Essential Utilities(WTRG) - 2024 Q1 - Quarterly Report

Part I – Financial Information This section presents the company's unaudited financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section provides unaudited consolidated financial statements, including balance sheets, income statements, capitalization, equity, and cash flows, with detailed explanatory notes Consolidated Balance Sheets The consolidated balance sheets show the company's financial position at March 31, 2024, compared to December 31, 2023, highlighting changes in assets, liabilities, and equity Consolidated Balance Sheet Summary | Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total Assets | $17,054,344 | $16,841,459 | $212,885 | | Net property, plant and equipment | $12,255,585 | $12,097,072 | $158,513 | | Cash and cash equivalents | $35,200 | $4,612 | $30,588 | | Total current assets | $419,534 | $491,979 | $(72,445) | | Total Liabilities and Equity | $17,054,344 | $16,841,459 | $212,885 | | Total stockholders' equity | $6,081,127 | $5,896,183 | $184,944 | | Long-term debt (net) | $6,856,129 | $6,826,085 | $30,044 | | Total current liabilities | $678,606 | $797,927 | $(119,321) | Consolidated Statements of Operations and Comprehensive Income The consolidated statements of operations show a significant increase in net income for the three months ended March 31, 2024, compared to the same period in 2023, primarily driven by a substantial gain on the sale of other assets and lower purchased gas costs Consolidated Statements of Operations Summary | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Change (in thousands) | % Change | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------- | | Operating revenues | $612,069 | $726,450 | $(114,381) | -15.7% | | Total operating expenses | $381,403 | $500,981 | $(119,578) | -23.9% | | Operating income | $230,666 | $225,469 | $5,197 | 2.3% | | Gain on sale of other assets | $91,625 | $249 | $91,376 | 36697.2% | | Income before income taxes | $255,130 | $159,797 | $95,333 | 59.7% | | Net income | $265,772 | $191,434 | $74,338 | 38.8% | | Basic net income per common share | $0.97 | $0.72 | $0.25 | 34.7% | | Diluted net income per common share | $0.97 | $0.72 | $0.25 | 34.7% | Consolidated Statements of Capitalization The consolidated statements of capitalization detail the company's equity and long-term debt structure, showing an increase in total capitalization driven by higher stockholders' equity and long-term debt Consolidated Capitalization Summary | Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | Change (in thousands) | | :----------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total stockholders' equity | $6,081,127 | $5,896,183 | $184,944 | | Total long-term debt | $6,970,791 | $6,938,008 | $32,783 | | Total capitalization | $12,937,256 | $12,722,268 | $214,988 | Consolidated Statements of Equity The consolidated statements of equity show the changes in stockholders' equity for the three months ended March 31, 2024 and 2023, reflecting net income, dividend declarations, stock issuances, repurchases, and stock-based compensation Consolidated Equity Changes | Equity Component | Balance at Dec 31, 2023 (in thousands) | Net Income (in thousands) | Dividends Declared (in thousands) | Stock Issuances (in thousands) | Repurchase of Stock (in thousands) | Stock-based Compensation (in thousands) | Balance at Mar 31, 2024 (in thousands) | | :----------------------- | :------------------------------------- | :------------------------ | :-------------------------------- | :----------------------------- | :--------------------------------- | :-------------------------------------- | :------------------------------------- | | Common Stock | $138,297 | - | - | $141 | - | - | $138,438 | | Capital in Excess of Par | $4,137,696 | - | - | $4,006 | - | $1,049 | $4,142,610 | | Retained Earnings | $1,706,675 | $265,772 | $(83,998) | - | - | $73 | $1,888,521 | | Treasury Stock | $(86,485) | - | - | - | $(2,231) | - | $(88,442) | | Total Equity | $5,896,183 | $265,772 | $(83,998) | $4,147 | $(2,231) | $1,122 | $6,081,127 | Consolidated Statements of Cash Flow The consolidated statements of cash flow show a net increase in cash and cash equivalents for the three months ended March 31, 2024, primarily due to financing activities, despite a decrease in cash from operating activities compared to the prior year Consolidated Cash Flow Summary | Cash Flow Activity | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Net cash flows from operating activities | $240,713 | $401,628 | $(160,915) | | Net cash flows used in investing activities | $(86,483) | $(243,208) | $156,725 | | Net cash flows used in financing activities | $(123,642) | $(149,669) | $26,027 | | Net change in cash and cash equivalents | $30,588 | $8,751 | $21,837 | | Cash and cash equivalents at end of period | $35,200 | $20,149 | $15,051 | Notes to Consolidated Financial Statements The notes provide detailed explanations and disclosures for the consolidated financial statements, covering accounting policies, revenue breakdown, acquisitions, dispositions, goodwill, capitalization, financial instruments, earnings per share, stock-based compensation, pension plans, rate adjustments, tax information, segment reporting, legal contingencies, and recent accounting pronouncements Note 1 – Basis of Presentation The financial statements are unaudited and prepared in accordance with GAAP for interim reporting, with management's estimates subject to economic uncertainties - Interim financial statements are unaudited and prepared under GAAP for interim reporting, requiring review in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2023[23] - Management's estimates and judgments are subject to change due to the uncertain state of the economy and macroeconomic conditions, including inflation and rising interest rates[24] - No changes have been made to the summary of significant accounting policies previously identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2023[25] Note 2 – Revenue Recognition Revenue is disaggregated by major source and customer class, showing a decrease in consolidated revenues primarily due to lower natural gas revenues Revenue by Source | Revenue Source | March 31, 2024 (in thousands) | March 31, 2023 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Water Revenues | $228,354 | $215,568 | $12,786 | 5.9% | | Wastewater Revenues | $48,730 | $45,573 | $3,157 | 6.9% | | Natural Gas Revenues | $324,331 | $441,295 | $(116,964) | -26.5% | | Other Revenues | $10,654 | $24,014 | $(13,360) | -55.6% | | Consolidated Total | $612,069 | $726,450 | $(114,381) | -15.7% | Note 3 – Acquisitions The company completed several water and wastewater utility acquisitions in 2023, with other significant acquisitions pending regulatory approval and litigation - In July 2023, the Company completed water utility acquisitions in Pennsylvania, Ohio, and Texas, serving approximately 4,000 customers, and a wastewater utility acquisition in Illinois serving 1,500 customers[27] - In June and March 2023, the Company acquired wastewater utility assets in Ohio and Pennsylvania, serving approximately 4,300 and 300 customers, respectively[28] - Pending acquisitions include North Versailles wastewater assets (4,400 customers), Greenville water system (3,000 customers), Westfield HOA wastewater assets (200 customers), Greenville Sanitation Authority wastewater assets (2,300 customers), and City of Beaver Falls wastewater assets (7,600 customers), all subject to regulatory approval and expected to close in 2024[30][31][32][33][34] - The acquisition of East Whiteland Wastewater Assets (4,018 customers) was reversed by the Pennsylvania Commonwealth Court in July 2023, and the Company has appealed to the Pennsylvania Supreme Court[35] - The acquisition of DELCORA's wastewater utility system (198,000 retail customers equivalent) for $276,500 (in thousands), initiated in 2019, is subject to regulatory approval and ongoing litigation[36][37] Note 4 – Dispositions The company completed the sale of its West Virginia natural gas utility assets and non-utility microgrid projects, recognizing a significant gain from the latter - On October 1, 2023, the Company sold its regulated natural gas utility assets in West Virginia (Peoples Gas West Virginia) for a final purchase price of $41,178 (in thousands), resulting in an inconsequential loss[38] - In January 2024, the Company completed the sale of its interest in three non-utility local microgrid and distributed energy projects for $165,000 (in thousands), recognizing a gain of $91,236 (in thousands) in the first quarter of 2024[39] Note 5 – Goodwill Goodwill remained largely stable, with a minor reclassification to utility plant acquisition adjustment in the Regulated Water segment Goodwill by Segment | Segment | Balance at December 31, 2023 (in thousands) | Reclassification (in thousands) | Balance at March 31, 2024 (in thousands) | | :---------------- | :---------------------------------------- | :------------------------------ | :--------------------------------------- | | Regulated Water | $58,450 | $(5) | $58,445 | | Regulated Natural Gas | $2,277,447 | - | $2,277,447 | | Other | $4,841 | - | $4,841 | | Consolidated | $2,340,738 | $(5) | $2,340,733 | Note 6 – Capitalization The company filed a new universal shelf registration and issued $500 million in 2024 Senior Notes to repay debt and for general corporate purposes - In March 2024, the Company filed a new universal shelf registration statement with the SEC, effective for three years, allowing for potential future offerings of common stock, preferred stock, debt securities, and other securities[41][42] - During the three months ended March 31, 2024, there were no common stock sales under the At-the-Market (ATM) sales agreements; approximately $110,000 (in thousands) remained available for sale as of March 31, 2024[43] - On January 8, 2024, the Company issued $500,000 (in thousands) of 5.375% long-term debt (2024 Senior Notes) due in 2034, using net proceeds to repay borrowings under its revolving credit facility and for general corporate purposes[44] Note 7 – Financial Instruments The fair values of loans payable, cash, and equity securities approximate carrying amounts, while long-term debt's fair value is lower than its carrying amount - The fair value of loans payable ($87,500 (in thousands) at March 31, 2024) and cash and cash equivalents ($35,200 (in thousands) at March 31, 2024) approximates their carrying amounts, determined using Level 1 methods[47] - Equity securities held in non-qualified pension plans recognized a net gain of $421 (in thousands) in Q1 2024, up from $131 (in thousands) in Q1 2023[48] Long-Term Debt Fair Value | Debt Type | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :---------------- | :----------------------------- | :------------------------------- | | Carrying amount | $6,970,791 | $6,938,009 | | Estimated fair value | $5,883,354 | $5,980,722 | Note 8 – Net Income per Common Share Basic and diluted net income per common share increased significantly for Q1 2024, reflecting higher net income and an increase in average common shares outstanding Net Income Per Common Share | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Basic net income per common share | $0.97 | $0.72 | | Diluted net income per common share | $0.97 | $0.72 | | Average common shares outstanding (basic) | 273,377 | 264,192 | | Average common shares outstanding (diluted) | 273,738 | 264,751 | - The number of outstanding employee stock options that were anti-dilutive and excluded from diluted EPS calculation increased from 152,138 in Q1 2023 to 268,273 in Q1 2024[52] Note 9 – Stock-based Compensation Stock-based compensation expense for PSUs significantly decreased in Q1 2024, while RSU and stock option expenses increased, with no restricted stock awards granted - The Equity Compensation Plan authorizes 6,250,000 shares for issuance, with 1,227,138 shares still available as of March 31, 2024[54] Stock-based Compensation Expense | Award Type | Stock-based Compensation Expense (Q1 2024, in thousands) | Stock-based Compensation Expense (Q1 2023, in thousands) | | :----------------------- | :------------------------------------------------------- | :------------------------------------------------------- | | Performance Share Units | $106 | $2,443 | | Restricted Stock Units | $846 | $681 | | Stock Options | $131 | $77 | | Restricted Stock | $12 | $12 | | Stock Awards | $0 | $210 | - The weighted-average fair value at grant date for PSUs decreased from $45.06 in Q1 2023 to $38.10 in Q1 2024, and for RSUs decreased from $45.61 in Q1 2023 to $36.60 in Q1 2024[57][58] Note 10 – Pension Plans and Other Postretirement Benefits Net periodic benefit cost for both pension and other postretirement plans increased in Q1 2024, with no cash contributions made to the Pension Plan Net Periodic Benefit Cost | Benefit Type | Net Periodic Benefit Cost (Q1 2024, in thousands) | Net Periodic Benefit Cost (Q1 2023, in thousands) | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Pension Benefits | $401 | $17 | | Other Postretirement Benefits | $103 | $34 | - The net periodic benefit cost is based on estimated values and assumptions regarding discount rates, expected return on plan assets, compensation increases, mortality, turnover, and medical costs[67] - No cash contributions were made to the Pension Plan during the first three months of 2024[68] Note 11 – Rate Activity The company has several pending rate increase applications and has implemented rate increases across various states, designed to boost annual operating revenues - Aqua New Jersey filed an application in January 2024 to increase water rates by $8,328 (in thousands) (17.3%) annually, with a final order anticipated by August 2024[69] - Aqua Illinois filed an application in January 2024 to increase water and wastewater rates by $19,196 (in thousands) (18.9%) annually, with a final order anticipated by December 2024[70] - Peoples Natural Gas filed an application in December 2023 to increase natural gas rates by $156,024 (in thousands) (18.7%) annually, with a final order anticipated by September 2024[70] - The company's Ohio water and wastewater divisions received an order in December 2023 to increase operating revenues by $4,850 (in thousands) annually, with new rates effective immediately[71] - Aqua Texas received final approval in September 2023 for infrastructure rehabilitation surcharges to increase revenues by $8,388 (in thousands) annually, implemented interimly from April 1, 2023[72] - Aqua Virginia filed an application in July 2023 to increase revenues by $6,911 (in thousands) (29.5%) annually, implementing interim rates in February 2024[73] - Aqua North Carolina received an order in June 2023 to increase rates by $14,001 (in thousands) in the first year, with additional increases in subsequent years[74] - In Q1 2024, Ohio water utility divisions implemented base rate increases of $1,627 (in thousands) annually, and infrastructure rehabilitation surcharges increased revenues by $7,445 (in thousands) in Pennsylvania and Illinois water/wastewater, and $1,220 (in thousands) in Kentucky natural gas[75] Note 12 – Taxes Other than Income Taxes Total taxes other than income taxes increased in Q1 2024, primarily due to higher property and payroll taxes Taxes Other Than Income Taxes | Tax Type | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Property | $8,877 | $8,104 | | Gross receipts, excise and franchise | $4,155 | $4,030 | | Payroll | $7,658 | $6,632 | | Regulatory assessments | $1,900 | $1,684 | | Pumping fees | $1,496 | $1,466 | | Other | $938 | $962 | | Total taxes other than income | $25,024 | $22,878 | Note 13 – Segment Information The Regulated Water segment saw increased revenues but decreased net income, while Regulated Natural Gas revenues decreased but net income significantly increased - The Company has two reportable segments: Regulated Water (eight operating segments aggregated) and Regulated Natural Gas (one operating segment)[77] Segment Performance (Q1 2024) | Metric (Q1 2024, in thousands) | Regulated Water | Regulated Natural Gas | Other | Consolidated | | :----------------------------- | :-------------- | :-------------------- | :---- | :----------- | | Operating revenues | $279,894 | $324,331 | $7,844 | $612,069 | | Operations and maintenance expense | $90,683 | $45,917 | $300 | $136,900 | | Purchased gas | - | $125,542 | $4,133 | $129,675 | | Net income (loss) | $63,905 | $209,940 | $(8,073) | $265,772 | | Capital expenditures | $152,231 | $100,767 | - | $252,998 | Segment Performance (Q1 2023) | Metric (Q1 2023, in thousands) | Regulated Water | Regulated Natural Gas | Other | Consolidated | | :----------------------------- | :-------------- | :-------------------- | :---- | :----------- | | Operating revenues | $267,300 | $441,295 | $17,855 | $726,450 | | Operations and maintenance expense | $82,802 | $57,150 | $(1,958) | $137,994 | | Purchased gas | - | $241,856 | $14,459 | $256,315 | | Net income (loss) | $77,402 | $123,546 | $(9,514) | $191,434 | | Capital expenditures | $159,394 | $81,669 | $2,667 | $243,730 | Note 14 – Commitments and Contingencies The company accrued $23.8 million for loss contingencies and is involved in ongoing litigation, including a class action and PFAS multi-district litigation - As of March 31, 2024, the Company has accrued $23,819 (in thousands) for loss contingencies, with an estimated $1,283 (in thousands) probable of recovery through insurance[82][83] - A class action lawsuit is ongoing in Illinois related to a 'do not consume' advisory issued in 2019, with the Company vigorously defending against the claim and assessing potential loss[84] - The Company is a party to multi-district litigation (MDL) against PFAS manufacturers; final approval for class action settlements with DuPont and 3M Company was issued in February and April 2024, respectively[85] Note 15 – Income Taxes The effective tax rate was a benefit of 4.2% for Q1 2024, a decrease from 19.8% in Q1 2023, primarily due to a gain on asset sale - The Company's effective tax rate was a benefit of 4.2% for the three months ended March 31, 2024, compared to a benefit of 19.8% for the same period in 2023[88] - The decrease in income tax benefit is primarily attributed to the gain recognized from the sale of non-utility local microgrid and distributed energy projects in Q1 2024, partially offset by an increased tax benefit from qualifying infrastructure investment[88] - The Company intends to adopt the safe harbor method provided by Revenue Procedure 2023-15 for capitalizing natural gas transmission and distribution property expenses on its 2023 tax return[90] Note 16 – Recent Accounting Pronouncements and Disclosure Rules The company is evaluating new FASB ASUs on income tax disclosures and segment reporting, and the SEC's climate disclosure rule has been paused - The Company is evaluating ASU 2023-09, 'Income Taxes (Topic 740): Improvements to Income Tax Disclosures,' effective for annual periods beginning after December 15, 2024[91] - The Company is assessing the timing and impact of adopting ASU 2023-07, 'Segment Reporting – Improving Reportable Segment Disclosures (Topic 280),' effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024[92][93] - The SEC's final climate disclosure rule, requiring Scope 1 and Scope 2 greenhouse gas emissions disclosure, has been paused due to legal challenges, and the Company is evaluating its impact[94] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and results, covering forward-looking statements, business overview, recent developments, liquidity, capital resources, and detailed financial performance Forward-looking Statements The report contains forward-looking statements regarding acquisitions, legal proceedings, accounting pronouncements, and business plans, subject to various risks and uncertainties - Forward-looking statements address expected timing of acquisitions, projected impact of legal proceedings, effects of accounting pronouncements, and management's plans and beliefs[98] - These statements are subject to risks and uncertainties, including regulation, weather, geopolitical forces, inflation, cyber-attacks, changes in capital requirements, and the ability to assimilate acquired operations[98] - The Company undertakes no obligation to update or revise forward-looking statements[98] General Information Essential Utilities, Inc. is a holding company providing regulated water, wastewater, and natural gas services across nine states, focusing on utility acquisitions and divesting non-core assets - Essential Utilities, Inc. provides regulated water, wastewater, or natural gas services to an estimated 5.5 million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, and Kentucky[100] - The company's strategy focuses on acquiring businesses in the U.S. regulated sector, particularly water and wastewater utilities, and pursuing growth ventures in select market-based activities[100] - The Company sold its regulated natural gas utility assets in West Virginia in October 2023 and its interest in three non-utility local microgrid and distributed energy projects in January 2024, aligning with its strategy to focus on core business and prioritize growth in states with scale[102] Recent Developments The company experienced moderate macroeconomic pressures in Q1 2024 and is addressing new EPA PFAS regulations, estimating significant capital expenditures for compliance - The industry continues to be impacted by inflation and higher interest rates, leading to increased operating and capital spending requirements, with moderate macroeconomic pressures expected to continue through 2024[105] - The EPA's final NPDWR for PFAS requires an estimated investment of at least $450,000 (in thousands) in capital expenditures for additional treatment facilities over a five-year compliance period, plus annual operating expenses of approximately five percent of installed capital[106][107] - The EPA designated PFOA and PFOS as hazardous substances under CERCLA, and the Company is evaluating potential liabilities while continuing to advocate for polluter accountability and participate in litigation against PFAS manufacturers[108][109] Liquidity and Capital Resources The company's capital-intensive business relies on internal cash flows and external financing, with operating cash flow decreasing in Q1 2024 due to lower gas prices - Cash flow from operations was $240,713 (in thousands) for Q1 2024, a decrease from $401,628 (in thousands) in Q1 2023, primarily due to a decrease in working capital driven by lower gas prices impacting accounts receivable, unbilled revenues, deferred purchased gas costs, and gas inventory[113] - In Q1 2024, the Company incurred $252,998 (in thousands) in capital expenditures, issued $618,008 (in thousands) of long-term debt, and received $166,563 (in thousands) from asset sales, using these funds for capital projects, debt repayment, and general corporate purposes[114] - As of March 31, 2024, the Company had $725,162 (in thousands) available under its $1,000,000 (in thousands) unsecured revolving credit facility and $348,000 (in thousands) available under short-term lines of credit totaling $435,500 (in thousands)[119] - S&P lowered the Company's credit rating from A to A- on March 19, 2024, citing weakening financial measures due to inflationary pressures and significant capital spending, but revised its outlook from negative to stable[121] Results of Operations Consolidated operating revenues decreased by 15.7% in Q1 2024, but net income increased by 38.8% due to a significant gain on asset sales and reduced purchased gas costs Consolidated Results of Operations Consolidated operating revenues decreased by 15.7% in Q1 2024, mainly due to lower natural gas revenues, but net income increased by 38.8% driven by asset sales and reduced gas costs Consolidated Financial Performance | Metric | Q1 2024 (in thousands) | Q1 2023 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :--------------------- | :--------------------- | :-------------------- | :------- | | Operating revenues | $612,069 | $726,450 | $(114,381) | -15.7% | | Operations and maintenance expense | $136,900 | $137,994 | $(1,094) | -0.8% | | Purchased gas | $129,675 | $256,315 | $(126,640) | -49.4% | | Net income | $265,772 | $191,434 | $74,338 | 38.8% | - Consolidated operating revenues decreased by $114,381 (in thousands) (15.7%) due to decreases in Regulated Natural Gas ($116,964 (in thousands)) and Other business segment ($10,011 (in thousands)), partially offset by an increase in Regulated Water ($12,594 (in thousands))[126] - Purchased gas decreased by $126,640 (in thousands) (49.4%) due to lower average cost of gas ($107,916 (in thousands)) and lower gas usage ($18,724 (in thousands)) from warmer weather and the sale of Peoples West Virginia[128] - A gain on sale of assets of $91,625 (in thousands) was recognized in Q1 2024, primarily from the sale of non-utility local microgrid and distributed energy projects[132] Segment Results of Operations Regulated Water revenues increased but net income decreased, while Regulated Natural Gas revenues decreased but net income surged due to lower purchased gas costs Regulated Water Segment Operating revenues for the Regulated Water segment increased by 4.7% due to rate increases, infrastructure surcharges, and customer growth, but net income decreased by 17.4% due to higher operations and maintenance expenses and increased interest expense Regulated Water Segment Performance | Metric | Q1 2024 (in thousands) | Q1 2023 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :--------------------- | :--------------------- | :-------------------- | :------- | | Operating revenues | $279,894 | $267,300 | $12,594 | 4.7% | | Operations and maintenance expense | $90,683 | $82,802 | $7,881 | 9.5% | | Segment net income | $63,905 | $77,402 | $(13,497) | -17.4% | - Revenue increase of $12,594 (in thousands) was driven by $11,378 (in thousands) from water and wastewater rates (including infrastructure surcharges) and $2,990 (in thousands) from a larger customer base (acquisitions and organic growth), partially offset by a $2,930 (in thousands) decrease in non-utility revenue[136][137][138] - Operations and maintenance expense increased by $7,881 (in thousands) (9.5%) due to higher production costs ($2,397 (in thousands)), additional operating costs from acquired systems and customer base ($1,127 (in thousands)), increased bad debt expense ($4,458 (in thousands)), and higher employee-related costs ($1,814 (in thousands))[138][143] Regulated Natural Gas Segment Operating revenues for the Regulated Natural Gas segment decreased by 26.5% due to significantly lower purchased gas costs and reduced gas usage from warmer weather, but net income increased by 69.9% as the decrease in purchased gas costs was larger than the revenue decrease, coupled with a gain on asset sales Regulated Natural Gas Segment Performance | Metric | Q1 2024 (in thousands) | Q1 2023 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :--------------------- | :--------------------- | :-------------------- | :------- | | Operating revenues | $324,331 | $441,295 | $(116,964) | -26.5% | | Operations and maintenance expense | $45,917 | $57,150 | $(11,233) | -19.7% | | Purchased gas | $125,542 | $241,856 | $(116,314) | -48.1% | | Segment net income | $209,940 | $123,546 | $86,394 | 69.9% | - Operating revenues decreased by $116,964 (in thousands) (26.5%) primarily due to a $116,314 (in thousands) decrease in purchased gas costs and lower customer assistance surcharges, partially offset by higher rates[144][145] - Purchased gas costs decreased by $116,314 (in thousands) (48.1%) due to a $107,122 (in thousands) decrease in the average cost of gas, $5,994 (in thousands) from lower gas usage due to warmer weather, and $3,198 (in thousands) from the sale of Peoples West Virginia[146] - A gain on sale of assets of $91,581 (in thousands) was recognized in Q1 2024, primarily from the sale of non-utility local microgrid and distributed energy projects[149] Impact of Recent Accounting Pronouncements This section refers to Note 16 for details on the impact of recent accounting pronouncements - Refer to Note 16, Recent Accounting Pronouncements, for details on the impact of new accounting pronouncements[152] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, including changes in interest rates and equity prices, with further discussion in its Annual Report on Form 10-K - The Company is subject to market risks from changes in interest rates and equity prices[153] - Additional information on market risks can be found in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2023[153] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting - Management, with CEO and CFO participation, evaluated and concluded that disclosure controls and procedures were effective as of March 31, 2024[153] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2024[154] Part II – Other Information This section provides additional information including legal proceedings, risk factors, other disclosures, and a list of exhibits Item 1. Legal Proceedings This section refers to Note 14 of the consolidated financial statements for a discussion of the company's legal proceedings - For a discussion of the Company's legal proceedings, refer to Part I - Item I - Note 14 to the Company's consolidated financial statements[154] Item 1A. Risk Factors This section directs readers to the Annual Report on Form 10-K for a review of the company's risk factors - Readers should review the risks disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, under 'Part 1, Item 1A – Risk Factors'[155] Item 5. Other Information The Board approved amendments to stock award agreements for officers, redefining 'Retirement' to accelerate vesting under specific age and service conditions - On May 2, 2024, the Board of Directors approved amendments to stock award agreements (RSUs, PSUs, stock options) for officers, redefining 'Retirement' to include specific age and service criteria (age 55 with 5 years service or age + service = 60) and requiring 6 months' advance notice for full vesting acceleration[156][157] - No directors or executive officers adopted, modified, or terminated any Rule 10b5-1(c) trading plans or non-Rule 10b5-1 trading arrangements during the quarter ended March 31, 2024[158] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including forms of stock award agreements, certifications from the CEO and CFO, and Inline XBRL documents - Exhibits include forms of 2025 Restricted Stock Unit, Stock Option, and Performance Stock Unit Grant Terms and Conditions for certain officers and executive officers[160] - Certifications of the Chief Executive Officer and Chief Financial Officer are filed pursuant to Rule 13a-14(a) and furnished pursuant to 18 U.S.C. Section 1350[160] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) and the cover page formatted in Inline XBRL are included[160] Signatures The report is duly executed on behalf of Essential Utilities, Inc. by Christopher H. Franklin and Daniel J. Schuller as of May 8, 2024 - The report was executed on May 8, 2024, by Christopher H. Franklin, Chairman, President and Chief Executive Officer, and Daniel J. Schuller, Executive Vice President and Chief Financial Officer[164]