Essential Utilities(WTRG) - 2021 Q2 - Quarterly Report

Part I – Financial Information This section presents the unaudited consolidated financial statements and management's discussion and analysis of Essential Utilities, Inc. for the interim periods Item 1. Financial Statements This section provides the unaudited consolidated financial statements, including balance sheets, statements of operations, capitalization, equity, and cash flows, along with detailed notes on accounting policies and financial performance for the specified periods Consolidated Balance Sheets This section presents the consolidated balance sheets, highlighting key asset, liability, and equity changes between June 30, 2021, and December 31, 2020 Consolidated Balance Sheet Highlights (June 30, 2021 vs. December 31, 2020) | Metric (in thousands of dollars) | June 30, 2021 | December 31, 2020 | Change | % Change | | :------------------------------- | :------------ | :---------------- | :----- | :------- | | Assets | | | | | | Net property, plant and equipment | 9,707,363 | 9,512,877 | 194,486 | 2.04% | | Total current assets | 304,732 | 380,220 | (75,488) | (19.85%) | | Regulatory assets | 1,400,215 | 1,362,788 | 37,427 | 2.75% | | Goodwill | 2,340,836 | 2,324,547 | 16,289 | 0.70% | | Total assets | 13,933,992 | 13,705,277 | 228,715 | 1.67% | | Liabilities & Equity | | | | | | Total stockholders' equity | 4,836,815 | 4,683,877 | 152,938 | 3.26% | | Long-term debt (net) | 5,648,232 | 5,507,744 | 140,488 | 2.55% | | Total current liabilities | 469,155 | 603,873 | (134,718) | (22.31%) | | Total liabilities and equity | 13,933,992 | 13,705,277 | 228,715 | 1.67% | Consolidated Statements of Operations and Comprehensive Income (Three Months Ended June 30, 2021 and 2020) This section details the consolidated statements of operations and comprehensive income for the three months ended June 30, 2021, and 2020, showing revenue, expenses, and net income trends Three Months Ended June 30 (in thousands, except per share amounts) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Operating revenues | 397,032 | 384,468 | 12,564 | 3.27% | | Total operating expenses | 267,704 | 261,349 | 6,355 | 2.43% | | Operating income | 129,328 | 123,119 | 6,209 | 5.04% | | Income before income taxes | 84,700 | 75,091 | 9,609 | 12.79% | | Provision for income taxes | 3,786 | 462 | 3,324 | 719.48% | | Net income | 80,914 | 74,629 | 6,285 | 8.42% | | Basic net income per common share | 0.32 | 0.29 | 0.03 | 10.34% | | Diluted net income per common share | 0.32 | 0.29 | 0.03 | 10.34% | Consolidated Statements of Operations and Comprehensive Income (Six Months Ended June 30, 2021 and 2020) This section presents the consolidated statements of operations and comprehensive income for the six months ended June 30, 2021, and 2020, reflecting significant financial performance changes Six Months Ended June 30 (in thousands, except per share amounts) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- |\n| Operating revenues | 980,597 | 640,053 | 340,544 | 53.20% | | Total operating expenses | 618,917 | 443,437 | 175,480 | 39.57% | | Operating income | 361,680 | 196,616 | 165,064 | 83.95% | | Income before income taxes | 273,155 | 119,748 | 153,407 | 128.11% | | Provision for income taxes (benefit) | 8,552 | (6,662) | 15,214 | -228.37% | | Net income | 264,603 | 126,410 | 138,193 | 109.32% | | Basic net income per common share | 1.04 | 0.52 | 0.52 | 100.00% | | Diluted net income per common share | 1.04 | 0.50 | 0.54 | 108.00% | Consolidated Statements of Capitalization This section outlines the consolidated capitalization structure, including stockholders' equity and various debt instruments, as of June 30, 2021, and December 31, 2020 Consolidated Capitalization (in thousands of dollars) | Metric | June 30, 2021 | December 31, 2020 | Change | % Change | | :--------------------------------------- | :------------ | :---------------- | :----- | :------- | | Total stockholders' equity | 4,836,815 | 4,683,877 | 152,938 | 3.26% | | Long-term debt of subsidiaries | 3,097,995 | 3,014,280 | 83,715 | 2.78% | | Notes payable to bank (revolving credit) | 60,000 | 385,000 | (325,000) | (84.42%) | | Unsecured notes payable | 2,066,095 | 1,980,963 | 85,132 | 4.30% | | Total capitalization | 10,485,047 | 10,191,621 | 293,426 | 2.88% | Consolidated Statements of Equity (Six Months Ended June 30, 2021) This section details the changes in consolidated stockholders' equity for the six months ended June 30, 2021, including net income, dividends, and stock transactions Changes in Stockholders' Equity (Six Months Ended June 30, 2021, in thousands of dollars) | Item | Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | Total | | :------------------------------------------ | :----------- | :----------------------------- | :---------------- | :------------- | :------ | | Balance at December 31, 2020 | 124,285 | 3,379,057 | 1,261,862 | (81,327) | 4,683,877 | | Net income | - | - | 264,603 | - | 264,603 | | Dividends declared | - | - | (123,104) | - | (123,104) | | Issuance of common stock (DRIP) | 95 | 8,161 | - | - | 8,256 | | Repurchase of stock | - | - | - | (3,279) | (3,279) | | Equity compensation plan | 99 | (99) | - | - | - | | Exercise of stock options | 21 | 1,485 | - | - | 1,506 | | Stock-based compensation | - | 4,947 | (320) | - | 4,627 | | Other | - | (179) | - | 508 | 329 | | Balance at June 30, 2021 | 124,500 | 3,393,372 | 1,403,041 | (84,098) | 4,836,815 | Consolidated Statements of Equity (Six Months Ended June 30, 2020) This section presents the changes in consolidated stockholders' equity for the six months ended June 30, 2020, reflecting net income, dividends, and significant stock issuances Changes in Stockholders' Equity (Six Months Ended June 30, 2020, in thousands of dollars) | Item | Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | Total | | :------------------------------------------ | :----------- | :----------------------------- | :---------------- | :------------- | :------ | | Balance at December 31, 2019 | 111,935 | 2,636,555 | 1,210,072 | (77,702) | 3,880,860 | | Net income | - | - | 126,410 | - | 126,410 | | Dividends declared | - | - | (109,619) | - | (109,619) | | Issuance of common stock (Private Placement) | 11,999 | 718,136 | - | - | 730,135 | | Issuance of common stock (DRIP) | 93 | 7,968 | - | - | 8,061 | | Repurchase of stock | - | - | - | (4,343) | (4,343) | | Equity compensation plan | 114 | (114) | - | - | - | | Exercise of stock options | 30 | 1,037 | - | - | 1,067 | | Stock-based compensation | - | 3,990 | (241) | - | 3,749 | | Other | - | (43) | - | 91 | 48 | | Balance at June 30, 2020 | 124,171 | 3,366,695 | 1,226,622 | (81,954) | 4,635,534 | Consolidated Statements of Cash Flow This section provides the consolidated statements of cash flow for the six months ended June 30, 2021, and 2020, detailing operating, investing, and financing activities Consolidated Statements of Cash Flow (Six Months Ended June 30, in thousands of dollars) | Cash Flow Activity | 2021 | 2020 | Change | % Change | | :----------------------------------- | :----- | :----- | :----- | :------- | | Net cash flows from operating activities | 412,868 | 245,202 | 167,666 | 68.38% | | Net cash flows used in investing activities | (403,781) | (3,759,935) | 3,356,154 | 89.26% | | Net cash flows (used in) from financing activities | (5,510) | 1,653,038 | (1,658,548) | (100.33%) | | Net change in cash and cash equivalents | 3,577 | (1,861,695) | 1,865,272 | 100.19% | | Cash and cash equivalents at end of period | 8,404 | 7,227 | 1,177 | 16.29% | Notes to Consolidated Financial Statements This section provides detailed explanatory notes to the consolidated financial statements, covering accounting policies, significant transactions, and financial instrument disclosures Note 1 – Basis of Presentation The unaudited consolidated financial statements are prepared in accordance with GAAP for interim reporting and SEC rules, and should be read with the 2020 Form 10-K. Management believes all necessary recurring accruals have been made for a fair presentation. The COVID-19 pandemic has not materially impacted estimates, assumptions, or forecasts due to the essential nature of the business, though future effects are uncertain. No changes to significant accounting policies were made since the 2020 Form 10-K - The financial statements are unaudited and prepared for interim reporting, consistent with GAAP and SEC rules[23] - Management believes all necessary recurring accruals have been made for a fair presentation of financial position, equity changes, results of operations, and cash flow[23] - The COVID-19 pandemic has not had a material impact on the Company's estimates, assumptions, and forecasts due to the essential nature of its business, but future impacts remain uncertain[25] Note 2 – Revenue Recognition Revenue is disaggregated by major source (water, wastewater, natural gas, other) and customer class (residential, commercial, fire protection, industrial, gas transportation, other water/wastewater). Tariff revenues are recognized over time as services are rendered, with rates approved by state utility commissions. Other utility revenues, including antenna fees and operation/maintenance contracts, are also recognized over time. Alternative revenue programs, such as weather-normalization adjustments for natural gas, are contracts with regulators, not customers, and are outside FASB revenue recognition guidance. Non-regulated natural gas operations and Aqua Resources also contribute to 'Other and Eliminations' revenues Operating Revenues Disaggregated by Source and Customer Class (Three Months Ended June 30, in thousands) | Revenue Source/Class | June 30, 2021 | June 30, 2020 | | :------------------- | :------------ | :------------ | | Water Revenues | 212,183 | 200,863 | | Wastewater Revenues | 32,504 | 30,149 | | Natural Gas Revenues | 142,886 | 146,880 | | Other Revenues | 9,459 | 6,576 | | Consolidated Total | 397,032 | 384,468 | Operating Revenues Disaggregated by Source and Customer Class (Six Months Ended June 30, in thousands) | Revenue Source/Class | June 30, 2021 | June 30, 2020 | | :------------------- | :------------ | :------------ | | Water Revenues | 405,114 | 385,643 | | Wastewater Revenues | 64,100 | 58,363 | | Natural Gas Revenues | 486,252 | 184,915 | | Other Revenues | 25,131 | 11,132 | | Consolidated Total | 980,597 | 640,053 | - The Company's performance obligation for tariff revenues is to provide potable water, wastewater treatment, or natural gas delivery and sale, satisfied over time as services are rendered[29] Note 3 – Acquisitions The Company completed the Peoples Gas Acquisition on March 16, 2020, for $3.47 billion, expanding its regulated utility business to include natural gas distribution. The purchase price allocation was finalized in Q1 2021, increasing goodwill by $16.4 million. The Company also completed several smaller water and wastewater utility acquisitions in 2020 and 2021 and has multiple pending acquisitions, including a significant DELCORA wastewater system acquisition for $276.5 million, which is subject to ongoing litigation and regulatory approval - Peoples Gas Acquisition completed on March 16, 2020, for $3.47 billion, expanding into natural gas distribution[35] Peoples Gas Acquisition Purchase Price Allocation Adjustments (in thousands of dollars) | Item | Previously Recognized as of Acquisition Date (a) | Measurement Period Adjustments | Recognized as of Acquisition Date (as Adjusted) | | :-------------------------------- | :--------------------------------------------- | :----------------------------- | :-------------------------------------------- | | Property, plant and equipment, net | 2,476,551 | - | 2,476,551 | | Current assets | 242,531 | (9,197) | 233,334 | | Regulatory assets | 286,751 | (22,293) | 264,458 | | Goodwill | 2,261,047 | 16,400 | 2,277,447 | | Total assets acquired | 5,341,951 | (15,090) | 5,326,861 | | Total liabilities assumed | 1,876,607 | (15,090) | 1,861,517 | | Net assets acquired | 3,465,344 | - | 3,465,344 | - Pending acquisitions include Shenandoah Borough ($12.0 million), Oak Brook ($12.5 million), East Whiteland Township and Willistown Township ($72.4 million), Village of Bourbonnais ($32.1 million), and Lower Makefield Township ($53.0 million)[46] - The DELCORA wastewater system acquisition for $276.5 million is pending, subject to regulatory approval and ongoing litigation with Delaware County, with closing expected in 2022[49] Note 4 – Goodwill Goodwill increased by $16.4 million to $2.34 billion as of June 30, 2021, primarily due to measurement period adjustments related to the Peoples Gas Acquisition. A reclassification of $111 thousand from goodwill to utility plant acquisition adjustment also occurred, reflecting a mechanism for recovery through customer rates Changes in Goodwill by Business Segment (in thousands of dollars) | Segment | December 31, 2020 | Measurement Period Adjustments | Reclassification | June 30, 2021 | | :---------------- | :---------------- | :----------------------------- | :--------------- | :------------ | | Regulated Water | 58,659 | - | (111) | 58,548 | | Regulated Natural Gas | 2,261,047 | 16,400 | - | 2,277,447 | | Other | 4,841 | - | - | 4,841 | | Consolidated | 2,324,547 | 16,400 | (111) | 2,340,836 | - Goodwill increased by $16.4 million due to measurement period purchase price allocation adjustments from the Peoples Gas Acquisition[50] Note 5 – Disposition In October 2020, the Company sold its 49% investment in a joint venture, Aqua Infrastructure, which operated a private pipeline system for natural gas well drilling operations. A $3.7 million charge for the write-down of this investment was recorded in Q3 2020 - The Company sold its 49% investment in a joint venture (Aqua Infrastructure) in October 2020, which supplied raw water to natural gas well drilling operations[52] - A charge of $3.7 million was recorded in Q3 2020 for the write-down of the investment associated with the sale[52] Note 6 – Capitalization The Company filed a universal shelf registration in April 2021 for future equity and debt offerings. It has a forward equity sale agreement for 6.7 million shares of common stock, expected to settle in August 2021, with proceeds for general corporate purposes and acquisitions. A private placement of 21.66 million common shares was completed in March 2020, generating $749.9 million. Tangible equity units issued in April 2019 will automatically settle into common stock by April 2022. New long-term debt was issued in April 2021, including $100 million in first mortgage bonds by Aqua Ohio and $400 million in unsecured notes by the Company, used to repay existing indebtedness and for general corporate purposes - Filed a universal shelf registration in April 2021 for potential future offerings of common stock, preferred stock, debt securities, and other securities[54] - Entered into a forward equity sale agreement for 6.7 million shares of common stock in August 2020, with settlement expected by August 9, 2021, at a forward price of $44.77 per share as of June 30, 2021[55][56] - Completed a private placement of 21.66 million common shares in March 2020, generating gross proceeds of $749.9 million[57] - Issued $690 million in tangible equity units in April 2019, which will automatically settle into common stock by April 30, 2022[61][62] - Issued $100 million of first mortgage bonds by Aqua Ohio and $400 million of long-term debt by the Company in April 2021, used to repay existing debt and for general corporate purposes[64] Note 7 – Financial Instruments The Company follows FASB guidance for fair value measurements, categorizing inputs into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs). Loans payable, cash and cash equivalents, and assets underlying deferred compensation/non-qualified pension plans are recorded at carrying value, approximating fair value using Level 1 methods. Long-term debt fair value is determined using Level 2 methods by discounting future cash flows with current market interest rates. Customers' advances for construction fair value cannot be accurately estimated due to variable future payments - Fair value measurements are categorized into Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[71] - Loans payable, cash and cash equivalents, and assets for deferred compensation/non-qualified pension plans approximate fair value using Level 1 methods[70] Long-term Debt Carrying Amounts and Estimated Fair Values (in thousands of dollars) | Metric | June 30, 2021 | December 31, 2020 | | :---------------- | :------------ | :---------------- | | Carrying amount | 5,769,090 | 5,630,243 | | Estimated fair value | 6,254,857 | 6,366,030 | - The fair value of long-term debt is determined by discounting future cash flows using current market interest rates for similar financial instruments (Level 2 methods)[72] Note 8 – Net Income per Common Share Basic net income per common share is calculated based on weighted average common shares outstanding and the minimum shares from tangible equity units. Diluted net income per common share includes potentially dilutive securities like the forward equity sale agreement and employee stock-based compensation, calculated using the treasury stock method. All employee stock options were dilutive for the periods presented Average Common Shares Outstanding (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic computation | 254,769 | 254,167 | 254,667 | 245,144 | | Effect of dilutive securities: | | | | | | Forward equity sale agreement | 285 | - | 147 | - | | Issuance of common stock from private placement | - | - | - | 8,926 | | Employee stock-based compensation | 387 | 267 | 454 | 382 | | Diluted computation | 255,441 | 254,434 | 255,268 | 254,452 | - Basic EPS includes the weighted-average impact of 9.09 million shares from tangible equity units for both periods[76] - All employee stock options were included in diluted EPS calculations as their exercise cost was less than the average market price[77] Note 9 – Stock-based Compensation The Company's Amended and Restated Equity Compensation Plan authorizes 6.25 million shares for various awards, including Performance Share Units (PSUs), Restricted Stock Units (RSUs), Stock Options, Restricted Stock, and Stock Awards. Compensation costs for PSUs, RSUs, and stock options are amortized over their vesting periods, while restricted stock awards are amortized over the restriction period, and stock awards are expensed immediately. Total stock-based compensation within operations and maintenance expenses for the six months ended June 30, 2021, was $5.05 million - The Amended and Restated Equity Compensation Plan authorizes 6.25 million shares for issuance, with 2.13 million shares available at June 30, 2021[78] Stock-based Compensation within Operations and Maintenance Expenses (in thousands of dollars) | Award Type | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Performance Share Units (PSUs) | 1,290 | 966 | 2,931 | 1,447 | | Restricted Stock Units (RSUs) | 761 | 554 | 1,365 | 1,032 | | Stock Options | 90 | 265 | 301 | 766 | | Restricted Stock | 12 | 99 | 106 | 117 | | Stock Awards | 175 | 170 | 350 | 345 | | Total | 2,328 | 2,054 | 5,053 | 3,707 | - The Company did not grant stock options or restricted stock for the six months ended June 30, 2021[83][84] Note 10 – Pension Plans and Other Postretirement Benefits The Company maintains qualified and nonqualified pension plans and other postretirement benefit plans, including those assumed from the Peoples Gas Acquisition. Net periodic benefit cost for pension benefits was a credit of $(1.35) million for the six months ended June 30, 2021, compared to a cost of $2.54 million in 2020, driven by improved investment returns. A plan amendment in Q2 2021, ending benefit accrual for a participant group, resulted in a $20.73 million decrease in pension benefit obligation and regulatory assets Net Periodic Benefit Cost (in thousands of dollars) | Benefit Type | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------- | :----------------------------- | :----------------------------- | | Pension Benefits | (1,352) | 2,536 | | Other Postretirement Benefits | 892 | 892 | - A plan amendment effective May 1, 2021, ended benefit accrual for a group of participants, leading to a $20.73 million decrease in pension benefit obligation and regulatory assets[91] - The Company made cash contributions of $12.66 million to its Pension Plan during the first six months of 2021 and plans to contribute an additional $2.11 million during the remainder of 2021[90] Note 11 – Rate Activity During the first six months of 2021, the Company's water and wastewater utilities in New Jersey, Ohio, Virginia, and Indiana received base rate increases totaling $2.64 million annually. Its Kentucky gas utility also received a rate increase of $0.75 million annually. Additionally, infrastructure rehabilitation surcharges were approved for Pennsylvania and North Carolina water/wastewater divisions, expected to increase annual operating revenues by $12.89 million - Water and wastewater utility operating divisions in New Jersey, Ohio, Virginia, and Indiana were granted base rate increases designed to increase total operating revenues by $2.64 million annually[92] - A gas utility operating division in Kentucky was granted a rate increase designed to increase annual revenues by $0.75 million[92] - Infrastructure rehabilitation surcharges were approved for water and wastewater utility operating divisions in Pennsylvania and North Carolina, designed to increase total operating revenues by $12.89 million annually[92] Note 12 – Taxes Other than Income Taxes Taxes other than income taxes increased by $6.29 million (17.5%) for the six months ended June 30, 2021, compared to the same period in 2020. This increase was primarily driven by higher payroll taxes ($2.77 million) and other taxes ($1.65 million) associated with acquired operations, particularly the Peoples Gas Acquisition Components of Taxes Other than Income Taxes (in thousands of dollars) | Tax Type | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Property | 9,570 | 8,275 | 17,284 | 15,308 | | Gross receipts, excise and franchise | 3,949 | 3,579 | 7,633 | 6,701 | | Payroll | 4,718 | 4,693 | 11,474 | 8,973 | | Regulatory assessments | 847 | 698 | 1,685 | 1,398 | | Pumping fees | 1,464 | 1,487 | 2,590 | 2,568 | | Other | 572 | 701 | 1,495 | 921 | | Total | 21,120 | 19,433 | 42,161 | 35,869 | Note 13 – Segment Information The Company operates with two reportable segments: Regulated Water (eight operating segments aggregated) and Regulated Natural Gas (one operating segment from Peoples Gas Acquisition). An 'Other' category includes non-regulated natural gas operations, Aqua Infrastructure, Aqua Resources, and unallocated corporate costs. The Regulated Natural Gas segment significantly increased operating revenues and income for the six months ended June 30, 2021, due to the full period inclusion of Peoples Gas results - The Company has two reportable segments: Regulated Water (eight aggregated operating segments) and Regulated Natural Gas (one operating segment)[94] - The 'Other' category includes non-regulated natural gas operations, Aqua Infrastructure, Aqua Resources, and unallocated corporate costs[95] Segment Operating Results (Six Months Ended June 30, 2021 vs. 2020, in thousands of dollars) | Metric | Regulated Water 2021 | Regulated Water 2020 | Regulated Natural Gas 2021 | Regulated Natural Gas 2020 | Other 2021 | Other 2020 | Consolidated 2021 | Consolidated 2020 | | :-------------------------- | :------------------- | :------------------- | :------------------------- | :------------------------- | :--------- | :--------- | :---------------- | :---------------- | | Operating revenues | 476,530 | 450,283 | 484,677 | 184,915 | 19,390 | 4,855 | 980,597 | 640,053 | | Operating income (loss) | 198,233 | 186,299 | 153,545 | 36,530 | 9,902 | (26,213) | 361,680 | 196,616 | | Net income (loss) | 142,879 | 128,929 | 121,155 | 31,535 | 569 | (34,054) | 264,603 | 126,410 | | Capital expenditures | 247,911 | 217,373 | 156,252 | 75,458 | 394 | 259 | 404,557 | 293,090 | Total Assets by Segment (in thousands of dollars) | Segment | June 30, 2021 | December 31, 2020 | | :---------------- | :------------ | :---------------- | | Regulated water | 8,158,852 | 7,838,034 | | Regulated natural gas | 5,594,238 | 5,303,507 | | Other | 180,902 | 563,736 | | Consolidated | 13,933,992 | 13,705,277 | Note 14 – Commitments and Contingencies The Company has accrued $17.51 million for loss contingencies as of June 30, 2021, with an estimated $3.33 million probable of recovery through insurance. A class action lawsuit related to a 'do not consume' advisory in Illinois is in discovery, but management does not expect a material adverse effect. Commitments from the Peoples Gas Acquisition include $120 million for pipe replacement (recoverable through rates) and $23.004 million in one-time customer rate credits, which have been granted - As of June 30, 2021, $17.51 million is accrued for loss contingencies, with an estimated $3.33 million probable of recovery through insurance[98] - A class action lawsuit in Illinois related to a 'do not consume' water advisory is ongoing, but management does not expect a material adverse effect on financial position, results of operations, or cash flows[99][100] - Commitments from the Peoples Gas Acquisition include $120 million for pipe replacement (recoverable through customer rates) and $23.004 million in one-time customer rate credits, which were granted in 2020[102] Note 15 – Income Taxes The Company's effective tax rate increased to 4.5% for Q2 2021 (from 0.6% in Q2 2020) and to 3.1% for the six months ended June 30, 2021 (from -5.6% in 2020). This increase is attributed to higher income before income taxes and a lower tax deduction for qualifying infrastructure in Q2 2021, and an increased tax benefit from qualifying infrastructure for the six-month period. A settlement approved by the Pennsylvania Public Utility Commission dictates that $160.655 million in income tax benefits from a 'catch-up adjustment' for infrastructure investments will be refunded to utility customers over five years, starting August 2021 - Effective tax rate was 4.5% for Q2 2021 (vs. 0.6% in Q2 2020) and 3.1% for the six months ended June 30, 2021 (vs. -5.6% in 2020)[104] - The increase in effective tax rate is due to higher income before income taxes and changes in tax deductions for qualifying infrastructure[104] - A settlement approved by the Pennsylvania Public Utility Commission will refund $160.655 million in income tax benefits from a 'catch-up adjustment' to utility customers over a five-year period, starting August 2021[103] Note 16 – Recent Accounting Pronouncements The Company is evaluating new FASB guidance on convertible instruments and contracts in an entity's own equity (effective after December 15, 2021) and reference rate reform (effective upon issuance, applicable through December 31, 2022) to determine their impact. Updated guidance simplifying income tax accounting was adopted on January 1, 2021, with no material impact on consolidated financial statements - Evaluating new FASB guidance on accounting for convertible instruments and contracts in an entity's own equity (effective after December 15, 2021)[108] - Evaluating new FASB guidance on reference rate reform (effective upon issuance, applicable through December 31, 2022)[109] - Adopted updated FASB guidance simplifying income tax accounting on January 1, 2021, which did not have a material impact on consolidated financial statements[110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, including forward-looking statements, a general overview of the business, the impact of the COVID-19 pandemic, and a detailed analysis of financial performance for the three and six months ended June 30, 2021, compared to the prior year. It highlights the Company's growth strategy through acquisitions, particularly the Peoples Gas Acquisition, and discusses key financial metrics and operational drivers across its Regulated Water and Regulated Natural Gas segments Forward-looking Statements This section contains forward-looking statements regarding expected acquisition timings, legal proceedings, accounting pronouncements, and management's plans. These statements are subject to risks and uncertainties, including the COVID-19 pandemic, regulation, and capital markets, and readers are cautioned not to place undue reliance on them. The Company undertakes no obligation to update or revise these statements - The report contains forward-looking statements about acquisitions, legal proceedings, accounting pronouncements, and management's plans[114] - These statements are subject to risks and uncertainties, including the COVID-19 pandemic, regulation, and capital markets, which could cause actual results to differ materially[114] - The Company undertakes no obligation to update or revise forward-looking statements[114] General Information Essential Utilities, Inc. is a holding company providing regulated water, wastewater, and natural gas services to approximately five million people across ten states under the Aqua and Peoples brands. Its growth strategy focuses on acquiring regulated utilities and pursuing opportunistic market-based activities. The Company's most significant recent transaction was the March 2020 acquisition of Peoples, a natural gas distribution utility - Essential Utilities, Inc. provides regulated water, wastewater, and natural gas services to approximately five million people in ten states[116] - The Company's growth strategy targets acquisitions in the U.S. regulated sector (water, wastewater, natural gas) and opportunistic market-based activities[119] - The March 16, 2020, acquisition of Peoples, a natural gas distribution utility, marked the Company's entrance into the regulated natural gas business[119] COVID-19 Pandemic The Company continues to monitor the COVID-19 pandemic, prioritizing employee safety and operational continuity for its essential services. It has implemented security measures, adjusted purchasing procedures to manage supply chain risks, and is monitoring customer utility billings. While some collection practices were temporarily curtailed by regulators, most states have allowed disconnections to resume. Despite ongoing risks, the Company has not experienced material financial or operational impacts related to COVID-19 as of the report date - The Company provides critical services and prioritizes employee safety, operational continuity, and customer support during the COVID-19 pandemic[122] - Adjusted purchasing procedures to secure necessary materials and continued its capital investment program without material impact[124] - As of the report date, the Company has not experienced any material financial or operational impacts related to COVID-19, despite ongoing risks[125] Financial Condition The Company maintains a negative working capital position but expects adequate liquidity from internally generated funds, existing credit facilities, and proceeds from long-term debt and equity. In the first six months of 2021, it incurred $404.56 million in capital expenditures and issued $760.18 million in long-term debt. The Peoples Gas Acquisition in March 2020 was financed through various transactions, and related commitments include $120 million for pipe replacement and $23.004 million in customer rate credits. A $160.655 million income tax benefit from a 'catch-up adjustment' will be refunded to customers over five years - Management believes internally generated funds, existing credit facilities, and proceeds from long-term debt and equity will provide sufficient working capital for the next twelve months[127] - Incurred $404.56 million in capital expenditures and issued $760.18 million of long-term debt during the first six months of 2021[128] - The $1.00 billion unsecured revolving credit facility had $916.69 million available for borrowing at June 30, 2021[137] - A $160.655 million income tax benefit from a 'catch-up adjustment' for infrastructure investments will be refunded to utility customers over a five-year period starting August 2021[133] Results of Operations The Company's results of operations show significant growth, particularly for the six months ended June 30, 2021, driven by the full inclusion of Peoples Gas Acquisition results. Consolidated operating revenues increased by 53.2% and net income by 109.3% for the six-month period. The Regulated Water segment also saw revenue growth from rate increases and customer base expansion, while the Regulated Natural Gas segment's performance was heavily influenced by the timing of the Peoples Gas acquisition and weather-related volume changes Analysis of Second Quarter of 2021 Compared to Second Quarter of 2020 Consolidated results (Q2 2021 vs. Q2 2020) Consolidated operating revenues increased by $12.56 million (3.3%) for Q2 2021, leading to an 8.4% rise in net income despite a higher income tax provision Consolidated Financial Performance (Three Months Ended June 30, in thousands) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------- | :----- | :----- | :----- | :------- | | Operating revenues | 397,032 | 384,468 | 12,564 | 3.27% | | Operating expenses | 267,704 | 261,349 | 6,355 | 2.43% | | Operating income | 129,328 | 123,119 | 6,209 | 5.04% | | Net income | 80,914 | 74,629 | 6,285 | 8.42% | | Effective income tax rate | 4.5% | 0.6% | 3.9% | 650.00% | - Operations and maintenance expenses decreased by $1.09 million (0.8%), primarily due to reduced insurance claims, charitable trust contributions, and COVID-19 related expenses, offset by increased employee-related costs and production costs[141][146] - Allowance for funds used during construction (AFUDC) increased by $2.68 million (120.0%) due to an increase in utility plant construction work in progress[145] Regulated Water Segment (Q2 2021 vs. Q2 2020) The Regulated Water segment's revenues increased by $14.09 million (6.0%) for Q2 2021, driven by rate increases, customer base expansion, and higher volumes - Regulated Water segment revenues increased by $14.09 million (6.0%) for Q2 2021[149] - Revenue growth was primarily due to rate increases ($7.85 million), additional customers from acquisitions and organic growth ($2.66 million), and increased customer volumes ($3.00 million)[151] - Operations and maintenance expense increased by $1.16 million (1.5%), driven by acquired systems, labor, and production costs, offset by decreased COVID-19 expenses[149][151] Regulated Natural Gas Segment (Q2 2021 vs. Q2 2020) The Regulated Natural Gas segment's operating revenues decreased by $5.32 million (3.6%) for Q2 2021 due to warmer weather and lower purchased gas adjustment revenues, significantly impacting net income Regulated Natural Gas Segment Gross Margin (Three Months Ended June 30, in thousands) | Metric | 2021 | 2020 | Change | % Change | | :-------------------- | :----- | :----- | :----- | :------- | | Operating revenues (GAAP) | 141,562 | 146,880 | (5,318) | (3.62%) | | Purchased gas | 39,788 | 41,593 | (1,805) | (4.34%) | | Gross margin (non-GAAP) | 101,774 | 105,287 | (3,513) | (3.34%) | - Operating revenues decreased by $5.32 million (3.6%) due to lower volumes from warmer weather and decreased purchased gas adjustment revenues[157][160] - Net income for the Regulated Natural Gas segment decreased by $16.09 million (89.4%) due to factors including increased interest expense[159] Analysis of First Six Months of 2021 Compared to First Six Months of 2020 Consolidated results (Six Months 2021 vs. 2020) Consolidated operating revenues increased by $340.54 million (53.2%) for the first six months of 2021, with net income surging by $138.19 million (109.3%) due to the full period inclusion of Peoples Gas Acquisition results Consolidated Financial Performance (Six Months Ended June 30, in thousands)