,391 

-

-

-

34,862 

-

Other water

19,893 

-

-

-

11,917 

-

-

-

Other wastewater

-

2,762 

-

-

-

2,730 

-

-

Other utility

-

-

7,450 

2,901 

-

-

10,845 

2,649 

Revenues from contracts with customers

250,481 

48,187 

128,203 

2,901 

244,286 

45,941 

138,951 

2,649 

Alternative revenue program

1,024 

(114)

(15)

-

767 

29 

32 

-

Other and eliminations

-

-

-

3,739 

-

-

-

4,045 

Consolidated

$

251,505 

$

48,073 

$

128,188 

$

6,640 

$

245,053 

$

45,970 

$

138,983 

$

6,694 

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:

Residential

$

317,243 

$

71,647 

$

277,523 

$

-

$

314,373 

$

67,536 

$

368,706 

$

-

Commercial

87,533 

17,790 

56,579 

-

87,728 

17,247 

81,454 

-

Fire protection

21,123 

-

-

-

20,444 

-

-

-

Industrial

16,780 

1,106 

1,247 

-

16,146 

1,087 

2,260 

-

Gas transportation & storage

-

-

105,882 

-

-

-

102,515 

-

Other water

35,500 

-

-

-

20,761 

-

-

-

Other wastewater

-

6,386 

-

-

-

5,464 

-

-

Other utility

-

-

10,152 

5,711 

-

-

23,922 

8,808 

Revenues from contracts with customers

478,179 

96,929 

451,383 

5,711 

459,452 

91,334 

578,857 

8,808 

Alternative revenue program

1,680 

(127)

1,136 

-

1,169 

209 

1,421 

-

Other and eliminations

-

-

-

11,584 

-

-

-

21,900 

Consolidated

$

479,859 

$

96,802 

$

452,519 

$

17,295 

$

460,621 

$

91,543 

$

580,278 

$

30,708 

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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)

 

Note 3 – Acquisitions

Water and Wastewater Utility Acquisitions - Completed

In May 2024, the Company acquired the wastewater utility assets of Westfield HOA, which serves approximately 200 customers within Westfield Homeowners Subdivision in Glenview, Illinois for a cash purchase price of $67.

In July 2023, the Company completed the following water utility asset acquisitions: Shenandoah Borough, Pennsylvania, which serves approximately 2,900 customers for $12,291; La Rue, an Ohio municipality, which serves approximately 300 customers for $2,253; and, Southern Oaks Water System, which serves approximately 800 customers in Texas for $3,321. Additionally, in July 2023, the Company completed their acquisition of a portion of the water and wastewater utility assets of the Village of Frankfort, an Illinois municipality, which serves approximately 1,500 customers for $1,424.

In June 2023, the Company acquired the wastewater utility assets of Union Rome, Ohio, which serves approximately 4,300 customers for a cash purchase price of $25,547.

In March 2023, the Company acquired the North Heidelberg Sewer Company in Berks County, Pennsylvania, which serves approximately 300 customer connections for a cash purchase price of $136.

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 400 equivalent retail customers for $1,125.

In December 2023, the Company entered into a purchase agreement to acquire North Versailles wastewater assets in North Versailles Township, Pennsylvania which serves approximately 4,400 customers for between $25,000 and $30,000.

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 3,000 customers for $18,000.

In April 2023, the Company entered into a purchase agreement to acquire Greenville Sanitation Authority’s wastewater utility assets, which serves approximately 2,300 customers in Greenville, Pennsylvania for $18,000.

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Table of Contents

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 7,600 equivalent retail customers for $41,250.

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 4,018 customers (the “East Whiteland Wastewater Assets”). On August 12, 2022, the Company acquired the East Whiteland Wastewater Assets for a cash purchase price of $54,374. Subsequently on August 25, 2022, the Office of Consumer Advocate (“OCA”) filed an appeal of the PUC Order to the Pennsylvania Commonwealth Court. On July 31, 2023, a decision was issued by the Pennsylvania Commonwealth Court, in which the Pennsylvania Commonwealth Court agreed with the OCA and reversed the PUC order which approved the acquisition. On September 26, 2023, the Pennsylvania Commonwealth Court denied our motion for reargument. On October 26, 2023, the Company, the Pennsylvania Public Utility Commission, and East Whiteland Township filed an appeal to the Pennsylvania Supreme Court. East Whiteland Township filed to Supplement its Petition for Allowance of Appeal on January 2, 2024. On January 16, 2024, the Company, the OCA and the PUC filed Answers to East Whiteland Township’s Petition. On June 14, 2024, the Pennsylvania Supreme Court granted the Petitions for Allowance of Appeal of the Pennsylvania Public Utility Commission, the Company, and East Whiteland Township. Management believes the final resolution of this matter will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

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 16,000 customers, or the equivalent of 198,000 retail customers, in 42 municipalities in Southeast Pennsylvania for $276,500. There are several legal proceedings involving the Company as a result of the purchase agreement that are on-going. For additional information, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The purchase price for this pending acquisition is subject to certain adjustments at closing, and is 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 this acquisition with a mix of equity and debt financing, utilizing our revolving credit facility until permanent debt is secured. Closing of our acquisition of DELCORA is subject to regulatory approval and on-going litigation.

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Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

Note 4 –Dispositions

On October 1, 2023, the Company sold its regulated natural gas utility assets in West Virginia, which served approximately 13,000 customers or about two percent of the Company’s regulated natural gas customers (“Peoples Gas West Virginia”). 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. The sale of Peoples Gas West Virginia had no major effect on the Company’s operations and did not meet the requirements to be classified as discontinued operations.

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. As of December 31, 2023, balances associated with these projects of $63,182 were included in prepayments and other current assets in the condensed consolidated balance sheets. The sale was completed in January 2024, and the Company recognized a gain of $91,236 during the first quarter of 2024 which is included in other expense (income) in the accompanying condensed consolidated statement of operations.

Note 5 – Goodwill 

The following table summarizes the changes in the Company’s goodwill, by business segment:

 

Regulated Water

Regulated Natural Gas

Other

Consolidated

Balance at December 31, 2023

$

58,450

$

2,277,447

$

4,841

$

2,340,738

Reclassification to utility plant acquisition adjustment

(7)

-

-

(7)

Balance at June 30, 2024

$

58,443

$

2,277,447

$

4,841

$

2,340,731

The reclassification of goodwill to utility plant acquisition adjustment results from a mechanism approved by the applicable utility commission. The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with some acquisitions upon achieving specific objectives.

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Table of Contents

ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

Note 6 – Capitalization

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 no common stock sales 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.

Long-term Debt and Loans Payable

On June 12, 2024, Aqua Pennsylvania and Peoples Natural Gas Companies amended the terms of their respective $100,000 and $300,000, 364-day revolving credit agreements, as follows: (1) extended the maturity dates to June 10, 2025; and (2) revised the interest rate index from the Bloomberg Short-Term Bank Yield Index (BSBY) to the Secured Overnight Financing Rate (SOFR).

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%. The Company used the net proceeds from the issuance of 2024 Senior Notes (1) to repay a portion of the borrowings under the Company’s existing five year unsecured revolving credit facility, and (2) for general corporate purposes.

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 bonds were used to repay existing indebtedness and for general corporate purposes.

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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)

 

Note 7 – Financial Instruments 

 

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 $93,267 and $160,123, respectively, which equates to their estimated fair value. The fair value of cash and cash equivalents, is determined based on Level 1 methods and assumptions. As of June 30, 2024 and December 31, 2023, the carrying amounts of the Company's cash and cash equivalents was $18,819 and $4,612, respectively, which equates to their fair value. The Company’s assets underlying the deferred compensation and non-qualified pension plans are determined by the fair value of mutual funds, which are based on quoted market prices from active markets utilizing Level 1 methods and assumptions. As of June 30, 2024 and December 31, 2023, the carrying amount of these securities was $28,968 and $26,442, respectively, which equates to their fair value, and is reported in the condensed consolidated balance sheet in deferred charges and other assets.

Unrealized gain and loss on equity securities held in conjunction with our non-qualified pension plan is as follows: 

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

Net gain recognized during the period on equity securities

$

197

$

211

$

618

$

342

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

$

197

$

211

$

618

$

342

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:

June 30,

December 31,

2024

2023

Carrying amount

$

7,129,410

$

6,938,009

Estimated fair value

6,036,732

5,980,722

 

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.

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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’s customers’ advances for construction have a carrying value of $118,121 as of June 30, 2024, and $128,755 as of December 31, 2023. Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rates. Portions of these non-interest-bearing instruments are payable annually through 2033, and amounts not paid by the respective contract expiration dates become non-refundable. The fair value of these amounts would, however, be less than their carrying value due to the non-interest-bearing feature.

 

Note 8 – Net Income per Common Share

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: 

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

Average common shares outstanding during the period for basic computation

273,567

264,418

273,472

264,306

Effect of dilutive securities:

Employee stock-based compensation

386

400

397

534

Average common shares outstanding during the period for diluted computation

273,953

264,818

273,869

264,840

The number of outstanding employee stock options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was: 265,378 for the three and six months ended June 30, 2024; and 150,062 for the three and six months ended June 30, 2023. Additionally, the dilutive effect of performance share units and restricted share units granted are included in the Company’s calculation of diluted net income per share.

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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)

 

Note 9 – Stock-based Compensation 

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 6,250,000 shares for issuance under the Plan. A maximum of 3,125,000 shares under the Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the Plan. During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the Plan for more than 500,000 shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the Plan. Awards to employees and consultants under the Plan are made by a committee of the Board of Directors of the Company, except that with respect to awards to the Chief Executive Officer, the committee recommends those awards for approval by the non-employee directors of the Board of Directors. In the case of awards to non-employee directors, the Board of Directors makes such awards. At June 30, 2024, 1,229,638 shares were still available for issuance under the Plan. No further grants may be made under the Company’s 2004 Equity Compensation Plan.  

 

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 three year performance period specified in the grant, subject to exceptions through the respective vesting period, which is generally three years. Each grantee is granted a target award of PSUs and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals. The following table provides compensation expense for PSUs:

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

Stock-based compensation within operations and maintenance expenses

$

1,082

$

1,962

$

1,188

$

4,405

Income tax benefit

271

492

297

1,104

The following table summarizes the PSU transactions for the six months ended June 30, 2024:  

Number

Weighted

of

Average

Share Units

Fair Value

Nonvested share units at beginning of period

531,437

$

40.03

Granted

227,284

38.10

Performance criteria adjustment

(156,857)

31.59

Share units issued

(96,425)

43.40

Forfeited

(11,599)

41.69

Nonvested share units at end of period

493,840

41.14

 

 

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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)

 

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 $38.10 and $45.06, respectively. The fair value of each PSU grant is amortized monthly into compensation expense on a straight-line basis over their respective vesting periods, generally 36 months. The accrual of compensation costs is based on the Company’s estimate of the final expected value of the award and is adjusted as required for the portion based on the performance-based condition. The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense. As the payout of the PSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the PSUs. The recording of compensation expense for PSUs has no impact on net cash flows.  

Restricted Stock UnitsA 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 three years, beginning on the date of grant. The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense. As the payout of the RSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the RSUs. The following table provides the compensation expense and income tax benefit for RSUs:

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

Stock-based compensation within operations and maintenance expenses

$

724

$

759

$

1,570

$

1,440

Income tax benefit

182

190

393

361

 

The following table summarizes the RSU transactions for the six months ended June 30, 2024: 

Number

Weighted

of

Average

Stock Units

Fair Value

Nonvested stock units at beginning of period

192,217

$

45.06

Granted

104,661

36.61

Stock units vested and issued

(64,618)

44.45

Forfeited

(4,966)

41.75

Nonvested stock units at end of period

227,294

41.39

 

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 $36.61 and $45.61, respectively.  

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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)

 

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 33% annually, starting one year from the grant date and expire 10 years from the grant date, subject to satisfaction of designated performance goals. The fair value of each stock option is amortized into compensation expense using the graded-vesting method, which results in the recognition of compensation costs over the requisite service period for each separately vesting tranche of the stock options as though the stock options were, in substance, multiple stock option grants. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock options: 

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

Stock-based compensation within operations and maintenance expenses

$

71

$

222

$

202

$

299

Income tax benefit

17

56

50

75

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:



2024

2023

Expected term (years)

5.5

5.5

Risk-free interest rate

4.00%

4.03%

Expected volatility

28.30%

27.80%

Dividend yield

3.43%

2.53%

Grant date fair value per option

$

8.12

$

11.37

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.

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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 following table summarizes stock option transactions for the six months ended June 30, 2024:

Weighted

Weighted

Average

Average

Aggregate

Exercise

Remaining

Intrinsic

Shares

Price

Life (years)

Value

Outstanding at beginning of period

882,442

$

37.03

Granted

119,548

35.78

Forfeited

(2,055)

39.64

Expired

(1,367)

41.66

Exercised

(12,088)

35.02

Outstanding at end of period

986,480

$

36.90

5.6

$

1,598

Exercisable at end of period

795,896

$

36.30

4.7

$

1,414

 

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:

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

Stock-based compensation within operations and maintenance expenses

$

12

$

13

$

24

$

25

Income tax benefit

3

4

6

7

The following table summarizes restricted stock transactions for the six months ended June 30, 2024:

Number

Weighted

of

Average

Shares

Fair Value

Nonvested restricted stock at beginning of period

1,412

$

35.42

Granted

-

-

Vested

-

-

Nonvested restricted stock at end of period

1,412

$

35.42

There were no restricted stock awards granted during the six months ended June 30, 2024 and 2023.

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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)

 

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:

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

Stock-based compensation within operations and maintenance expenses

$

840

$

570

$

840

$

780

Income tax benefit

233

160

233

219

The following table summarizes stock award transactions for the six months ended June 30, 2024:

Number

Weighted

of

Average

Stock Awards

Fair Value

Nonvested stock awards at beginning of period

-

$

-

Granted

22,813

36.82

Vested

(22,813)

36.82

Nonvested stock awards at end of period

-

-

The weighted-average fair value at the date of grant for stock awards granted during the six months ended June 30, 2024 and 2023 was $36.82 and $41.78, respectively.

Note 10 – Pension Plans and Other Postretirement Benefits  

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:

Pension Benefits

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

Service cost

$

357

$

400

$

714

$

801

Interest cost

3,908

4,309

7,816

8,617

Expected return on plan assets

(4,696)

(5,673)

(9,392)

(11,345)

Amortization of prior service cost

81

171

162

342

Amortization of actuarial loss

751

809

1,502

1,618

Net periodic benefit cost

$

401

$

16

$

802

$

33

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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

$

363

$

337

$

726

$

674

Interest cost

1,112

1,119

2,224

2,238

Expected return on plan assets

(1,105)

(1,093)

(2,210)

(2,186)

Amortization of actuarial gain

(267)

(330)

(534)

(659)

Net periodic benefit cost

$

103

$

33

$

206

$

67

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”.

There were no cash contributions made to the Pension Plan during the first six months of 2024. 

Note 11 – Rate Activity 

On May 23, 2024, Aqua Pennsylvania filed an application with the Pennsylvania Public Utility Commission designed to increase rates by $126,675 or 18.9% on an annual basis. The Company anticipates a final order to be issued by February 2025.

On January 19, 2024, Aqua New Jersey filed an application with the New Jersey Board of Public Utilities designed to increase water rates by $8,328 or 17.3% on an annual basis. The Company anticipates a final order to be issued by September 2024.

On January 2, 2024, Aqua Illinois filed an application with the Illinois Commerce Commission designed to increase water and wastewater rates by $19,196 or 18.9% on an annual basis. The Company anticipates a final order to be issued by December 2024.

On December 29, 2023, Peoples Natural Gas filed an application with the Pennsylvania Public Utility Commission designed to increase natural gas rates by $156,024 or 18.7% on an annual basis. The Company received a recommended decision from the administrative law judge on July 15, 2024 and anticipates a final order to be issued by September 2024.

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 $4,850 annually. New rates for water and sewer service went into effect on December 13, 2023.

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 $8,388 annually. The rates

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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)

 

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 $6,911 or 29.5% on an annual basis. In February 2024, the Company implemented interim rates which may be subject to refund for the difference between interim and final approved rates pending the final order.

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 $14,001 in the first year of new rates being implemented, then by an additional $3,743 and $4,130 in the second and third years, respectively. In February 2023, the Company had implemented interim rates, based on an estimate of the final outcome of the order, and no refunds or additional billings are required for the difference between interim and final approved rates.

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 $1,627. Further, during the first six months of 2024, the Company implemented infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $15,729 in its water and wastewater utility operating divisions in Pennsylvania and Illinois, and by $2,293 in its natural gas operating division in Kentucky.

 

Note 12 – Taxes Other than Income Taxes 

 

The following table provides the components of taxes other than income taxes:

Three Months Ended

Six Months Ended

June 30,

June 30,

2024

2023

2024

2023

Property

$

8,535

$

8,431

$

17,411

$

16,535

Gross receipts, excise and franchise

4,297

4,175

8,600

8,205

Payroll

5,009

4,935

12,520

11,567

Regulatory assessments

1,925

1,715

3,825

3,398

Pumping fees

1,882

181

3,377

1,647

Other

585

911

1,524

1,874

Total taxes other than income

$

22,233

$

20,348

$

47,257

$

43,226

 

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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)

 

Note 13 – Segment Information 

 

The Company has eleven operating segments and two reportable segments. The Regulated Water segment is comprised of eight operating segments representing its water and wastewater regulated utility companies, which are organized by the states where the Company provides water and wastewater services. The eight water and wastewater utility operating segments are aggregated into one reportable segment, because each of these operating segments has the following similarities: economic characteristics, nature of services, production processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment. The Regulated Natural Gas segment is comprised of one operating segment representing natural gas utility companies, acquired in the Peoples Gas Acquisition, for which the Company provides natural gas distribution services.

In addition to the Company’s two reportable segments, we include two of our operating segments within the Other category below. These segments are not quantitatively significant and are comprised of our non-regulated natural gas operations and Aqua Resources. Our non-regulated natural gas operations consist of utility service line protection solutions and repair services to households and the operation of gas marketing and production entities. Aqua Resources offers, through a third party, water and sewer service line protection solutions and repair services to households. In addition to these segments, Other is comprised of business activities not included in the reportable segments, corporate costs that have not been allocated to the Regulated Water and Regulated Natural Gas segments, and intersegment eliminations. Corporate costs include general and administrative expenses, and interest expense. The Company reports these corporate costs within Other as they relate to corporate-focused responsibilities and decisions and are not included in internal measures of segment operating performance used by the Company to measure the underlying performance of the operating segments.

The following table presents information about the Company’s reportable segments:  

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

$

302,479 

$

128,188 

$

3,739 

$

434,406 

$

293,672 

$

138,983 

$

4,045 

$

436,700 

Operations and maintenance expense

95,575 

49,709 

(2,772)

142,512 

93,227 

41,114 

(833)

133,508 

Purchased gas

-

32,680 

1,048 

33,728 

-

39,665 

2,268 

41,933 

Depreciation and amortization

57,625 

32,632 

389 

90,646 

53,231 

32,188 

242 

85,661 

Interest expense, net (a)

34,450 

20,869 

17,450 

72,769 

30,523 

20,982 

16,707 

68,212 

Allowance for funds used during construction

(3,962)

(1,267)

-

(5,229)

(2,940)

(484)

-

(3,424)

Provision for income taxes (benefit)

14,505 

(9,830)

(2,811)

1,864 

15,859 

(13,314)

(2,808)

(263)

Net income (loss)

87,679 

(1,717)

(10,577)

75,385 

90,027 

13,630 

(12,389)

91,268 

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

$

582,372 

452,519 

$

11,584 

$

1,046,475 

$

560,972 

580,278 

$

21,900 

$

1,163,150 

Operations and maintenance expense

186,258 

95,626 

(2,472)

279,412 

176,029 

98,264 

(2,791)

271,502 

Purchased gas

-

158,222 

5,181 

163,403 

-

281,521 

16,727 

298,248 

Depreciation and amortization

114,819 

65,043 

588 

180,450 

106,698 

62,316 

441 

169,455 

Interest expense, net (a)

69,240 

46,225 

29,588 

145,053 

60,236 

48,489 

31,336 

140,061 

Allowance for funds used during construction

(7,650)

(2,260)

-

(9,910)

(7,886)

(1,226)

-

(9,112)

Provision for income taxes (benefit)

35,315 

(38,980)

(5,113)

(8,778)

29,373 

(56,798)

(4,475)

(31,900)

Net income (loss)

151,583 

208,223 

(18,649)

341,157 

167,429 

137,176 

(21,903)

282,702 

Capital expenditures

302,085 

246,783 

-

548,868 

329,862 

215,212 

2,526 

547,600 

(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.

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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)

 

June 30,

December 31,

2024

2023

Total assets:

Regulated water

$

9,638,046

$

9,386,347

Regulated natural gas

7,156,351

6,965,350

Other

457,719

489,762

Consolidated

$

17,252,116

$

16,841,459

 

Note 14 – Commitments and Contingencies 

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 $23,052 is accrued for loss contingencies and is reported in the Company’s condensed consolidated balance sheet as other accrued liabilities and other liabilities. These accruals represent management’s best estimate of probable loss (as defined in the accounting guidance) for loss contingencies or the low end of a range of losses if no single probable loss can be estimated. For some loss contingencies, the Company is unable to estimate the amount of the probable loss or range of probable losses. Further, Essential Utilities has insurance coverage for certain of these loss contingencies, and as of June 30, 2024, estimates that approximately $855 of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported in the Company’s condensed consolidated balance sheet as deferred charges and other assets, net.

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, two individuals, on behalf of themselves and those similarly situated, commenced an action against the Company’s Illinois subsidiary in the State court in Will County, Illinois related to this do not consume advisory. The complaint seeks class action certification, attorney’s fees, and “damages, including, but not limited to, out of pocket damages, and discomfort, aggravation, and annoyance” based upon the water provided by the Company’s subsidiary to a discrete service area in University Park, Illinois. The complaint contains allegations of damages as a result of supplied water that exceeded the standards established by the federal Lead and Copper Rule. The complaint is in the discovery phase and class certification has not been granted. The Company has an accrual for the amount of loss asserted in the complaint that we determined to be probable and estimable of being incurred. The Company is vigorously defending against this claim. While the final outcome of this claim cannot be predicted with certainty, and unfavorable outcomes could negatively impact the Company, at this time in the opinion of management, the final resolution of this matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows. Further, the Company submitted a claim for the

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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)

 

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 $1,846 at June 30, 2024 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.

Note 15 – Income Taxes

The Company’s effective tax rate was an expense of 2.4% and a benefit of 2.6% for the three and six months ended June 30, 2024, respectively.  The Company’s effective tax rate was a benefit of 0.3% and 12.7% for the three and six months ended June 30, 2023, respectively.  The change in the effective tax rate for the second quarter is mainly due to the decrease in tax benefit associated with the tax deduction for continued qualifying infrastructure investment. The decrease in income tax benefit for the first half of the year is primarily attributed to the gain recognized from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects in the first quarter of 2024. In determining its interim tax provision, the Company reflects its estimated permanent and flow-through tax differences for the taxable year. The Company uses the flow-through method to account for the tax deduction for qualifying utility infrastructure at its regulated Pennsylvania and New Jersey subsidiaries.

The statutory Federal tax rate is 21.0% for the six months ended June 30, 2024 and 2023. For states with a corporate net income tax, the state corporate net income tax rates range from 2.5% to 9.50% for all periods presented.

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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)

 

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.

Note 16 – Recent Accounting Pronouncements and Disclosure Rules  

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.

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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)

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 

Forward-looking Statements

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.  

General Information

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.

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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.

Environmental Compliance

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

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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.

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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)

Liquidity and Capital Resources

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

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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, we had $18,819 of cash and cash equivalents compared to $4,612 at December 31, 2023. During the first six months of 2024, we used the proceeds from long-term debt, the proceeds from issuance of common stock, and proceeds from the sale of the non-utility energy projects, as well as internally generated funds, to fund the cash requirements discussed above and to pay dividends.

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

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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.

Results of Operations

Consolidated Results of Operations

Consolidated financial and operational highlights for the periods ended June 30, 2024 and 2023 are presented below.

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

Operating Statistics

Selected operating results as a percentage of operating revenues:

Operations and maintenance

32.8%

30.6%

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%

Effective tax rate

2.4%

-0.3%

-2.6%

-12.7%

Three months ended June 30, 2024 compared with three months ended June 30, 2023

Consolidated operating revenues decreased by $2,294 or 0.5% as compared to the same period in 2023. Revenues from our Regulated Water segment increased by $8,807. Revenues from our Regulated Natural Gas segment and Other business segment decreased by $10,795 and $306, respectively. A detailed discussion of the factors contributing to the changes in segment revenue is included below under the section, Segment Results of Operations.

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 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

Consolidated operations and maintenance expense increased by $9,004 or 6.7%, primarily due to:

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.

Purchased gas decreased by $8,205 or 19.6%. Purchased gas represents the cost of gas sold by Peoples, which for the regulated gas business has a corresponding offset in revenue. The decrease is the result of lower gas usage of $8,669 due to warmer weather conditions during the second quarter of 2024 as well as the sale of Peoples West Virginia, offset by an increase in the average cost of gas of $464.

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.

Taxes other than income taxes increased by $1,885 or 9.3% largely due to an increase in pumping fees in our Aqua Texas subsidiary during the second quarter of 2024 as compared to the prior period.

Interest expense increased by $4,557 or 6.7% for the quarter. Interest expense increased by $3,927 in our Regulated Water segment and decreased by $113 in our Regulated Natural Gas segment. Refer to Segment Results of Operations below for further details. Interest expense in Other relates to our corporate operations, and this increased by $743 during the second quarter of 2024.

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.

Our effective income tax rate was an expense of 2.4% and a benefit of 0.3% in the second quarter of 2024 and 2023, respectively. The decrease in the income tax benefit is primarily the result of a decrease in income tax benefit associated with the tax deduction for continued qualifying infrastructure investment.

Six months ended June 30, 2024 compared with six months ended June 30, 2023

Consolidated operating revenues decreased by $116,675 or 10.0% for the six months ended June 30, 2024, as compared to the same period in 2023. Revenues from our Regulated Water segment increased by $21,400. Revenues from our Regulated Natural Gas segment and Other business segment decreased

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 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

by $127,759 and $10,316, respectively. A detailed discussion of the factors contributing to the changes in segment net revenue is included below under the section, Segment Results of Operations. The decrease in our Other business segment revenue is due to lower revenues from our non-regulated natural gas operations primarily as a result of lower average gas prices and lower gas usage in the current period as compared to the prior period.

Consolidated operations and maintenance increased by $7,910 or 2.9%, primarily due to:

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.

Purchased gas decreased by $134,845 or 45.2%. Purchased gas represents the cost of gas sold by Peoples for the Regulated Natural Gas business and has a corresponding offset in revenue. The decrease is the result of the lower average cost of gas of $107,452 during the six month period compared to prior period, and the impact of lower gas usage of $27,393 due to warmer weather conditions as well as the sale of Peoples West Virginia.

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.

Taxes other than income taxes increased by $4,031 or 9.3% largely due to an increase in property taxes and payroll taxes in our Regulated Natural Gas segment during the first quarter of 2024 and an increase in pumping fees in our Aqua Texas subsidiary during the second quarter of 2024 as compared with the prior period.

Interest expense increased by $4,992 or 3.6% for the first six months of 2024. Interest expense increased by $9,004 in our Regulated Water segment and decreased by $2,264 for our Regulated Natural Gas segment. Refer to Segment Results of Operations below for further details. Interest expense in Other relates to our corporate operations, and this decreased by $1,748 primarily due to lower average borrowings on our revolving credit facility in 2024.

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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)

Allowance for funds used during construction (“AFUDC”) increased by $798 or by 8.8% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

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.

Our effective income tax rate was a benefit of 2.6% in the first six months of 2024 and a benefit of 12.7% in the first six months of 2023. The decrease in the income tax benefit is primarily attributed to the gain recognized from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects in the first quarter of 2024, partially offset by increase in tax benefit associated with the tax deduction for continued qualifying infrastructure investment in our Regulated Natural Gas segment.

Segment Results of Operations

Regulated Water Segment

Our Regulated Water segment is comprised of eight operating segments representing its water and wastewater regulated utility companies which are organized by the states where the Company provides water and wastewater services. The Regulated Water segment is aggregated into one reportable segment.

The following tables present selected operating results and statistics for our Regulated Water segment for the periods ended June 30, 2024 and 2023:

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

Operating Statistics

Selected operating results as a percentage of operating revenues:

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%

Effective tax rate

14.2%

15.0%

18.9%

14.9%

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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)

Three months ended June 30, 2024 compared with three months ended June 30, 2023

Revenues from our Regulated Water segment increased by $8,807 or 3.0% for the second quarter of 2024 as compared to the same period in 2023, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $15,082;  

additional water and wastewater revenues of $3,113 associated with a larger customer base due to utility acquisitions and organic growth; offset by 

a decrease in volume consumption of $9,681.

Operations and maintenance expense increased by $2,348 or 2.5% primarily due to the following:

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.

Depreciation and amortization increased by $4,394 or 8.3% primarily due to continued capital investment to expand and improve our utility facilities and our acquisitions of new utility systems.

Interest expense, net, increased by $3,927 or 12.9% for the quarter primarily due to higher push down debt borrowings and operating company debt issuances for the Regulated Water segment.

AFUDC increased by $1,022 or by 34.8% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Our effective income tax rate for our Regulated Water Segment was an expense of 14.2% in the second quarter of 2024, compared to an expense of 15.0% in the second quarter of 2023. The decrease in the effective tax rate is primarily the result of the increase in the income tax benefit associated with the tax deduction for qualifying infrastructure.

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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)

Six months ended June 30, 2024 compared with six months ended June 30, 2023

Revenues increased by $21,400 or 3.8% for the first six months of 2024 as compared to the same period in 2023, mainly due to the following:

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.

Operations and maintenance expense increased by $10,229 or 5.8% primarily due to the following:

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.

Depreciation and amortization increased by $8,121 or 7.6% primarily due to continued capital investment to expand and improve our utility facilities and our acquisitions of new utility systems.

Interest expense, net, increased by $9,004 or 14.9% primarily due to higher push down debt borrowings and operating company debt issuances for the Regulated Water segment.

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.

Regulated Natural Gas Segment

Our Regulated Natural Gas segment recognizes revenues by selling gas directly to customers at approved rates or by transporting gas through our pipelines at approved rates to customers that have purchased gas directly from other producers, brokers, or marketers. Natural gas sales to residential, commercial and industrial customers are seasonal, which results in higher demand for natural gas for heating purposes during the colder months.

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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:

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

Operating Statistics

Selected operating results as a percentage of operating revenues:

Operations and maintenance

38.8%

29.6%

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%

Effective tax rate

85.1%

-4213.3%

-23.0%

-70.7%

Three months ended June 30, 2024 compared with three months ended June 30, 2023

Operating revenues from the Regulated Natural Gas segment decreased by $10,795 or by 7.8% due to:

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.

Operations and maintenance expense for the three months ended June 30, 2024 increased by $8,595 or 20.9% primarily due to the following:

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.

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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 Natural Gas segment is affected by the cost of natural gas, which is passed through to customers using a purchased gas adjustment clause and includes commodity price, transportation and storage costs. These costs are reflected in the condensed consolidated statement of operations and comprehensive income as purchased gas expenses. Fluctuations in the cost of purchased gas impact operating revenues on a dollar-for-dollar basis. Purchased gas decreased by $6,985 or 17.6% as a result of the impact of: lower gas usage of $7,187 due to warmer weather conditions and $1,567 from the sale of Peoples West Virginia, offset by an increase in the average cost of gas of $1,769 during the current period compared to the prior period.

Depreciation and amortization increased by $444 or 1.4% primarily due to continued capital investment.

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.

Six months ended June 30, 2024 compared with six months ended June 30, 2023

Operating revenues from the Regulated Natural Gas segment decreased by $127,759 or 22.0% due to:

a decrease in purchased gas costs of $123,299; refer to purchased gas costs discussion below for further information;

lower gas usage of $3,639 due to the sale of Peoples West Virginia and $2,314 primarily due to warmer weather conditions; and

a decrease in other utility revenues of $3,142 resulting from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects; offset by

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. 

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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)

Operations and maintenance expense decreased by $2,638 or 2.7% primarily due to the following:

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.

Depreciation and amortization increased by $2,727 or 4.4% primarily due to continued capital investment in pipe replacement.

Taxes other than income taxes increased by $1,213 or 10.9% mainly due to an increase in property taxes and payroll taxes.

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.

AFUDC increased by $1,034 due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

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.

Our effective income tax rate was a benefit of 23.0% in the first six months of 2024 and a benefit of 70.7% in the first six months of 2023. The decrease in income tax benefit is primarily attributed to the gain recognized from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects in the first quarter of 2024, partially offset by an increase in tax benefit associated with the tax deduction for continued qualifying infrastructure investment.

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.

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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”.

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Item 5 - Other Information

Security Trading Plans of Directors and Executive Officers

During the quarter ended June 30, 2024, none of the Company’s directors or executive officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement”, except as follows:

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

Christopher Luning,
Executive Vice President & General Counsel

Rule 10b5-1(c) Trading Arrangement

Terminated - April 2, 2024

Up to 30,000 shares to be sold

3/5/2024 - 3/31/2025


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Item 6 – Exhibits  

Exhibit No. 

 Description 

10.1*

Eighth Amendment to Credit Agreement, dated June 12, 2024, by and between Aqua Pennsylvania, Inc. PNC National Bank Association, Citizens Bank N.A., and The Huntington National Bank

10.2*

Fourth Amendment to Credit Agreement, dated June 12, 2024, by and between PNG Companies LLC, PNC National Bank Association, Citizens Bank N.A., and The Huntington National Bank

31.1* 

Certification of Chief Executive Officer, filed pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934

31.2* 

Certification of Chief Financial Officer, filed pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934

32.1* 

Certification of Chief Executive Officer, furnished pursuant to 18 U.S.C. Section 1350

32.2* 

Certification of Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350

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.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRES

Inline XBRL Taxonomy Extension Presentation Linkbase Document

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.


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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

Essential Utilities, Inc.                  

Registrant

/s/ Christopher H. Franklin

Christopher H. Franklin

Chairman, President and

Chief Executive Officer

/s/ Daniel J. Schuller

Daniel J. Schuller

Executive Vice President and

Chief Financial Officer

 

46