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 September 30, 2023
£ 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 October 23, 2023: 273,165,817
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I – Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets (unaudited) – September 30, 2023 and December 31, 2022
2
Consolidated Statements of Operations and Comprehensive Income (unaudited) –Three Months Ended September 30, 2023 and 2022
4
Consolidated Statements of Operations and Comprehensive Income (unaudited) –Nine Months Ended September 30, 2023 and 2022
5
Consolidated Statements of Capitalization (unaudited) –September 30, 2023 and December 31, 2022
6
Consolidated Statements of Equity (unaudited) –Nine Months Ended September 30, 2023
7
Consolidated Statements of Equity (unaudited) –Nine Months Ended September 30, 2022
8
Consolidated Statements of Cash Flow (unaudited) –Nine Months Ended September 30, 2023 and 2022
9
Notes to Consolidated Financial Statements (unaudited)
10
Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
46
Item 4. Controls and Procedures
Part II – Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
47
Item 5. Other Information
Item 6. Exhibits
48
Signatures
49
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
September 30,
December 31,
Assets
2023
2022
Property, plant and equipment, at cost
$
14,681,336
13,737,387
Less: accumulated depreciation
2,834,771
2,606,441
Net property, plant and equipment
11,846,565
11,130,946
Current assets:
Cash and cash equivalents
8,505
11,398
Accounts receivable, net
133,735
206,324
Unbilled revenues
75,101
170,504
Inventory - materials and supplies
48,811
46,592
Inventory - gas stored
78,634
153,143
Current assets held for sale
7,461
11,167
Prepayments and other current assets
31,409
39,759
Regulatory assets
25,692
19,272
Total current assets
409,348
658,159
1,564,056
1,342,753
Deferred charges and other assets, net
191,958
166,653
Funds restricted for construction activity
1,370
1,342
Goodwill
2,340,661
2,340,792
Non-current assets held for sale
37,327
32,124
Operating lease right-of-use assets
37,836
41,734
Intangible assets
3,672
4,604
Total assets
16,432,793
15,719,107
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED BALANCE SHEETS (continued)
ShareBasedCompensationArrangementByShareBasedPaymentAwardEquityInstrumentsOtherThanOptionsVestedInPeriod
Liabilities and Equity
Stockholders' equity:
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 276,471,716 and 266,973,321 as of September 30, 2023 and December 31, 2022
138,235
133,486
Capital in excess of par value
4,131,834
3,793,262
Retained earnings
1,739,271
1,534,331
Treasury stock, at cost, 3,305,899 and 3,236,237 shares as of September 30, 2023 and December 31, 2022
(86,783)
(83,693)
Total stockholders' equity
5,922,557
5,377,386
Long-term debt, excluding current portion
6,501,254
6,418,039
Less: debt issuance costs
45,214
46,982
Long-term debt, excluding current portion, net of debt issuance costs
6,456,040
6,371,057
Commitments and contingencies (See Note 14)
Current liabilities:
Current portion of long-term debt
218,619
199,356
Loans payable
131,832
228,500
Accounts payable
191,924
238,843
Book overdraft
19,688
28,694
Accrued interest
81,429
47,063
Accrued taxes
29,113
34,393
Liabilities related to assets held for sale
2,669
3,263
Regulatory liabilities
80,190
35,276
Dividends payable
-
75,808
Other accrued liabilities
141,104
130,673
Total current liabilities
896,568
1,021,869
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits
1,486,979
1,345,766
Customers' advances for construction
129,139
114,732
825,659
778,754
Asset retirement obligations
845
843
Operating lease liabilities
35,133
37,666
Non-current liabilities related to assets held for sale
758
974
Pension and other postretirement benefit liabilities
32,380
31,244
Other
24,326
28,562
Total deferred credits and other liabilities
2,535,219
2,338,541
Contributions in aid of construction
622,409
610,254
Total liabilities and equity
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended
Operating revenues
411,255
434,618
Operating expenses:
Operations and maintenance
147,018
151,361
Purchased gas
16,590
52,041
Depreciation
84,348
80,471
Amortization
1,687
2,259
Taxes other than income taxes
24,207
22,625
Total operating expenses
273,850
308,757
Operating income
137,405
125,861
Other expense (income):
Interest expense
68,590
60,488
Interest income
(942)
(1,510)
Allowance for funds used during construction
(5,455)
(5,812)
Loss (gain) on sale of other assets
285
(299)
(1,438)
(441)
Income before income taxes
76,365
73,435
Provision for income taxes (benefit)
(3,711)
4,797
Net income
80,076
68,638
Comprehensive income
Net income per common share:
Basic
0.30
0.26
Diluted
Average common shares outstanding during the period:
266,767
262,213
267,176
262,754
Nine Months Ended
1,574,405
1,582,649
418,520
428,923
314,838
354,896
252,208
235,774
3,282
4,478
67,433
67,352
1,056,281
1,091,423
518,124
491,226
210,440
169,345
(2,731)
(2,943)
(14,567)
(17,802)
Gain on sale of other assets
(184)
(777)
(2,001)
(2,566)
327,167
345,969
Income tax benefit
(35,611)
(4,336)
362,778
350,305
1.37
1.34
1.33
265,135
262,089
265,688
262,641
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Treasury stock, at cost
Long-term debt of subsidiaries (substantially collateralized by utility plant):
Interest Rate Range
Maturity Date Range
0.00% to 0.99%
2023 to 2033
1,411
1,875
1.00% to 1.99%
2023 to 2039
7,730
8,369
2.00% to 2.99%
2024 to 2058
208,425
209,755
3.00% to 3.99%
2023 to 2056
1,315,519
1,351,432
4.00% to 4.99%
2023 to 2059
1,398,614
1,403,313
5.00% to 5.99%
2023 to 2061
313,698
14,357
6.00% to 6.99%
2026 to 2036
31,000
7.00% to 7.99%
2025 to 2027
28,188
28,378
8.00% to 8.99%
2025
1,488
2,116
9.00% to 9.99%
2026
11,800
3,317,873
3,062,395
Notes payable to bank under revolving credit agreement, variable rate, due 2027
347,000
490,000
Unsecured notes payable:
Notes at 2.40% due 2031
400,000
Notes at 2.704% due 2030
500,000
Notes ranging from 3.01% to 3.59% due 2029 through 2050
1,125,000
Notes at 4.28%, due 2049
Notes at 5.30%, due 2052
Notes at 5.95%, due 2023 through 2034
30,000
40,000
Total long-term debt
6,719,873
6,617,395
Total capitalization
12,378,597
11,748,443
CONSOLIDATED STATEMENTS OF EQUITY
Capital in
Common
Excess of
Retained
Treasury
Stock
Par Value
Earnings
Total
Balance at December 31, 2022
191,434
Dividends of March 1, 2023 ($0.2870 per share)
(1)
Dividends of June 1, 2023 declared ($0.2870 per share)
(75,876)
Issuance of common stock under dividend reinvestment plan (97,315 shares)
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)
Equity compensation plan (222,782 shares)
111
(111)
Exercise of stock options (2,917 shares)
101
103
Stock-based compensation
3,410
(267)
3,143
(20)
273
253
Balance at March 31, 2023
133,848
3,819,804
1,649,621
(87,331)
5,515,942
91,268
Dividends of June 1, 2023 ($0.2870 per share)
Issuance of common stock under dividend reinvestment plan (102,676 shares)
51
3,901
3,952
Repurchase of stock (971 shares)
(42)
Equity compensation plan (17,054 shares)
(9)
Exercise of stock options (3,026 shares)
1
105
106
3,515
(206)
3,309
(117)
281
164
Balance at June 30, 2023
133,909
3,827,199
1,740,682
(87,092)
5,614,698
Dividends of September 1, 2023 ($0.3071 per share)
(81,230)
Issuance of common stock under dividend reinvestment plan (113,043 shares)
56
3,936
3,992
Issuance of common stock from at-the-market sale agreements (8,539,711 shares)
4,270
299,419
303,689
Repurchase of stock (48 shares)
(2)
Equity compensation plan (133 shares)
Exercise of stock options (610 shares)
20
1,967
(257)
1,710
(707)
311
(396)
Balance at September 30, 2023
Balance at December 31, 2021
128,050
3,705,814
1,434,201
(83,615)
5,184,450
199,376
Dividends of March 1, 2022 ($0.2682 per share)
(67,821)
Dividends of June 1, 2022 declared ($0.2682 per share)
(67,863)
Issuance of common stock under dividend reinvestment plan (93,833 shares)
4,070
Repurchase of stock (21,290 shares)
(1,012)
Equity compensation plan (57,052 shares)
29
(29)
Exercise of stock options (28,516 shares)
14
998
1,012
2,716
(136)
2,580
270
261
Balance at March 31, 2022
128,140
3,713,560
1,497,757
(84,357)
5,255,100
82,291
Dividends of June 1, 2022 ($0.2682 per share)
(2,424)
Issuance of common stock from stock purchase contracts (9,029,461 shares)
4,515
(4,515)
Issuance of common stock under dividend reinvestment plan (92,889 shares)
4,007
4,054
Repurchase of stock (305 shares)
(15)
Equity compensation plan (4,736 shares)
Exercise of stock options (6,462 shares)
3
224
227
2,725
(182)
2,543
(24)
280
256
Balance at June 30, 2022
132,707
3,715,975
1,577,442
(84,092)
5,342,032
Dividends of September 1, 2022 ($0.2870 per share)
(75,246)
Issuance of common stock under dividend reinvestment plan (89,123 shares)
44
4,206
4,250
Repurchase of stock (604 shares)
Equity compensation plan (6,555 shares)
(3)
Exercise of stock options (18,992 shares)
660
670
2,702
2,520
(17)
284
267
Balance at September 30, 2022
132,764
3,723,523
1,570,652
(83,837)
5,343,102
Click or tap here to enter text.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization
255,490
240,252
Deferred income taxes
(40,541)
(12,794)
Provision for doubtful accounts
17,021
18,519
8,929
8,164
Gain on sale of utility systems and other assets
Net change in receivables, deferred purchased gas costs, inventory and prepayments
265,922
(116,804)
Net change in payables, accrued interest, accrued taxes and other accrued liabilities
(5,266)
65,845
Pension and other postretirement benefits contributions
(20,343)
(20,390)
(39,237)
(13,161)
Net cash flows from operating activities
804,569
519,159
Cash flows from investing activities:
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $4,502 and $4,527
(874,491)
(719,688)
Acquisitions of utility systems, net
(45,303)
(104,383)
Net proceeds from the sale of utility systems and other assets
634
797
451
205
Net cash flows used in investing activities
(918,709)
(823,069)
Cash flows from financing activities:
Customers' advances and contributions in aid of construction
13,151
10,732
Repayments of customers' advances
(5,222)
(1,726)
Net proceeds (repayments) of short-term debt
(96,668)
148,235
Proceeds from long-term debt
681,203
944,882
Repayments of long-term debt
(570,634)
(521,792)
Change in cash overdraft position
(9,006)
(64,326)
Proceeds from issuance of common stock under dividend reinvestment plan
12,061
12,421
Proceeds from issuance of common stock from at-the-market sale agreement
322,983
Proceeds from exercised stock options
229
1,909
Repurchase of common stock
(3,955)
(1,056)
Dividends paid on common stock
(232,916)
(213,354)
21
784
Net cash flows from financing activities
111,247
316,709
Net change in cash and cash equivalents
(2,893)
12,799
Cash and cash equivalents at beginning of period
10,567
Cash and cash equivalents at end of period
23,366
Non-cash investing activities:
Property, plant and equipment additions purchased at the period end, but not yet paid for
106,150
97,777
Non-cash utility property contributions
36,913
21,736
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation
The accompanying unaudited consolidated balance sheets and statements of capitalization of Essential Utilities, Inc. and subsidiaries (collectively, the “Company”, “we”, “us” or “our”) at September 30, 2023, the unaudited consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2023, and the unaudited consolidated statements of cash flows and of equity for the nine months ended September 30, 2023 and 2022, 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, 2022. 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 consolidated balance sheets, consolidated statements of equity, consolidated statements of operations and comprehensive income, and consolidated 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 consolidated balance sheets, the revenues and expenses in its consolidated statements of operations and comprehensive income, and the information that is contained in its summary of significant accounting policies and notes to 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 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, 2022.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 2 – Revenue Recognition
The following table presents our revenues disaggregated by major source and customer class:
September 30, 2023
September 30, 2022
Water Revenues
Wastewater Revenues
Natural Gas Revenues
Other Revenues
Revenues from contracts with customers:
Residential
173,331
36,096
46,501
173,798
32,806
65,631
Commercial
49,699
9,396
9,577
49,026
8,769
15,180
Fire protection
10,350
9,934
Industrial
9,438
500
353
9,291
466
990
Gas transportation & storage
26,636
26,824
Other water
15,549
11,920
Other wastewater
2,827
2,175
Other utility
11,731
2,898
11,096
2,362
Revenues from contracts with customers
258,367
48,819
94,798
253,969
44,216
119,721
Alternative revenue program
434
73
669
60
Other and eliminations
5,866
545
13,076
Consolidated
258,801
48,892
8,764
255,183
44,276
15,438
487,704
103,632
415,207
454,628
89,954
446,679
137,427
26,643
91,031
125,171
21,807
91,073
30,794
28,674
25,584
1,587
2,613
24,076
1,242
3,789
129,151
146,571
36,310
45,170
8,291
8,180
35,653
11,706
46,162
8,602
717,819
140,153
673,655
677,719
121,183
734,274
1,603
282
1,421
2,393
(128)
27,766
38,606
719,422
140,435
675,076
39,472
680,112
121,055
47,208
Note 3 – Acquisitions
Water and Wastewater Utility Acquisitions - Completed
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 750 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 1,400 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 273 customer connections for a cash purchase price of $136.
In November 2022, the Company acquired certain water utility assets of Oak Brook, Illinois, which serve 2,037 customers for a cash purchase price of $12,500.
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. The Company is currently waiting to see if the Supreme Court will grant allocatur. Management believes 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.
In March 2022, the Company acquired the wastewater system of Lower Makefield Township, which serves 11,323 customer connections in Lower Makefield, Falls and Middletown townships, and Yardley Borough, Bucks County, Pennsylvania, for a cash purchase price of $53,000.
The purchase price allocation for these acquisitions consisted primarily of acquired 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 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 June 2023, the Company entered into a purchase agreement to acquire Westfield HOA wastewater assets, which serves approximately 225 customers within Westfield Homeowners Subdivision in Glenview, Illinois for $50.
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.
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 2024. Closing for our utility acquisitions are subject to the timing of the respective regulatory approval processes.
In January 2021, the Company entered into a purchase agreement to acquire the wastewater utility system assets of Willistown Township, Pennsylvania, which consist of approximately 2,300 customers, for $17,500. On April 14, 2023, the Willistown Township supervisors exercised their right to terminate the agreement.
DELCORA Purchase Agreement
In September 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. In May 2020, Delaware County, Pennsylvania, filed a lawsuit alleging that DELCORA did not have the legal authority to establish and fund a customer trust with the net proceeds of the transaction. In December 2020, the judge in the Delaware County Court lawsuit issued an order that (1) the County cannot interfere with the purchase agreement between DELCORA and the Company; (2) the County cannot terminate DELCORA prior to the closing of the transaction; and (3) the establishment of the customer trust was valid. Delaware County appealed this decision to Commonwealth Court of Pennsylvania. On March 3, 2022, the Commonwealth Court issued a decision finding that Delaware County can dissolve DELCORA if it so chooses, but the purchase agreement must be upheld regardless of who is operating the system. The case was remanded back to the trial court for the entry of an order consistent with the Commonwealth Court’s opinion. This order was issued on September 8, 2022 (“Remand Order”). Since then, the County has challenged the Remand Order through two separate actions described in the below bullet points. The effect of those proceedings has resulted in the Remand Order being on appeal to the Commonwealth Court. Argument has not yet been scheduled by the Commonwealth Court on the appeal.
First, Delaware County filed an Application for Determination of Finality (“Application”) on October 13, 2022, with the Delaware County Court of Common Pleas. The Company filed its opposition to the Application on October 27, 2022, and on November 2, 2022, the Delaware County Court of Common Pleas denied Delaware County’s Application indicating that its previous order already constituted a final order that addressed the claims of all parties. On December 2, 2022, following the denial of its Application, Delaware County filed a Petition for Permission to Appeal (“Petition”) the Remand Order in the Commonwealth Court of Pennsylvania. On December 16, 2022, the Company filed an Answer in opposition to the Petition. The Commonwealth Court issued an Order denying the County’s Petition on February 2,
2023. The County filed an Application for Reconsideration of the Commonwealth Court’s February 2023 Order, which the Commonwealth Court granted on April 4, 2023. In that April 4, 2023 Order, the Commonwealth Court construed the Petition as a Notice of Appeal and has initiated a briefing schedule for this appeal.
Second, on November 2, 2022, Delaware County filed a Notice of Appeal (“Notice of Appeal”) from the Remand Order with the Delaware County Court of Common Pleas. On December 2, 2022, the Delaware County Court of Common Pleas issued an Opinion concluding that the County Court did not err in issuing the Remand Order. On January 13, 2023, Delaware County filed an Application in Commonwealth Court seeking confirmation of briefing deadlines with respect to the Notice of Appeal. In response, by Order dated January 24, 2023, the Commonwealth Court stated that “the record received from the Court of Common Pleas of Delaware County is currently under review for finality. A briefing schedule will be issued upon completion of this review.” The Company filed an Application to quash the County’s Appeal on February 7, 2023. On April 4, 2023, the Commonwealth Court granted the Company’s Application and quashed the appeal.
On January 25, 2023, DELCORA filed in the Delaware Court of Common Pleas a complaint for Declaratory Judgment against the Company and Delaware County seeking resolution of whether the County Ordinance dissolving DELCORA is a final action prohibiting DELCORA from carrying out the material transaction of the Asset Purchase Agreement and, in the event that DELCORA retains the ability to close the transaction, whether DELCORA is permitted to exist as a trust. The Company filed preliminary objections to DELCORA’s complaint, which were scheduled for a hearing on October 12, 2023. However, prior to the scheduled hearing, the Court notified the parties that the hearing was canceled and would be re-listed after the parties receive the benefit of the Commonwealth Court’s decision on the appeal addressed above.
Meanwhile, the administrative law judges (“ALJ”) in the regulatory approval process recommended that the Company’s application to acquire DELCORA be denied, and subsequently, the Company provided exceptions to the recommended decision. On March 30, 2021, the Pennsylvania Public Utility Commission (“PUC”) ruled that the case be remanded back to the Office of Administrative Law Judge and vacated the original administrative law judges’ recommended decision (“2021 Order”). This 2021 Order was also appealed to the Commonwealth Court by Delaware County on April 29, 2021. A decision was issued by the Commonwealth Court on September 12, 2022, which dismissed the appeal of the County.
After the PUC issued the 2021 Order, on April 16, 2021, the ALJ issued an order staying the proceeding until the Delaware County Court lawsuit is final and unappealable. On March 25, 2022, the Company sent a letter notifying the PUC of the March 3, 2022, Commonwealth Court decision (that originated in Delaware County Court of Common Pleas) and requested that the PUC move forward with processing the application. On July 14, 2022, the Commission moved to lift the stay imposed by the ALJ, and required the ALJ to establish a schedule on remand for the proceeding. The ALJ established a procedural schedule for the remand proceeding.
On August 17, 2022, Receiver for the City of Chester filed suit in Delaware County Common Pleas Court against DELCORA premised upon the claimed reversionary interest of the City in some of DELCORA’s assets. The Company intervened in that matter on October 19, 2022 and on March 27, 2023 filed preliminary objections. Following a hearing on the Company’s preliminary objections on August 28, 2023, the Receiver for the City of Chester discontinued the case without prejudice.
On January 26, 2023, several parties involved in the PUC case filed a joint motion for stay based on DELCORA’s filing of the January 25, 2023 Complaint for Declaratory Judgment and referenced the City of Chester’s bankruptcy filing in which the City of Chester has asserted reversionary contract interests regarding some of DELCORA’s wastewater assets. On February 6, 2023, the ALJ stayed the PUC DELCORA application proceedings again.
On May 23, 2023, the Bankruptcy Court issued an order in the City of Chester’s bankruptcy filing staying the PUC proceedings until relief from the stay is granted by the Bankruptcy Court. The Company appealed the Bankruptcy Court stay order to the United States District Court for the Eastern District of Pennsylvania on June 6, 2023. The Company filed its brief on August 7, 2023, to which the City responded on September 6, 2023. The Company filed its Reply brief on September 20, 2023, and we are awaiting the Court to determine whether oral argument will be scheduled or a decision rendered based solely on the briefing.
On June 16, 2023, the Company filed a Complaint against DELCORA in the Delaware County Court of Common Pleas requesting a declaratory judgment and injunctive relief regarding breach of the Asset Purchase Agreement in acting outside the ordinary course of business by attempting to enter into a new agreement with Philadelphia Water Department (“PWD”) for the treatment of wastewater without the Company’s consent. DELCORA filed an answer, new matter and counterclaim against the Company, alleging that the Company has tortiously interfered with DELCORA’s contract with the PWD. The Company filed preliminary objections to the counterclaim, and DELCORA filed an amended counterclaim. The Company filed preliminary objections to the amended counterclaim, and on October 9, 2023, DELCORA filed a second amended counterclaim, to which the Company filed preliminary objections.
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 the timing of the above-described regulatory approval process and on-going litigation.
Note 4 – Assets Held for Sale and Dispositions
On December 31, 2022, the Company entered into a definitive agreement with Hope Gas, Inc. for the sale of its regulated natural gas utility assets in West Virginia, which served approximately 13,000 customers or about 2% of the Company’s regulated natural gas customers (“Peoples Gas West Virginia”). The Peoples Gas West Virginia sale closed on October 1, 2023 for an estimated purchase price of $39,965, subject to working capital and other adjustments. 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 a discontinued operation. The assets and liabilities of Peoples Gas West Virginia were reported as held for sale in the accompanying consolidated balance sheet, carried at the lower of its carrying amount or fair value less costs to sell, and consisted of the following:
December 31, 2022
1,197
2,807
Other current assets
1,334
3,284
4,930
5,076
Property, plant and equipment, net
35,232
30,267
Regulatory assets and other
2,095
1,857
Current liabilities related to assets held for sale
509
649
Other long-term liabilities
249
325
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. Balances associated with these projects are included in deferred charges and other assets, net, in the consolidated balance sheets as of September 30, 2023, and December 31, 2022. The sale is subject to various closing conditions and regulatory approvals and is expected to be completed in late 2023 or early 2024.
Note 5 – Goodwill
The following table summarizes the changes in the Company’s goodwill, by business segment:
Regulated Water
Regulated Natural Gas
58,504
2,277,447
4,841
Reclassification to utility plant acquisition adjustment
(131)
58,373
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.
According to our normal schedule, we will be performing our annual goodwill impairment test during the fourth quarter for our Regulated Water, Regulated Natural Gas, and Other reporting units.
Note 6 – Capitalization
At-the-Market Offering
On October 14, 2022, the Company entered into at-the market sales agreements (“ATM”) with third-party sales agents, under which the Company may offer and sell shares of its common stock, from time to time, at its option, having an aggregate gross offering price of up to $500,000 pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-255235). The Company intends to use the net proceeds from the sales of shares through the ATM for working capital, capital expenditures, water and wastewater utility acquisitions and repaying outstanding indebtedness. As of December 31, 2022, the Company issued 1,321,994 shares of common stock under the ATM for proceeds of $63,040, net of expenses. During the three and nine months ended September 30, 2023, the Company sold 8,539,711 and 8,938,839 shares of common stock, in exchange for net proceeds of $303,689 and $322,983, respectively, under the ATM. As of September 30, 2023, approximately $110,000 remained available for sale under the ATM.
Tangible Equity Units
On April 23, 2019, the Company issued $690,000, less expenses of $16,358, of its tangible equity units (the “Units”), with a stated amount of $50.00 per unit. This issuance was part of the permanent financing to close the Peoples Gas Acquisition. Each Unit consisted of a prepaid stock purchase contract and an amortizing note, each issued by the Company. The amortizing notes had an initial principal amount of $8.62909, or $119,081 in aggregate, and yielded interest at a rate of 3.00% per year, and paid equal quarterly per unit cash installments of $0.75 per amortizing note (except for the July 30, 2019 installment payment, which was $0.80833 per amortizing note), that constituted a payment of interest and a partial repayment of principal. This cash payment in the aggregate was equivalent to 6.00% per year with respect to each $50.00 stated amount of the Units. The amortizing notes represented unsecured senior obligations of the Company.
Certain holders of the tangible equity units had early settled their prepaid stock purchase contracts prior to the due date, and, in exchange, the Company issued shares of its common stock. During April 2022, 981,919 stock purchase contracts were early settled by the holders of the contracts, resulting in the issuance of 1,166,107 shares of the Company’s common stock. On May 2, 2022, the remaining 6,621,315 stock purchase contracts were each mandatorily settled for 1.18758 shares of the Company’s common stock, and in the aggregate the Company issued 7,863,354 shares of its common stock. Additionally, the final quarterly installment payment was made, which resulted in the complete pay-off of the amortizing notes.
Long-term Debt and Loans Payable
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. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
On June 29, 2023, 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 27, 2024; and (2) updated the adjustment on the Bloomberg Short-Term Bank Yield Index (BSBY) Rate.
In January 2023 and October 2022, Aqua Pennsylvania, issued $75,000 and $125,000 of first mortgage bonds, due in 2043 and 2052, and with interest rates of 5.60% and 4.50%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
On December 14, 2022, the Company entered into a five year $1,000,000 unsecured revolving credit facility, which replaced the Company’s prior five year $1,000,000 unsecured revolving credit facility. The Company’s new unsecured revolving credit facility was used to repay all indebtedness and fees under our prior unsecured revolving credit facility, and for other general corporate purposes. The facility includes a $100,000 sublimit for daily demand loan. Funds borrowed under this facility are classified as long-term debt and are used to provide working capital as well as support for letters of credit for insurance policies and other financing arrangements. As of September 30, 2023, the Company has the following sublimits and available capacity under the credit facility: $100,000 letter of credit sublimit, $82,664 of letters of credit available capacity, $0 borrowed under the swing-line commitment, $100,000 was available for borrowing under the swing-line commitment, $635,664 available for borrowing and $347,000 of funds borrowed under the agreement.
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 nine months ended September 30, 2023 and 2022.
The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of September 30, 2023 and December 31, 2022, the carrying amount of the Company’s loans payable was $131,832 and $228,500, 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 September 30, 2023 and December 31, 2022, the carrying amounts of the Company's cash and cash equivalents was $8,505 and $11,398, 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 September 30, 2023 and December 31, 2022, the carrying amount of these securities was $26,297 and $24,962, respectively, which equates to their fair value, and is reported in the 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:
Net gain (loss) recognized during the period on equity securities
155
497
(994)
Less: net gain / loss recognized during the period on equity securities sold during the period
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date
The net gain (loss) recognized on equity securities is presented on the consolidated statements of operations and comprehensive income on the line item “Other.”
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
Carrying amount
Estimated fair value
5,300,219
5,528,131
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.
The Company’s customers’ advances for construction have a carrying value of $129,139 as of September 30, 2023, and $114,732 as of December 31, 2022. 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 2032, 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:
Average common shares outstanding during the period for basic computation
Effect of dilutive securities:
Employee stock-based compensation
409
541
553
552
Average common shares outstanding during the period for diluted computation
Based on the minimum number of shares to be issued upon settlement of the stock purchase contracts issued in April 2019 under the tangible equity units, the average common shares outstanding for basic computation for the three and nine months ended September 30, 2022 includes the weighted-average impact of 0 and 3,920,087 shares, respectively. On May 2, 2022, all of the remaining stock purchase contracts under the tangible equity units were mandatorily settled.
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: 150,062 for the three and nine months ended September 30, 2023; and 81,729 for the three and nine months ended September 30, 2022. 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.
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 September 30, 2023, 1,533,338 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:
Stock-based compensation within operations and maintenance expenses
1,039
1,676
5,444
5,018
260
309
1,364
1,261
The following table summarizes the PSU transactions for the nine months ended September 30, 2023:
Number
Weighted
of
Average
Share Units
Fair Value
Nonvested share units at beginning of period
556,462
42.77
Granted
162,030
45.06
Performance criteria adjustment
(14,805)
43.36
Actual vested
(168,549)
53.77
Forfeited
(12,513)
44.10
Nonvested share units at end of period
522,625
39.88
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 nine months ended September 30, 2023 and 2022 was $45.06 and $42.31, 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 Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock. RSUs are eligible to be earned at the end of a specified restricted period, which is generally 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:
746
702
2,186
2,206
187
126
548
554
The following table summarizes the RSU transactions for the nine months ended September 30, 2023:
Stock Units
Nonvested stock units at beginning of period
180,306
45.94
75,414
45.53
Stock units vested and issued
(52,744)
49.25
(5,104)
45.54
Nonvested stock units at end of period
197,872
45.07
The per unit weighted-average fair value at the date of grant for RSUs granted during the nine months ended September 30, 2023 and 2022 was $45.53 and $45.10, respectively.
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:
181
139
480
380
45
26
120
95
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:
Expected term (years)
5.5
Risk-free interest rate
4.03%
1.92%
Expected volatility
27.80%
26.50%
Dividend yield
2.53%
2.37%
Grant date fair value per option
11.37
9.34
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.
The following table summarizes stock option transactions for the nine months ended September 30, 2023:
Aggregate
Exercise
Remaining
Intrinsic
Shares
Price
Life (years)
Value
Outstanding at beginning of period
820,061
36.29
74,632
45.39
(2,076)
45.31
Expired
(664)
35.20
Exercised
(6,553)
34.98
Outstanding at end of period
885,400
37.04
5.8
206
Exercisable at end of period
762,586
35.72
5.3
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:
12
13
37
38
11
The following table summarizes restricted stock transactions for the nine months ended September 30, 2023:
Nonvested restricted stock at beginning of period
1,170
42.75
Vested
(1,170)
(42.75)
Nonvested restricted stock at end of period
The weighted-average fair value at the date of the grant for restricted stock awards granted during the nine months ended September 30, 2022 was $42.75. There were no restricted stock awards granted during the nine months ended September 30, 2023.
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:
165
780
522
219
151
There were no stock awards granted during the three months ended September 30, 2023.
The following table summarizes stock award transactions for the nine months ended September 30, 2023:
Stock Awards
Nonvested stock awards at beginning of period
18,676
41.78
(18,676)
(41.78)
Nonvested stock awards at end of period
The weighted-average fair value at the date of grant for stock awards granted during the nine months ended September 30, 2023 and 2022 was $41.78 and $46.40, 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 (credit) for the Company’s pension and other postretirement benefit plans:
Pension Benefits
Service cost
400
707
1,201
2,121
Interest cost
4,309
3,202
12,926
9,605
Expected return on plan assets
(5,673)
(5,895)
(17,018)
(17,684)
Amortization of prior service cost
171
134
513
402
Amortization of actuarial loss
810
435
2,428
1,306
Net periodic benefit cost (credit)
17
(1,417)
50
(4,250)
Postretirement Benefits
337
478
1,011
1,433
1,119
842
3,357
2,527
(1,093)
(1,142)
(3,279)
(3,376)
(329)
(334)
(988)
(1,002)
34
(156)
(418)
The net periodic benefit cost (credit) 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 (credit) other than service cost in the consolidated statements of operations and comprehensive income on the line item “Other”.
There were $20,343 in cash contributions made to the Pension Plan during the nine months ended September 30, 2023, which completed the Company’s expected cash contributions for the year.
Note 11 – Rate Activity
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 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 annually.
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 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.
In January 2023, the Company’s two water utility operating divisions in Ohio that are regulated by local regulatory authorities implemented base rate increases designed to increase total operating revenues on an annual basis by $1,569. Further, one of the Company’s wastewater divisions in Indiana implemented a base rate increase designed to increase operating revenues on an annual basis by $134. Lastly, during the first nine months of 2023, the Company implemented infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $5,022 in its water and wastewater utility operating divisions in Pennsylvania, New Jersey, and Illinois and by $21,272 in its natural gas operating divisions in Kentucky and Pennsylvania.
On December 30, 2022, our regulated water and wastewater utility operating divisions in Ohio filed an application with the Public Utilities Commission of Ohio designed to increase rates by $9,816 annually.
On September 21, 2022, our 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 $5,483 annually. New rates for water and sewer service went into effect on September 21, 2022.
On May 16, 2022, the Company’s regulated water and wastewater operating subsidiary in Pennsylvania, Aqua Pennsylvania, received an order from the Pennsylvania Public Utility Commission that allowed base rate increases that would increase total annual operating revenues by $69,251. New rates went into effect on May 19, 2022. At the time the rate order was received, the rates in effect also included $35,470 in Distribution System Improvement Charges (“DSIC”), which was 7.2% above prior base rates. Consequently, the aggregate base rates increased by $104,721 since the last base rate increase and DSIC was reset to zero.
On January 3, 2022, the Company’s natural gas operating division in Kentucky received an order from the Kentucky Public Service Commission resulting in an increase of $5,238 in annual revenues, and new rates went into effect on January 4, 2022. On June 7, 2022, an additional $260 was approved and made effective by the Commission, resulting from a rehearing requested by the operating division.
Note 12 – Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes:
Property
7,402
8,545
23,937
24,798
Gross receipts, excise and franchise
5,456
4,371
13,661
12,484
Payroll
4,901
4,695
16,468
16,133
Regulatory assessments
2,146
1,486
5,544
5,063
Pumping fees
3,320
2,824
4,967
6,147
982
704
2,856
2,727
Total taxes other than income
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:
310,591
301,335
118,985
14,298
Operations and maintenance expense
98,695
50,006
(1,683)
94,854
51,850
4,657
14,408
2,182
41,124
10,917
54,695
31,141
199
86,035
51,522
30,295
913
82,730
Interest expense, net (a)
30,867
19,405
17,376
67,648
27,762
20,323
10,893
58,978
(4,643)
(812)
(5,161)
(651)
16,186
(16,905)
(2,992)
19,182
(12,734)
(1,651)
Net income (loss)
99,916
(9,776)
(10,064)
98,586
(17,133)
(12,815)
871,563
809,888
731,897
40,864
274,724
148,270
(4,474)
273,757
156,209
(1,043)
295,929
18,909
321,822
33,074
161,393
93,457
640
150,498
89,130
624
91,103
67,894
48,712
207,709
82,920
60,146
23,336
166,402
(12,529)
(2,038)
(15,657)
(2,145)
45,559
(73,703)
(7,467)
40,528
(44,378)
(486)
267,345
127,400
(31,967)
235,471
133,831
(18,997)
Capital expenditures
493,851
377,562
3,078
874,491
382,853
335,738
1,097
719,688
(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.
Total assets:
Regulated water
9,331,307
8,792,633
Regulated natural gas
6,691,622
6,528,654
409,864
397,820
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 September 30, 2023, the aggregate amount of $19,063 is accrued for loss contingencies and is reported in the Company’s 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 September 30, 2023, estimates that
approximately $1,410 of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported in the Company’s 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. During the third quarter of 2023, an amount was accrued for the penalty and other fees that will be paid as a result of a conditional settlement that was reached with the regulators. The settlement is the subject of court approval. 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. During the third quarter of 2022, the Company established 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. The Company submitted a claim for the 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. 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.
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 September 30, 2023 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 (4.9)% and (10.9)% for the three and nine months ended September 30, 2023, respectively. The Company’s effective tax rate was 6.5% and (1.3)% for the three and nine months ended September 30, 2022, respectively. The decreases in the effective tax rate for the third quarter and nine months ended September 30, 2023 are primarily attributed to the increase in income tax benefits associated with the tax deduction for qualifying infrastructure. 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 nine months ended September 30, 2023 and 2022. For states with a corporate net income tax, the state corporate net income tax rates range from 2.5% to 9.99% for all periods presented. On July 8, 2022, Pennsylvania enacted House Bill 1342 into law, which among other things, reduces Pennsylvania’s corporate income tax rate from 9.99% to 8.99% beginning January 1, 2023, and an additional 0.5% annually through 2031, when it reaches to 4.99%. The Company evaluated the impacts of the tax rate change and recorded, in the year ended December 31, 2022, a reduction to our deferred tax liabilities of $244,537 with a corresponding reduction primarily to our regulatory assets.
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 is evaluating 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.
Note 16 – Recent Accounting Pronouncements
Pronouncement adopted during the year:
In October 2021, the FASB issued accounting guidance on accounting for acquired revenue contracts with customers in a business combination. The guidance specifies for all acquired revenue contracts, regardless of their timing of payment, the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination, as well as how to measure those contract assets and contract liabilities. The updated accounting guidance is effective for fiscal years beginning after December 15, 2022 with early adoption permitted. The Company adopted this guidance effective January 1, 2023, and will apply it prospectively to business combinations occurring on or after that date.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, changes in capital requirements and funding, our ability to close acquisitions, changes to the capital markets, the COVID-19 pandemic, 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, 2022, and the Form 10-Q for the quarter ended March 31, 2023 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such reports. As a result, readers are cautioned not to place undue reliance on any forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
Essential Utilities, Inc. (“we”, “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or natural gas services to an estimated 5.5 million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West 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. Additionally, commencing on March 16, 2020, with the completion of the Peoples Gas Acquisition, the Company began to provide natural gas distribution services to customers in western Pennsylvania, Kentucky, and West Virginia. Approximately 93% 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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
For many years, starting in the early 1990s, our business strategy was primarily directed toward the regulated water and wastewater utility industry, where we have more than quadrupled the number of regulated customers we serve, and have extended our regulated operations from southeastern Pennsylvania to include our current regulated utility operations throughout Pennsylvania and in seven additional states. On March 16, 2020, we completed the Peoples Gas Acquisition, a natural gas distribution utility, expanding the Company’s regulated utility business to include natural gas. 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.
During the fourth quarter of 2022, the Company signed an agreement to sell its regulated natural gas utility assets in West Virginia, which represented approximately two percent of the Company’s regulated natural gas customers. The sale closed on October 1, 2023 for an estimated purchase price of $39,965, subject to working capital and other adjustments. In October 2023, the Company entered into an agreement to sell its interest in three non-utility local microgrid and distributed energy projects. The sale is expected to be completed in late 2023 or early 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 intends to use 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 consolidated financial statements and related notes.
Recent Developments
Macroeconomic Factors
Macroeconomic factors and uncertainties continue to affect the overall business climate as well as our business. Inflation, higher interest rates, higher insurance costs due to market conditions, and supply chain pressures resulted in an increase in our operating and capital spending requirements in 2022 and 2023 to date, which we expect to continue through the remainder of 2023 and into 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
Provision of water and wastewater services is subject to regulation under the federal Safe Drinking Water Act, the Clean Water Act, and related state laws, and under federal and state regulations issued under these laws. These laws and regulations establish criteria and standards for drinking water and for wastewater discharges.
On March 14, 2023, the U.S. Environmental Protection Agency (“EPA”) announced the proposed National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”). The Company submitted comments on the NPDWR, which would establish legally enforceable levels for PFAS in drinking water. It is expected that the EPA will finalize the regulation by the end of 2023 or early 2024. The Company will be provided a three-year window to comply with the NPDWR, and the Safe Drinking Water Act allows for an additional potential for a two-year extension at the state level (the “Compliance Period”).
We expect that the regulation, once finalized, will result in changes to or addition of certain treatment processes that will require increased capital expenditures and operating expenses. The Company performed its initial analysis of the NPDWR and estimates an investment of approximately $450,000 of capital expenditures to install additional treatment facilities over the Compliance Period in order to comply with the proposed NPDWR. Additionally, the Company estimates annual operating expenses of approximately five percent of the installed capital expenditures, in today’s dollars, related to testing, treatment, and disposal. These are preliminary estimates and actual capital expenditures and expenses may differ based upon a variety of factors, including supply chain issues and a site-by-site analysis. 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. 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. The Company is also monitoring ongoing litigation and settlement activity with manufacturers of PFAS in these proceedings, including deadlines set in the multi-district litigation on December 4, 2023 and December 11, 2023 for water utilities, including the Company, to opt out of proposed class action settlements with certain of such manufacturers. For more information, see Part II, Item 1—Legal Proceedings.
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 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 $804,569 for the first nine months of 2023, compared to $519,159 for the first nine months of 2022. The net change in working capital and other assets and liabilities resulted in an increase in cash from operations of $221,419 for the first nine months of 2023 compared to a decrease of $64,120 for the first nine months of 2022. The change in working capital in 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, as a result of lower gas prices in the current period as compared with the prior period for our Regulated Natural Gas segment.
During the first nine months of 2023, we incurred $874,491 of capital expenditures, expended $45,303 for the acquisition of a wastewater utility system, issued $681,203 of long-term debt, repaid short-term debt, and made sinking fund contributions and other long-term debt repayments in aggregate of $667,302. 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, were used for capital expenditures, repayment of existing indebtedness, general corporate purposes, and acquisitions. Cash flows used in financing activities were higher during the first nine months of 2023 principally as a result of a greater amount for the paydown of loans payable associated with the financing of inventory.
In January 2023 and October 2022, Aqua Pennsylvania issued $75,000 and $125,000 of first mortgage bonds, due in 2043 and 2052, and with interest rates of 5.60% and 4.50%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
On October 14, 2022, the Company entered into at-the market sales agreements (“ATM”) with third-party sales agents, under which the Company may offer and sell shares of its common stock, from time to time, at its option, having an aggregate gross offering price of up to $500,000 pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-255235). As of December 31, 2022, the Company had issued 1,321,994 shares of common stock for net proceeds of $63,040 under the ATM. During the three and nine months ended September 30, 2023, the Company sold 8,539,711 and 8,938,839 shares of common stock, in exchange for net proceeds of $303,689 and $322,983, respectively, under the ATM. As of September 30, 2023, approximately $110,000 remained available for sale under the ATM. The Company used the net proceeds from the sales of shares through the ATM for working capital, capital expenditures, water and wastewater utility acquisitions, and repaying outstanding indebtedness.
As of September 30, 2023, our credit ratings remained at investment grade levels. On July 12, 2023, S&P affirmed an A issuer credit rating for the Company, Aqua Pennsylvania, and Peoples Natural Gas Companies, and revised its outlook from stable to negative for the companies, citing weakening financial measures as a result of inflationary pressures and our significant capital spending. 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 project costs and increases in operating costs efficiently and timely through various rate-making mechanisms.
Three Months Ended September 30,
Nine Months Ended September 30,
Operating Statistics
Selected operating results as a percentage of operating revenues:
35.7%
34.8%
26.6%
27.1%
4.0%
12.0%
20.0%
22.4%
20.9%
19.0%
16.2%
15.2%
5.9%
5.2%
4.3%
Interest expense, net of interest income
16.4%
13.6%
13.2%
10.5%
19.5%
15.8%
23.0%
22.1%
Effective tax rate
-4.9%
6.5%
-10.9%
-1.3%
decrease in customer assistance surcharge costs of $2,044 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues;
decrease in insurance expense of $2,824, which is the result of a lower reserve for claims expense, partially offset by the increase in insurance premiums in 2023;
decrease in employee related costs of $6,267, primarily due to the one-time incentive compensation provided to employees during the third quarter of 2022 and increased capitalization in 2023 as a result of greater capital spend; offset by
an increase in production costs for water and wastewater operations of $3,212, primarily due to higher chemical prices and increased purchased water costs;
increase in legal expenses of $1,490;
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $1,704; and,
expenses of $135, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2023.
Depreciation and amortization expense increased by $3,305 or 4.0% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.
The following tables present selected operating results and statistics for our Regulated Water segment for the periods ended September 30, 2023 and 2022:
Segment net income
31.8%
31.5%
33.8%
17.6%
17.1%
18.5%
18.6%
5.5%
5.6%
5.4%
6.0%
9.9%
9.2%
10.2%
32.2%
32.7%
30.7%
29.1%
13.9%
16.3%
14.6%
14.7%
decrease in volume consumption of $5,671 as a result of wetter weather conditions in the third quarter of 2023.
increase in production costs for water and wastewater operations of $3,212, primarily due to higher chemical prices and increased purchased water costs;
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $1,704;
increase in insurance expense of $1,018 due to higher insurance premiums in 2023;
increase in bad debt expense of $1,307; offset by
decrease in employee related costs of $3,429, primarily due to lower post-retirement benefit costs, higher capitalization in 2023 due to greater capital spend, and one-time incentive compensation in 2022; and,
Our effective income tax rate for our Regulated Water Segment was an expense of 14.6% in the first nine months of 2023, compared to an expense of 14.7% in the first nine months of 2022.
The following tables present selected operating results and statistics for our Regulated Natural Gas segment, for the periods ended September 30, 2023 and 2022:
Segment net income (loss)
52.8%
43.6%
22.0%
21.3%
34.6%
43.8%
44.0%
32.8%
25.5%
13.8%
12.2%
6.9%
2.6%
2.3%
20.5%
10.1%
8.2%
-10.3%
-14.4%
18.9%
18.3%
63.4%
42.6%
-137.3%
-49.6%
impact of lower gas cost of $26,716 during the quarter as compared to the prior period;
decrease in customer assistance surcharge of $2,044, which has an equivalent offsetting amount in operations and maintenance expense; and offset by,
an increase of $4,413 due to higher rates and other surcharges.
decrease in customer assistance surcharge costs of $2,044, which has an equivalent offsetting amount in revenues;
net decrease of $1,632 in labor and management fees, due to higher capitalization as a result of greater capital spend during 2023 and one-time incentive compensation in 2022; offset by,
increase in legal expenses of $1,143; and
increase in materials and supplies expenses of $575.
an increase of $7,912 due to higher rates and other surcharges, largely resulting from the weather normalization charge in Kentucky and favorable merchant function charge rider in Pennsylvania during the first quarter of the year.
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 nine months ended September 30, 2023, we experienced actual HDDs of 2,963 days, which was warmer by 17.8% than the actual HDDs of 3,606 days in the first nine months of 2022 for Pittsburgh, Pennsylvania, which we use as a proxy for our western Pennsylvania service territory. As a result, the operating revenue impact of the lower demand for gas volume was $35,076 and is largely attributed to the warmer weather experienced in 2023.
Purchased gas decreased by $25,893 or 8.0%. The decrease is the result of lower gas usage during the first nine months of 2023, offset by the impact of the higher average cost of gas withdrawn from storage during the first quarter of 2023.
Impact of Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note 16, Recent Accounting Pronouncements, to the consolidated financial statements in this report.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed March 1, 2023, 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 September 30, 2023 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
We are party to various legal proceedings in the ordinary course of business. Although the results of these legal proceedings cannot be predicted with certainty, besides the matter described below, there are no other pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our properties is the subject that we believe are material or are expected to have a material adverse effect on our financial position, results of operations or cash flows.
PFAS Litigation
Several of the Company’s subsidiaries are parties to several lawsuits against manufacturers of certain 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 and 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. In August 2023, a potential class action settlement involving defendants The Chemours Company, Corteva, Inc., and DuPont de Nemours, Inc. to resolve claims brought in the MDL against them by public water systems, including the Company, and a similar class action settlement with defendant 3M Company received preliminary approval from the MDL court. The Company is monitoring and evaluating the ongoing litigation and settlement activity with the PFAS manufacturers for potential impacts to the various claims that the Company has asserted, including deadlines set in the MDL of December 4, 2023 and December 11, 2023 for water utilities, including the Company, to opt out of the proposed settlements.
Item 1A – Risk Factors
Please review the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, under “Part 1, Item 1A – Risk Factors” and in our Form 10-Q for the quarter ended March 31, 2023.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the Company’s purchases of its common stock for the quarter ended September 30, 2023:
Issuer Purchases of Equity Securities
Maximum
Number of
Purchased
that May
as Part of
Yet be
Publicly
Announced
Under the
of Shares
Price Paid
Plans or
Plan or
Period
Purchased (1)
per Share
Programs
July 1-31, 2023
24
39.67
August 1-31, 2023
37.07
September 1-30, 2023
38.37
(1)These amounts consist of 48 shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of stock-based compensation. This feature of our equity compensation plan is available to all employees who receive stock-based compensation under the plan. We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day prior to the award vesting.
Item 5 - Other Information
During the quarter ended September 30, 2023, 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.”
Item 6 – Exhibits
Exhibit No.
Description
3.2
Amended and Restated Bylaws of Essential Utilities, Inc., effective October 25, 2023 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the SEC on October 25, 2023)
10.1*
Bond Purchase Agreement, dated August 24, 2023, by and among Aqua Pennsylvania, Inc. and the Purchasers
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 September 30, 2023, formatted in Inline XBRL (included in Exhibit 101)
*Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be executed on its behalf by the undersigned thereunto duly authorized.
November 7, 2023
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