SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
(Mark One)
☒SQUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2017March 31, 2021
☐£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
AQUA AMERICA,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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 |
| Smaller |
Emerging |
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 | ||
6.00% Tangible Equity Units | WTRU | New York Stock Exchange | ||
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 22, 2021: 245,643,343
October 20, 2017: 177,690,598
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| September 30, |
| December 31, | ||
Assets |
| 2017 |
| 2016 | ||
Property, plant and equipment, at cost |
| $ | 6,857,093 |
| $ | 6,509,117 |
Less: accumulated depreciation |
|
| 1,580,619 |
|
| 1,507,502 |
Net property, plant and equipment |
|
| 5,276,474 |
|
| 5,001,615 |
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
| 4,139 |
|
| 3,763 |
Accounts receivable and unbilled revenues, net |
|
| 104,894 |
|
| 97,394 |
Inventory, materials and supplies |
|
| 16,557 |
|
| 12,961 |
Prepayments and other current assets |
|
| 11,209 |
|
| 12,804 |
Assets held for sale |
|
| 1,543 |
|
| 1,728 |
Total current assets |
|
| 138,342 |
|
| 128,650 |
|
|
|
|
|
|
|
Regulatory assets |
|
| 1,044,787 |
|
| 948,647 |
Deferred charges and other assets |
|
| 36,169 |
|
| 30,845 |
Investment in joint venture |
|
| 7,379 |
|
| 7,026 |
Goodwill |
|
| 42,230 |
|
| 42,208 |
Total assets |
| $ | 6,545,381 |
| $ | 6,158,991 |
Liabilities and Equity |
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,669,222 and 180,311,345 as of September 30, 2017 and December 31, 2016 |
| $ | 90,334 |
| $ | 90,155 |
Capital in excess of par value |
|
| 804,753 |
|
| 797,513 |
Retained earnings |
|
| 1,115,601 |
|
| 1,032,844 |
Treasury stock, at cost, 2,984,973 and 2,916,969 shares as of September 30, 2017 and December 31, 2016 |
|
| (73,229) |
|
| (71,113) |
Accumulated other comprehensive income |
|
| 806 |
|
| 669 |
Total stockholders' equity |
|
| 1,938,265 |
|
| 1,850,068 |
|
|
|
|
|
|
|
Long-term debt, excluding current portion |
|
| 1,974,327 |
|
| 1,759,962 |
Less: debt issuance costs |
|
| 21,854 |
|
| 22,357 |
Long-term debt, excluding current portion, net of debt issuance costs |
|
| 1,952,473 |
|
| 1,737,605 |
Commitments and contingencies (See Note 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Current portion of long-term debt |
|
| 84,704 |
|
| 150,671 |
Loans payable |
|
| 20,990 |
|
| 6,535 |
Accounts payable |
|
| 63,358 |
|
| 59,872 |
Accrued interest |
|
| 23,210 |
|
| 18,367 |
Accrued taxes |
|
| 21,745 |
|
| 25,607 |
Other accrued liabilities |
|
| 38,943 |
|
| 40,484 |
Total current liabilities |
|
| 252,950 |
|
| 301,536 |
|
|
|
|
|
|
|
Deferred credits and other liabilities: |
|
|
|
|
|
|
Deferred income taxes and investment tax credits |
|
| 1,391,096 |
|
| 1,269,253 |
Customers' advances for construction |
|
| 107,715 |
|
| 91,843 |
Regulatory liabilities |
|
| 239,469 |
|
| 250,635 |
Other |
|
| 110,412 |
|
| 115,583 |
Total deferred credits and other liabilities |
|
| 1,848,692 |
|
| 1,727,314 |
|
|
|
|
|
|
|
Contributions in aid of construction |
|
| 553,001 |
|
| 542,468 |
Total liabilities and equity |
| $ | 6,545,381 |
| $ | 6,158,991 |
|
|
|
|
|
|
|
See notes to consolidated financial statements beginning on page 9 of this report. | ||||||
March 31, | December 31, | |||||
Assets | 2021 | 2020 | ||||
Property, plant and equipment, at cost | $ | 11,771,225 | $ | 11,620,019 | ||
Less: accumulated depreciation | 2,201,890 | 2,107,142 | ||||
Net property, plant and equipment | 9,569,335 | 9,512,877 | ||||
Current assets: | ||||||
Cash and cash equivalents | 18,046 | 4,827 | ||||
Accounts receivable, net | 168,464 | 154,775 | ||||
Unbilled revenues | 84,700 | 118,538 | ||||
Inventory - materials and supplies | 24,092 | 21,669 | ||||
Inventory - gas stored | 10,730 | 36,732 | ||||
Prepayments and other current assets | 33,547 | 38,594 | ||||
Regulatory assets | 8,530 | 5,085 | ||||
Total current assets | 348,109 | 380,220 | ||||
Regulatory assets | 1,409,022 | 1,362,788 | ||||
Deferred charges and other assets, net | 87,777 | 56,002 | ||||
Funds restricted for construction activity | 1,268 | 1,268 | ||||
Goodwill | 2,340,905 | 2,324,547 | ||||
Operating lease right-of-use assets | 58,513 | 60,334 | ||||
Intangible assets | 6,986 | 7,241 | ||||
Total assets | $ | 13,821,915 | $ | 13,705,277 | ||
The accompanying notes are an integral part of these consolidated financial statements | ||||||
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOMEBALANCE SHEETS (continued)
(In thousands, except per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
Operating revenues |
| $ | 215,008 |
| $ | 226,593 |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Operations and maintenance |
|
| 67,982 |
|
| 79,812 |
Depreciation |
|
| 34,264 |
|
| 33,881 |
Amortization |
|
| 42 |
|
| 389 |
Taxes other than income taxes |
|
| 15,234 |
|
| 14,712 |
Total operating expenses |
|
| 117,522 |
|
| 128,794 |
|
|
|
|
|
|
|
Operating income |
|
| 97,486 |
|
| 97,799 |
|
|
|
|
|
|
|
Other expense (income): |
|
|
|
|
|
|
Interest expense, net |
|
| 22,411 |
|
| 20,168 |
Allowance for funds used during construction |
|
| (3,914) |
|
| (2,267) |
Gain on sale of other assets |
|
| (43) |
|
| (62) |
Equity earnings in joint venture |
|
| (593) |
|
| (1,621) |
Income before income taxes |
|
| 79,625 |
|
| 81,581 |
Provision for income taxes |
|
| 3,400 |
|
| 8,411 |
Net income |
| $ | 76,225 |
| $ | 73,170 |
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
Basic |
| $ | 0.43 |
| $ | 0.41 |
Diluted |
| $ | 0.43 |
| $ | 0.41 |
|
|
|
|
|
|
|
Average common shares outstanding during the period: |
|
|
|
|
|
|
Basic |
|
| 177,660 |
|
| 177,336 |
Diluted |
|
| 178,124 |
|
| 177,817 |
|
|
|
|
|
|
|
Cash dividends declared per common share |
| $ | 0.2047 |
| $ | 0.191 |
|
|
|
|
|
|
|
See notes to consolidated financial statements beginning on page 9 of this report. | ||||||
|
|
|
|
|
|
|
3
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
Operating revenues |
| $ | 606,213 |
| $ | 623,076 |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Operations and maintenance |
|
| 207,963 |
|
| 227,347 |
Depreciation |
|
| 101,508 |
|
| 97,645 |
Amortization |
|
| 358 |
|
| 1,367 |
Taxes other than income taxes |
|
| 44,390 |
|
| 43,094 |
Total operating expenses |
|
| 354,219 |
|
| 369,453 |
|
|
|
|
|
|
|
Operating income |
|
| 251,994 |
|
| 253,623 |
|
|
|
|
|
|
|
Other expense (income): |
|
|
|
|
|
|
Interest expense, net |
|
| 65,124 |
|
| 60,136 |
Allowance for funds used during construction |
|
| (10,570) |
|
| (6,446) |
Gain on sale of other assets |
|
| (322) |
|
| (390) |
Equity earnings in joint venture |
|
| (402) |
|
| (1,143) |
Income before income taxes |
|
| 198,164 |
|
| 201,466 |
Provision for income taxes |
|
| 11,899 |
|
| 16,933 |
Net income |
| $ | 186,265 |
| $ | 184,533 |
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
Basic |
| $ | 1.05 |
| $ | 1.04 |
Diluted |
| $ | 1.05 |
| $ | 1.04 |
|
|
|
|
|
|
|
Average common shares outstanding during the period: |
|
|
|
|
|
|
Basic |
|
| 177,583 |
|
| 177,243 |
Diluted |
|
| 178,103 |
|
| 177,781 |
|
|
|
|
|
|
|
Cash dividends declared per common share |
| $ | 0.5873 |
| $ | 0.5473 |
|
|
|
|
|
|
|
See notes to consolidated financial statements beginning on page 9 of this report. | ||||||
4
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
(UNAUDITED)
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net income |
| $ | 76,225 |
| $ | 73,170 |
| $ | 186,265 |
| $ | 184,533 |
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain on investments, net of tax expense of $22 and $11 for the three months, and $73 and $14 for the nine months ended September 30, 2017 and 2016, respectively |
|
| 42 |
|
| 20 |
|
| 137 |
|
| 26 |
Reclassification of gain on sale of investment to net income, net of tax of $30 for the nine months ended September 30, 2016 (1) |
|
| - |
|
| - |
|
| - |
|
| (57) |
Comprehensive income |
| $ | 76,267 |
| $ | 73,190 |
| $ | 186,402 |
| $ | 184,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amount of pre-tax gain of $87 reclassified from accumulated other comprehensive income to gain on sale of other assets on the consolidated statements of net income for the nine months ended September 30, 2016. | ||||||||||||
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See notes to consolidated financial statements beginning on page 9 of this report. | ||||||||||||
5
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
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|
|
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|
|
|
|
|
|
| |
|
|
| September 30, |
| December 31, | ||
|
|
| 2017 |
| 2016 | ||
Stockholders' equity: |
|
|
|
|
|
|
|
Common stock, $.50 par value |
|
| $ | 90,334 |
| $ | 90,155 |
Capital in excess of par value |
|
|
| 804,753 |
|
| 797,513 |
Retained earnings |
|
|
| 1,115,601 |
|
| 1,032,844 |
Treasury stock, at cost |
|
|
| (73,229) |
|
| (71,113) |
Accumulated other comprehensive income |
|
| 806 |
|
| 669 | |
Total stockholders' equity |
|
|
| 1,938,265 |
|
| 1,850,068 |
|
|
|
|
|
|
|
|
Long-term debt of subsidiaries (substantially collateralized by utility plant): |
|
|
|
|
|
| |
Interest Rate Range | Maturity Date Range |
|
|
|
|
|
|
0.00% to 0.99% | 2023 to 2033 |
|
| 4,196 |
|
| 4,661 |
1.00% to 1.99% | 2019 to 2035 |
|
| 13,196 |
|
| 15,539 |
2.00% to 2.99% | 2024 to 2033 |
|
| 19,689 |
|
| 19,668 |
3.00% to 3.99% | 2019 to 2056 |
|
| 475,904 |
|
| 381,944 |
4.00% to 4.99% | 2020 to 2054 |
|
| 556,681 |
|
| 487,318 |
5.00% to 5.99% | 2019 to 2043 |
|
| 205,703 |
|
| 213,078 |
6.00% to 6.99% | 2017 to 2036 |
|
| 44,000 |
|
| 52,985 |
7.00% to 7.99% | 2022 to 2027 |
|
| 32,521 |
|
| 33,066 |
8.00% to 8.99% | 2021 to 2025 |
|
| 6,214 |
|
| 6,565 |
9.00% to 9.99% | 2018 to 2026 |
|
| 25,700 |
|
| 26,400 |
10.00% to 10.99% | 2018 |
|
| 6,000 |
|
| 6,000 |
|
|
|
| 1,389,804 |
|
| 1,247,224 |
|
|
|
|
|
|
|
|
Notes payable to bank under revolving credit agreement, variable rate, due 2021 |
|
| 49,000 |
|
| 25,000 | |
Unsecured notes payable: |
|
|
|
|
|
|
|
Bank notes at 1.975% and 2.48% due 2018 and 2019 |
|
|
| 100,000 |
|
| 100,000 |
Notes ranging from 3.01% to 3.59% due 2027 through 2041 |
|
| 245,000 |
|
| 245,000 | |
Notes ranging from 4.62% to 4.87%, due 2018 through 2024 |
|
| 122,800 |
|
| 133,600 | |
Notes ranging from 5.20% to 5.95%, due 2018 through 2037 |
|
| 152,427 |
|
| 159,809 | |
Total long-term debt |
|
|
| 2,059,031 |
|
| 1,910,633 |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
| 84,704 |
|
| 150,671 |
Long-term debt, excluding current portion |
|
| 1,974,327 |
|
| 1,759,962 | |
Less: debt issuance costs |
|
|
| 21,854 |
|
| 22,357 |
Long-term debt, excluding current portion, net of debt issuance costs |
|
| 1,952,473 |
|
| 1,737,605 | |
|
|
|
|
|
|
|
|
Total capitalization |
|
| $ | 3,890,738 |
| $ | 3,587,673 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements beginning on page 9 of this report. | |||||||
March 31, | December 31, | |||||
Liabilities and Equity | 2021 | 2020 | ||||
Stockholders' equity: | ||||||
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 248,882,867 and 248,571,355 as of March 31, 2021 and December 31, 2020 | $ | 124,441 | $ | 124,285 | ||
Capital in excess of par value | 3,386,376 | 3,379,057 | ||||
Retained earnings | 1,383,857 | 1,261,862 | ||||
Treasury stock, at cost, 3,251,478 and 3,180,887 shares as of March 31, 2021 and December 31, 2020 | (84,333) | (81,327) | ||||
Total stockholders' equity | 4,810,341 | 4,683,877 | ||||
Long-term debt, excluding current portion | 5,585,245 | 5,545,890 | ||||
Less: debt issuance costs | 37,309 | 38,146 | ||||
Long-term debt, excluding current portion, net of debt issuance costs | 5,547,936 | 5,507,744 | ||||
Commitments and contingencies (See Note 14) |
|
| ||||
Current liabilities: | ||||||
Current portion of long-term debt | 80,351 | 84,353 | ||||
Loans payable | 74,893 | 78,198 | ||||
Accounts payable | 121,593 | 177,489 | ||||
Book overdraft | - | 44,003 | ||||
Accrued interest | 65,286 | 39,408 | ||||
Accrued taxes | 38,365 | 37,172 | ||||
Regulatory liabilities | 14,662 | 19,866 | ||||
Other accrued liabilities | 108,244 | 123,384 | ||||
Total current liabilities | 503,394 | 603,873 | ||||
Deferred credits and other liabilities: | ||||||
Deferred income taxes and investment tax credits | 1,310,000 | 1,258,098 | ||||
Customers' advances for construction | 102,830 | 99,014 | ||||
Regulatory liabilities | 784,151 | 773,310 | ||||
Asset retirement obligations | 1,348 | 1,336 | ||||
Operating lease liabilities | 53,542 | 55,642 | ||||
Pension and other postretirement benefit liabilities | 83,306 | 91,896 | ||||
Other | 46,310 | 56,713 | ||||
Total deferred credits and other liabilities | 2,381,487 | 2,336,009 | ||||
Contributions in aid of construction | 578,757 | 573,774 | ||||
Total liabilities and equity | $ | 13,821,915 | $ | 13,705,277 | ||
The accompanying notes are an integral part of these consolidated financial statements | ||||||
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF EQUITY OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, of dollars)except per share amounts)
(UNAUDITED)
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| Accumulated |
|
|
| |
|
|
|
|
| Capital in |
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|
|
|
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| Other |
|
|
| ||
|
| Common |
| Excess of |
| Retained |
| Treasury |
| Comprehensive |
|
|
| |||||
|
| Stock |
| Par Value |
| Earnings |
| Stock |
| Income |
| Total | ||||||
Balance at December 31, 2016 |
| $ | 90,155 |
| $ | 797,513 |
| $ | 1,032,844 |
| $ | (71,113) |
| $ | 669 |
| $ | 1,850,068 |
Net income |
|
| - |
|
| - |
|
| 186,265 |
|
| - |
|
| - |
|
| 186,265 |
Other comprehensive income, net of income tax of $73 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 137 |
|
| 137 |
Dividends |
|
| - |
|
| - |
|
| (104,286) |
|
| - |
|
| - |
|
| (104,286) |
Sale of stock (34,814 shares) |
|
| 17 |
|
| 1,067 |
|
| - |
|
| - |
|
| - |
|
| 1,084 |
Repurchase of stock (68,004 shares) |
|
| - |
|
| - |
|
| - |
|
| (2,116) |
|
| - |
|
| (2,116) |
Equity compensation plan (165,442) shares) |
|
| 83 |
|
| (83) |
|
| - |
|
| - |
|
| - |
|
| - |
Exercise of stock options (157,621) shares) |
|
| 79 |
|
| 2,524 |
|
| - |
|
| - |
|
| - |
|
| 2,603 |
Stock-based compensation |
|
| - |
|
| 4,379 |
|
| (204) |
|
| - |
|
| - |
|
| 4,175 |
Cumulative effect of change in accounting principle - windfall tax benefit |
|
| - |
|
| - |
|
| 982 |
|
| - |
|
| - |
|
| 982 |
Other |
|
| - |
|
| (647) |
|
| - |
|
| - |
|
| - |
|
| (647) |
Balance at September 30, 2017 |
| $ | 90,334 |
| $ | 804,753 |
| $ | 1,115,601 |
| $ | (73,229) |
| $ | 806 |
| $ | 1,938,265 |
| ||||||||||||||||||
Refer to Note 15 - Recent Accounting Pronouncements for a discussion of the cumulative effect of change in accounting principle - windfall tax benefit | ||||||||||||||||||
See notes to consolidated financial statements beginning on page 9 of this report. | ||||||||||||||||||
Three Months Ended | ||||||
March 31, | ||||||
2021 | 2020 | |||||
Operating revenues | $ | 583,565 | $ | 255,585 | ||
Operating expenses: | ||||||
Operations and maintenance | 125,075 | 106,637 | ||||
Purchased gas | 132,153 | 12,770 | ||||
Depreciation | 71,637 | 45,566 | ||||
Amortization | 1,307 | 679 | ||||
Taxes other than income taxes | 21,041 | 16,436 | ||||
Total operating expenses | 351,213 | 182,088 | ||||
Operating income | 232,352 | 73,497 | ||||
Other expense (income): | ||||||
Interest expense | 50,769 | 35,122 | ||||
Interest income | (387) | (5,035) | ||||
Allowance for funds used during construction | (2,934) | (2,948) | ||||
Gain on sale of other assets | (80) | (105) | ||||
Equity loss in joint venture | - | 127 | ||||
Other | (3,471) | 1,679 | ||||
Income before income taxes | 188,455 | 44,657 | ||||
Provision for income taxes (benefit) | 4,766 | (7,124) | ||||
Net income | $ | 183,689 | $ | 51,781 | ||
Comprehensive income | $ | 183,689 | $ | 51,781 | ||
Net income per common share: | ||||||
Basic | $ | 0.72 | $ | 0.22 | ||
Diluted | $ | 0.72 | $ | 0.20 | ||
Average common shares outstanding during the period: | ||||||
Basic | 254,565 | 236,122 | ||||
Diluted | 254,969 | 255,054 | ||||
The accompanying notes are an integral part of these consolidated financial statements | ||||||
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW CAPITALIZATION
(In thousands of dollars)
(UNAUDITED)
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
| $ | 186,265 |
| $ | 184,533 |
Adjustments to reconcile net income to net cash flows from operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 101,866 |
|
| 99,012 |
Deferred income taxes |
|
| 9,774 |
|
| 15,345 |
Provision for doubtful accounts |
|
| 3,476 |
|
| 3,533 |
Stock-based compensation |
|
| 4,379 |
|
| 3,642 |
Loss (gain) on sale of utility system and market-based business unit |
|
| 324 |
|
| (1,824) |
Gain on sale of other assets |
|
| (322) |
|
| (390) |
Net change in receivables, inventory and prepayments |
|
| (13,550) |
|
| (15,235) |
Net change in payables, accrued interest, accrued taxes and other accrued liabilities |
|
| 3,705 |
|
| (241) |
Pension and other postretirement benefits contributions |
|
| (15,421) |
|
| (8,145) |
Other |
|
| 1,565 |
|
| 8,404 |
Net cash flows from operating activities |
|
| 282,061 |
|
| 288,634 |
Cash flows from investing activities: |
|
|
|
|
|
|
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $2,533 and $1,626 |
|
| (337,731) |
|
| (270,019) |
Acquisitions of utility systems and other, net |
|
| (5,860) |
|
| (5,626) |
Net proceeds from the sale of utility system and other assets |
|
| 1,144 |
|
| 6,545 |
Other |
|
| 1,448 |
|
| (32) |
Net cash flows used in investing activities |
|
| (340,999) |
|
| (269,132) |
Cash flows from financing activities: |
|
|
|
|
|
|
Customers' advances and contributions in aid of construction |
|
| 5,648 |
|
| 6,006 |
Repayments of customers' advances |
|
| (3,519) |
|
| (1,882) |
Net proceeds of short-term debt |
|
| 14,455 |
|
| 31,269 |
Proceeds from long-term debt |
|
| 441,294 |
|
| 234,288 |
Repayments of long-term debt |
|
| (293,270) |
|
| (181,359) |
Change in cash overdraft position |
|
| (1,932) |
|
| (12,586) |
Proceeds from issuing common stock |
|
| 1,084 |
|
| 1,029 |
Proceeds from exercised stock options |
|
| 2,603 |
|
| 3,836 |
Stock-based compensation windfall tax benefits |
|
| - |
|
| 1,263 |
Repurchase of common stock |
|
| (2,116) |
|
| (2,905) |
Dividends paid on common stock |
|
| (104,286) |
|
| (96,994) |
Other |
|
| (647) |
|
| (984) |
Net cash flows from (used in) financing activities |
|
| 59,314 |
|
| (19,019) |
Net change in cash and cash equivalents |
|
| 376 |
|
| 483 |
Cash and cash equivalents at beginning of period |
|
| 3,763 |
|
| 3,229 |
Cash and cash equivalents at end of period |
| $ | 4,139 |
| $ | 3,712 |
| ||||||
Non-cash investing activities: | ||||||
Property, plant and equipment additions purchased at the period end, but not yet paid for |
| $ | 35,145 |
| $ | 23,548 |
Non-cash customer advances and contributions in aid of construction |
|
| 31,615 |
|
| 20,065 |
|
|
|
|
|
|
|
Refer to Note 3 - Acquisitions for a description of non-cash activities |
|
|
|
|
|
|
See notes to consolidated financial statements beginning on page 9 of this report. | ||||||
8
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
March 31, | December 31, | ||||||
2021 | 2020 | ||||||
Stockholders' equity: | |||||||
Common stock, $0.50 par value | $ | 124,441 | $ | 124,285 | |||
Capital in excess of par value | 3,386,376 | 3,379,057 | |||||
Retained earnings | 1,383,857 | 1,261,862 | |||||
Treasury stock, at cost | (84,333) | (81,327) | |||||
Total stockholders' equity | 4,810,341 | 4,683,877 | |||||
Long-term debt of subsidiaries (substantially collateralized by utility plant): | |||||||
Interest Rate Range | Maturity Date Range | ||||||
0.00% to 0.99% | 2023 to 2033 | 2,764 | 2,805 | ||||
1.00% to 1.99% | 2021 to 2039 | 10,061 | 10,260 | ||||
2.00% to 2.99% | 2022 to 2033 | 264,861 | 265,557 | ||||
3.00% to 3.99% | 2021 to 2056 | 1,314,846 | 1,316,872 | ||||
4.00% to 4.99% | 2021 to 2059 | 1,314,127 | 1,315,812 | ||||
5.00% to 5.99% | 2021 to 2043 | 17,610 | 17,804 | ||||
6.00% to 6.99% | 2022 to 2036 | 33,926 | 33,955 | ||||
7.00% to 7.99% | 2022 to 2027 | 29,668 | 29,890 | ||||
8.00% to 8.99% | 2021 to 2025 | 4,267 | 4,425 | ||||
9.00% to 9.99% | 2021 to 2026 | 12,400 | 16,900 | ||||
3,004,530 | 3,014,280 | ||||||
Notes payable to bank under revolving credit agreement, variable rate, due 2023 | 440,000 | 385,000 | |||||
Unsecured notes payable: | |||||||
Amortizing notes at 3.00% due 2022 | 50,605 | 60,502 | |||||
Notes at 2.704% due 2030 | 500,000 | 500,000 | |||||
Notes ranging from 3.01% to 3.59% due 2029 through 2050 | 1,125,000 | 1,125,000 | |||||
Notes at 4.28%, due 2049 | 500,000 | 500,000 | |||||
Notes ranging from 5.64% to 5.95%, due 2021 through 2034 | 45,461 | 45,461 | |||||
5,665,596 | 5,630,243 | ||||||
Current portion of long-term debt | 80,351 | 84,353 | |||||
Long-term debt, excluding current portion | 5,585,245 | 5,545,890 | |||||
Less: debt issuance costs | 37,309 | 38,146 | |||||
Long-term debt, excluding current portion, net of debt issuance costs | 5,547,936 | 5,507,744 | |||||
Total capitalization | $ | 10,358,277 | $ | 10,191,621 | |||
The accompanying notes are an integral part of these consolidated financial statements | |||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars)
(UNAUDITED)
Capital in | |||||||||||||||
Common | Excess of | Retained | Treasury | ||||||||||||
Stock | Par Value | Earnings | Stock | Total | |||||||||||
Balance at December 31, 2020 | $ | 124,285 | $ | 3,379,057 | $ | 1,261,862 | $ | (81,327) | $ | 4,683,877 | |||||
Net income | - | - | 183,689 | - | 183,689 | ||||||||||
Dividends declared ($0.2507 per share) | - | - | (61,520) | - | (61,520) | ||||||||||
Issuance of common stock under dividend reinvestment plan (98,904 shares) | 49 | 4,112 | - | - | 4,161 | ||||||||||
Repurchase of stock (76,105 shares) | - | - | - | (3,262) | (3,262) | ||||||||||
Equity compensation plan (192,407 shares) | 97 | (97) | - | - | - | ||||||||||
Exercise of stock options (20,201 shares) | 10 | 704 | - | - | 714 | ||||||||||
Stock-based compensation | - | 2,631 | (174) | - | 2,457 | ||||||||||
Other | - | (31) | - | 256 | 225 | ||||||||||
Balance at March 31, 2021 | $ | 124,441 | $ | 3,386,376 | $ | 1,383,857 | $ | (84,333) | $ | 4,810,341 | |||||
The accompanying notes are an integral part of these consolidated financial statements | |||||||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars)
(UNAUDITED)
Capital in | |||||||||||||||
Common | Excess of | Retained | Treasury | ||||||||||||
Stock | Par Value | Earnings | Stock | Total | |||||||||||
Balance at December 31, 2019 | $ | 111,935 | $ | 2,636,555 | $ | 1,210,072 | $ | (77,702) | $ | 3,880,860 | |||||
Net income | - | - | 51,781 | - | 51,781 | ||||||||||
Dividends declared ($0.2343 per share) | - | - | (52,205) | - | (52,205) | ||||||||||
Issuance of common stock from private placement (21,661,095 shares) | 10,831 | 719,304 | 730,135 | ||||||||||||
Issuance of common stock from stock purchase contracts (2,335,654 shares) | 1,168 | (1,168) | - | ||||||||||||
Issuance of common stock under dividend reinvestment plan (86,969 shares) | 43 | 4,019 | - | - | 4,062 | ||||||||||
Repurchase of stock (81,722 shares) | - | - | - | (4,339) | (4,339) | ||||||||||
Equity compensation plan (223,495 shares) | 112 | (112) | - | - | - | ||||||||||
Exercise of stock options (56,106 shares) | 28 | 922 | - | - | 950 | ||||||||||
Stock-based compensation | - | 2,072 | (147) | - | 1,925 | ||||||||||
Other | - | (6) | - | - | (6) | ||||||||||
Balance at March 31, 2020 | $ | 124,117 | $ | 3,361,586 | $ | 1,209,501 | $ | (82,041) | $ | 4,613,163 | |||||
The accompanying notes are an integral part of these consolidated financial statements | |||||||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
Three Months Ended | ||||||
March 31, | ||||||
2021 | 2020 | |||||
Cash flows from operating activities: | ||||||
Net income | $ | 183,689 | $ | 51,781 | ||
Adjustments to reconcile net income to net cash flows from operating activities: | ||||||
Depreciation and amortization | 72,944 | 46,245 | ||||
Deferred income taxes | 19,335 | (18,701) | ||||
Provision for doubtful accounts | 8,921 | 2,204 | ||||
Stock-based compensation | 2,724 | 1,688 | ||||
Gain on sale of utility systems and other assets | (91) | (105) | ||||
Net change in receivables, inventory and prepayments | 30,261 | 22,921 | ||||
Net change in payables, accrued interest, accrued taxes and other accrued liabilities | (53,756) | (7,531) | ||||
Pension and other postretirement benefits contributions | (6,363) | (36) | ||||
Other | (2,183) | (2,945) | ||||
Net cash flows from operating activities | 255,481 | 95,521 | ||||
Cash flows from investing activities: | ||||||
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $170 and $873 | (178,009) | (118,734) | ||||
Acquisitions of utility systems, net | - | (3,446,056) | ||||
Net proceeds from the sale of other assets | 100 | 160 | ||||
Other | 197 | 28 | ||||
Net cash flows used in investing activities | (177,712) | (3,564,602) | ||||
Cash flows from financing activities: | ||||||
Customers' advances and contributions in aid of construction | 4,716 | 1,462 | ||||
Repayments of customers' advances | (971) | (1,065) | ||||
Net proceeds of short-term debt | (3,305) | 174,281 | ||||
Proceeds from long-term debt | 85,000 | 801,184 | ||||
Repayments of long-term debt | (46,305) | (11,509) | ||||
Change in cash overdraft position | (44,003) | (10,943) | ||||
Proceeds from issuance of common stock under dividend reinvestment plan | 4,161 | 4,062 | ||||
Proceeds from issuance of common stock from private placement | - | 730,135 | ||||
Proceeds from exercised stock options | 714 | 950 | ||||
Repurchase of common stock | (3,262) | (4,339) | ||||
Dividends paid on common stock | (61,520) | (52,205) | ||||
Other | 225 | (6) | ||||
Net cash flows (used in) from financing activities | (64,550) | 1,632,007 | ||||
Net change in cash and cash equivalents | 13,219 | (1,837,074) | ||||
Cash and cash equivalents at beginning of period | 4,827 | 1,868,922 | ||||
Cash and cash equivalents at end of period | $ | 18,046 | $ | 31,848 | ||
Non-cash investing activities: | ||||||
Property, plant and equipment additions purchased at the period end, but not yet paid for | $ | 73,014 | $ | 55,881 | ||
Non-cash customer advances and contributions in aid of construction | 8,997 | 8,637 | ||||
The accompanying notes are an integral part of these consolidated financial statements | ||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 1 – Basis of Presentation
The accompanying consolidated balance sheets and statements of capitalization of Aqua America,Essential Utilities, Inc. and subsidiaries (the(collectively, the “Company”, “we”, “us” or “our”) at September 30, 2017,March 31, 2021, and the consolidated statements of net incomeoperations and comprehensive income, for the three and nine months ended September 30, 2017 and 2016 the consolidated statements of cash flow for the nine months ended September 30, 2017flows, and 2016, and the consolidated statement of equity for the ninethree months ended September 30, 2017March 31, 2021 and 2020 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present a fair statement of its consolidated financial position, consolidated changes in equity, consolidated results of operations, and consolidated cash flow for the periods presented. 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, 2016.2020. The results of operations for interim periods may not be indicative of the results that may be expected for the entire year. The December 31, 20162020 consolidated balance sheet data presented herein was derived from the Company’s December 31, 20162020 audited consolidated financial statements but does not include all disclosures and notes normally provided in annual financial statements. Certain prior period amounts have been reclassified to conform to the current period presentation in the consolidated statements of cash flows:
|
|
|
|
The preparation of financial statements often requires the selection of specific accounting methods and policies. Further, 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 netoperations 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. 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.
In the preparation of these financial statements and related disclosures, we have assessed the impact that the COVID-19 pandemic has had on our estimates, assumptions, forecasts, and accounting policies. Because of the essential nature of our business, we do not believe the COVID-19 pandemic had a material impact on our estimates, assumptions and forecasts used in the preparation of our financial statements, although we continue to monitor this closely. As the COVID-19 pandemic is continuing to evolve, future events and effects related to the COVID-19 pandemic cannot be determined with precision, and actual results could significantly differ from our estimates or forecasts.
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, 2016. 2020.
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 2 – GoodwillRevenue Recognition
The following table presents our revenues disaggregated by major source and customer class:
Three Months Ended | Three Months Ended | ||||||||||||||||||||||
March 31, 2021 | March 31, 2020 | ||||||||||||||||||||||
Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | ||||||||||||||||
Revenues from contracts with customers: | |||||||||||||||||||||||
Residential | $ | 132,856 | 24,361 | 214,194 | - | $ | 127,014 | $ | 22,614 | $ | 22,900 | $ | - | ||||||||||
Commercial | 33,188 | 4,995 | 41,021 | - | 35,300 | 4,451 | 3,929 | - | |||||||||||||||
Fire protection | 9,045 | - | - | - | 8,646 | - | - | - | |||||||||||||||
Industrial | 6,989 | 445 | 957 | - | 6,942 | 446 | 433 | - | |||||||||||||||
Gas transportation & storage | - | - | 77,803 | - | - | - | 9,469 | - | |||||||||||||||
Other water | 10,443 | - | - | - | 7,159 | - | - | - | |||||||||||||||
Other wastewater | - | 1,750 | - | - | - | 724 | - | - | |||||||||||||||
Other utility | - | - | 9,179 | 3,826 | - | - | 1,731 | 3,204 | |||||||||||||||
Revenues from contracts with customers | 192,521 | 31,551 | 343,154 | 3,826 | 185,061 | 28,235 | 38,462 | 3,204 | |||||||||||||||
Alternative revenue program | 409 | 46 | 211 | - | (281) | (22) | 82 | - | |||||||||||||||
Other and eliminations | - | - | - | 11,847 | - | - | - | 844 | |||||||||||||||
Consolidated | $ | 192,930 | $ | 31,597 | $ | 343,365 | $ | 15,673 | $ | 184,780 | $ | 28,213 | $ | 38,544 | $ | 4,048 | |||||||
On March 16, 2020, the Company completed the Peoples Gas Acquisition, which expanded the Company’s regulated utility business, to include natural gas distribution. The natural gas revenues of Peoples are included for the period since the date of the acquisition.
Revenues from Contracts with Customers – These revenues are composed of four main categories: water, wastewater, natural gas, and other. Water revenues represent revenues earned for supplying customers with water service. Wastewater revenues represent revenues earned for treating wastewater and releasing it into the environment. Natural gas revenues represent revenues earned for the gas commodity and delivery of natural gas to customers. Other revenues are associated fees that relate to our utility businesses but are not water, wastewater, or natural gas revenues. Refer to the description below for a discussion of the performance obligation for each of these revenue streams.
Tariff Revenues – These revenues are categorized by customer class: residential, commercial, fire protection, industrial, gas transportation, other water and other wastewater. The rates that generate these revenues are approved by the respective state utility commission, and revenues are billed cyclically and accrued for when unbilled. The regulated natural gas rates are set and adjusted for increases or decreases in our purchased gas costs through purchased gas adjustment mechanisms. Purchased gas adjustment mechanisms provide us with a means to recover purchased gas costs on an ongoing basis without filing a rate case. Other water and other wastewater revenues consist primarily of fines, penalties, surcharges, and availability lot fees. Our performance obligation for tariff revenues is to provide potable water, wastewater treatment service, or delivery and sale of natural gas to customers. This performance obligation is satisfied over time as the services are rendered. The amounts that the Company has a right to invoice for tariff revenues reflect the right to consideration from the customers in an amount that corresponds directly with the value transferred to the customer for the performance completed to date.
Other Utility Revenues – Other utility revenues represent revenues earned primarily from: antenna revenues, which represent fees received from telecommunication operators that have put cellular antennas on our water towers; operation and maintenance and billing contracts, which represent fees earned from municipalities for our operation of their water or wastewater treatment services or performing billing services; fees earned from developers for accessing our water mains; miscellaneous
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
service revenue from gas distribution operations; gas processing and handling revenue; sales of natural gas at market-based rates and contracted fixed prices; sales of gas purchased from third parties; and other gas marketing activities. The performance obligations vary for these revenues, but all are primarily recognized over time as the service is delivered.
Alternative Revenue Program:
Water / Wastewater Revenues: These revenues represent the difference between the actual billed utility volumetric water and wastewater revenues for Aqua Illinois and the revenues set in the last Aqua Illinois rate case. In accordance with the Illinois Commerce Commission, we recognize revenues based on the target amount established in the last rate case, and then record either a regulatory asset or liability based on the cumulative annual difference between the target and actual, which results in either a payment from customers or a refund due to customers. The cumulative annual difference is either refunded to customers or collected from customers over a nine-month period.
Natural Gas Revenues: These revenues represent the weather-normalization adjustment (“WNA”) mechanism in place for our natural gas customers served in Kentucky. The WNA serves to minimize the effects of weather on the Company’s results for its residential and small commercial natural gas customers. This regulatory mechanism adjusts revenues earned for the variance between actual and normal weather and can have either positive (warmer than normal) or negative (colder than normal) effects on revenues. Customer bills are adjusted in the December through April billing months, with rates adjusted for the difference between actual revenues and revenues calculated under this mechanism billed to the customers.
These revenue programs represent a contract between the utility and its regulators, not customers, and therefore are not within the scope of the Financial Accounting Standards Board’s (“FASB”) accounting guidance for recognizing revenue from contracts with customers.
Other and Eliminations – Other and eliminations consist of our market-based revenues, which comprises: our non-regulated natural gas operations, Aqua Infrastructure and Aqua Resources (described below) and intercompany eliminations for revenue billed between our subsidiaries. Our non-regulated natural gas operations consist of utility service line protection solutions and repair services to households and the operations of gas marketing and production entities. Revenue is recognized and the performance obligation is satisfied over time as the service is delivered.
Aqua Infrastructure is the holding company for our former 49% investment in a joint venture that operated a private pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale of north central Pennsylvania. Prior to our October 30, 2020 sale of our investment in joint venture, the joint venture earned revenues through providing non-utility raw water supply services to natural gas drilling companies which enter into water supply contracts. The performance obligation was to deliver non-potable water to the joint venture’s customers. Aqua Infrastructure’s share of the revenues recognized by the joint venture was reflected, net, in equity earnings in joint venture on our consolidated statements of operations and comprehensive income. Aqua Resources earned revenues by providing non-regulated water and wastewater services through an operating and maintenance contract which concluded in 2020, and continues to earn revenue through third party water and sewer service line protection and repair services. The performance obligations were performing agreed upon contract
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
services to operate the water and wastewater system or allowing the use of our logo to a third-party water and sewer service line repair. Revenues are primarily recognized over time as service is delivered.
Note 3 – Acquisitions
Peoples Gas Acquisition
On March 16, 2020 (the “Closing Date”), the Company completed the acquisition of Peoples Natural Gas (the “Peoples Gas Acquisition”), which expanded the Company’s regulated utility business to include natural gas distribution, serving approximately 750,000 natural gas utility customers in western Pennsylvania, West Virginia and Kentucky. The Company paid cash consideration of $3,465,344, which is subject to adjustment based upon the terms of the purchase agreement. Purchase price adjustments include the completion of a closing balance sheet, which was provided to the seller, and the finalization of an adjustment for utility capital expenditures made by the seller during the period between November 1, 2018 and closing. There is a dispute between the parties regarding this adjustment for utility capital expenditures. It is expected the matter will be resolved in accordance with the provisions of the purchase agreement or by the competent court of law with jurisdiction over the matter. The estimated purchase price paid by the Company was determined as follows:
Base purchase price | $ | 4,275,000 |
Adjustments: | ||
Estimated change in working capital | 43,935 | |
Certain estimated capital expenditures | 247,500 | |
Assumption of indebtedness | (1,101,091) | |
Cash consideration | $ | 3,465,344 |
The assumption of $1,101,091 of indebtedness as of the Closing Date, consisted of $920,091 of senior notes and $181,000 of short-term debt. The acquisition was financed through a series of financing transactions which included the issuance of common stock from a public offering and a private placement, a tangible equity unit offering, and short and long-term debt.
The Company accounted for the Peoples Gas Acquisition as a business combination using the acquisition method of accounting. The estimated purchase price was allocated to the net tangible and intangible assets based upon their estimated fair values at the date of the acquisition. The purchase price allocation was preliminary and was subject to revision through the end of the measurement period on March 15, 2021. During the first quarter of 2021, the Company recorded an adjustment to increase goodwill by $16,400 primarily reflecting an adjustment to deferred income taxes and the valuation of accounts receivable. Goodwill recorded for the Peoples Gas Acquisition is not expected to be deductible for tax purposes. The following table summarizes the purchase price allocation as of the acquisition date and measurement period adjustments as of March 31, 2021:
Amounts | Amounts | |||||
Previously | Measurement | Recognized as of | ||||
Recognized as of | Period | Acquisition Date | ||||
Acquisition Date (a) | Adjustments | (as Adjusted) | ||||
Property, plant and equipment, net | $ | 2,476,551 | $ | - | $ | 2,476,551 |
Current assets | 242,531 | (9,197) | 233,334 |
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Regulatory assets | 286,751 | (22,293) | 264,458 | |||
Goodwill | 2,261,047 | 16,400 | 2,277,447 | |||
Other long-term assets | 75,071 | - | 75,071 | |||
Total assets acquired | 5,341,951 | (15,090) | 5,326,861 | |||
Current portion of long-term debt | 5,136 | - | 5,136 | |||
Loans payable | 181,000 | - | 181,000 | |||
Other current liabilities | 186,120 | (200) | 185,920 | |||
Long-term debt | 999,460 | - | 999,460 | |||
Deferred income taxes | 213,647 | (20,522) | 193,125 | |||
Regulatory liabilities | 123,029 | 6,389 | 129,418 | |||
Other long-term liabilities | 168,215 | (757) | 167,458 | |||
Total liabilities assumed | 1,876,607 | (15,090) | 1,861,517 | |||
Net assets acquired | $ | 3,465,344 | $ | - | $ | 3,465,344 |
(a)As reported, the Essential Utilities, Inc. 10-K for the period ended December 31, 2020.
The Company incurred transaction-related expenses for the Peoples Gas Acquisition, which consisted of costs recorded as operations and maintenance expenses in the first quarter of 2020 of $25,397 primarily representing expenses associated with investment banking fees, including bridge financing, employee related costs, obtaining regulatory approvals, legal expenses, and integration planning. There were no further transaction-related expenses for the Peoples Gas Acquisition after the first quarter of 2020.
The results of Peoples have been included in our consolidated financial statements as of the Closing Date. Peoples contributed revenues of $38,544 and earnings of $13,398 for the period from the Closing Date to March 31, 2020. The following pro forma summary presents consolidated unaudited information as if the Peoples Gas Acquisition had occurred on January 1, 2019:
Three Months Ended | ||||
March 31, 2020 | ||||
Operating revenues | $ | 536,653 | ||
Net income | 137,292 | |||
The supplemental pro forma information is not necessarily representative of the actual results that may have occurred for the period or of the results that may occur in the future. This supplemental pro forma information is based upon the historical operating results of Peoples for the period prior to the Closing Date and is adjusted to reflect the effect of non-recurring acquisition-related costs, incurred in 2020 as if they occurred on January 1, 2019. The adjustments include $20,628 ($25,197 pre-tax) of expenses incurred in 2020, primarily associated with investment banking fees, obtaining regulatory approvals, legal expenses and other direct costs of the Peoples Gas Acquisition, adjustments to reflect net acquisition financing as of January 1, 2019 of $10,700 ($14,342 pre-tax), the elimination of interest on debt that was not assumed in the acquisition of $2,448 ($3,442 pre-tax), and the elimination of a management fee charged quarterly to Peoples by its former parent company of $885 ($1,245 pre-tax).
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the Company committed to addressing the replacement of gathering pipe over a seven year timeframe for an estimated cost of $120,000, which will be recoverable through customer rates. Additionally, the Company has committed to provide $23,004 of one-time customer rate credits to its Pennsylvania natural gas utility customers and water and wastewater customers served by Aqua Pennsylvania, Inc. (“Aqua Pennsylvania”). In 2020, the Company granted $4,080 of customer rate credits to its water and wastewater customers during the third quarter of 2020, and $18,924 to its natural gas utility customers in the fourth quarter of 2020 to satisfy the $23,004 commitment.
Water and Wastewater Utility Acquisitions - Completed
In December 2020, the Company acquired the wastewater utility system assets of New Garden Township, Pennsylvania, which serves 1,965 customers. The total cash purchase price for the utility system was $29,944.
In October 2020, the Company acquired the water and wastewater utility system of Rockwell Utilities, which serves 514 customers in the Village of Lakemoor in Lake County, Illinois. The total cash purchase price for the utility system was $4,859.
In June 2020, the Company acquired the wastewater utility system assets of East Norriton Township, Pennsylvania, which serves 4,947 customers. The total cash purchase price for the utility system was $21,000.
In January 2020, the Company acquired the water utility system assets of the City of Campbell, Ohio, which serves 3,126 customers. The total cash purchase price for the utility system was $7,472.
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.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Water and Wastewater Utility Acquisitions – Pending Completion
In January 2021, the Company entered into purchase agreements to acquire, in separate transactions, the wastewater utility system assets of East Whiteland Township, Pennsylvania and Willistown Township, Pennsylvania which consist of approximately 10,500 customers for $72,400. In December 2020, the Company entered into a purchase agreement to acquire the wastewater utility system assets of the Village of Bourbonnais, Illinois, which consists of approximately 6,500 customers for $32,100. In September 2020, the Company entered into a purchase agreement to acquire the wastewater utility system assets of Lower Makefield Township, Pennsylvania, which consists of approximately 11,000 customers for $53,000. In July 2020, the Company entered into a purchase agreement to acquire the water utility system assets of Commons Water, Texas, which consists of approximately 980 customers for $4,000.
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 based 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. The closings of our acquisitions of East Whiteland Township and Willistown Township are expected to occur in the first quarter of 2022, closing for the Village of Bourbonnais is expected to occur before the end of 2021, and closing for the wastewater assets of Lower Makefield Township is expected to occur in the second half of 2021. Closing for our utility acquisitions are subject to the timing of the regulatory approval process.
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 does 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) that the establishment of the customer trust was valid. Delaware County appealed this decision to Commonwealth Court of Pennsylvania, where this case is continuing. The administrative law judges in the regulatory approval process recommended that the Company’s application be denied, and subsequently, the Company provided exceptions to the recommended decision. On March 25, 2021, the Pennsylvania Public Utility Commission ruled that the case be remanded back to the Office of Administrative Law Judge and vacated the original administrative law judges’ decision. On April 16, 2021, the administrative law judge issued an order staying the proceeding until the Delaware County Court lawsuit is final and unappealable. 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 by the issuance of common stock upon settlement of our forward equity sale agreement (refer to Note 6 – Capitalization for further info) and by utilizing our revolving credit facility until permanent debt is secured. Closing of our acquisition of DELCORA is expected to occur in the fourth quarter of 2021, subject to the timing of the regulatory approval process and DELCORA’s above-referenced litigation with Delaware County.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 4 – Goodwill
The following table summarizes the changes in the Company’s goodwill, by business segment:
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| Regulated |
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| Regulated Water | Regulated Natural Gas | Other | Consolidated | |||||||||||
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| Segment |
| Other |
| Consolidated | |||||||||||||||
Balance at December 31, 2016 |
| $ | 37,367 |
| $ | 4,841 |
| $ | 42,208 | ||||||||||||
Balance at December 31, 2020 | $ | 58,659 | $ | 2,261,047 | $ | 4,841 | $ | 2,324,547 | |||||||||||||
Goodwill acquired |
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| 72 |
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| - |
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| 72 | - | - | - | - | ||||||||
Measurement period purchase price allocation adjustments | - | 16,400 | - | 16,400 | |||||||||||||||||
Reclassification to utility plant acquisition adjustment |
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| (50) |
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| - |
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| (50) | (42) | - | - | (42) | ||||||||
Balance at September 30, 2017 |
| $ | 37,389 |
| $ | 4,841 |
| $ | 42,230 | ||||||||||||
Balance at March 31, 2021 | $ | 58,617 | $ | 2,277,447 | $ | 4,841 | $ | 2,340,905 | |||||||||||||
The measurement period purchase price allocation adjustments resulted from the completion of the Peoples Gas Acquisition on March 16, 2020, which resulted in goodwill of $2,277,447 which was subject to adjustment over the one year measurement period that ended on March 15, 2021. Refer to Note 3 – Acquisitions for information about the goodwill attributed to our Regulated Natural Gas segment.
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 acquisitionsacquisition upon achieving specific objectives.
Goodwill is not amortized but is tested for impairment annually, or more often, if circumstances indicate a possible impairment may exist, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. When testing goodwill for impairment,Note 5 –Disposition
In October 2020, the Company may assess qualitative factors, including macroeconomic conditions, industrysold its investment in a joint venture. Its investment represented its 49% investment in a joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale of north central Pennsylvania. This investment was an unconsolidated affiliate and market considerations, cost factors, overall financial performance, and entity specific events. Alternatively,was accounted for under the Company may bypass this qualitative assessmentequity method of accounting within our Aqua Infrastructure subsidiary. In the third quarter of 2020, we recorded a charge of $3,700 for some of its reporting units and perform a quantitative goodwill impairment test by determining the fair value of a reporting unit based on a discounted cash flow analysis. The Company tested the goodwill attributable to each of its reporting units for impairment as of July 31, 2017, in conjunction with the timing of its annual strategic business plan, and concluded that the estimated fair value of each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount, indicating that nonewrite-down of the Company’s goodwillinvestment associated with the sale, which was impaired.reported in equity loss in joint venture.
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 36 – AcquisitionsCapitalization
During the first nine months of 2017,In April 2021, the Company completed four acquisitions of waterfiled a new universal shelf registration through a filing with the Securities and wastewater utility systems in various states adding 1,003 customers. The total purchase price of these utility systems consisted of $5,860 in cash, which resulted in $72 of goodwill being recorded. The pro forma effect ofExchange Commission (SEC) to allow for the businesses acquired is not material either individually or collectively to the Company’s results of operations.
As part of the Company’s growth-through-acquisition strategy,potential future offer and sale by the Company, hasfrom time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities and other securities specified therein at indeterminate prices.
Stockholders’ Equity
In August 2020, the Company entered into purchase agreements to acquirea forward equity sale agreement for 6,700,000 shares of common stock with a third party (the “forward purchaser”). In connection with the water or wastewater utility system assetsforward equity sale agreement, the forward purchaser borrowed an equal number of five municipalities for a total combined purchase price in cash of $145,700. The purchase price for these pending acquisitions is subject to certain adjustments at closing, and is subject to regulatory approvals. Closing for these acquisitions are expected to occur by mid-year 2018, which is subject to the timing of the regulatory approval process. These acquisitions will add approximately 14,900 customers in two of the states that the Company operates in.
Pursuant to its strategy to grow through acquisitions, in January 2016, the Company acquired Superior Water Company, Inc., which provides public water service to approximately 3,900 customers in portions of Berks, Chester, and Montgomery counties in Pennsylvania. The total purchase price for the utility system was $16,750, which consisted of the issuance of 439,943 shares of the Company’s common stock from stock lenders and $3,905 in cash.sold the borrowed shares to the public. The purchase price allocation for this acquisition consisted primarilyCompany will not receive any proceeds from the sale of acquired property, plant and equipmentits common stock by the forward purchaser until settlement of $25,167, contributions in aid of construction of $16,565, and goodwill of $8,622. Additionally, during 2016,the shares underlying the forward equity sale agreement. The actual proceeds to be received by the Company completed eighteen acquisitionswill vary depending upon the settlement date, the number of shares designated for settlement on that settlement date and the method of settlement. The Company intends to use any proceeds received upon settlement of the forward equity sale agreement to fund general corporate purposes, including for water and wastewater utility systems in various states adding 2,469 customers.acquisitions, working capital and capital expenditures. The total purchaseforward equity sale agreement is accounted for as an equity instrument and was recorded at a fair value of $0 at inception. The fair value will not be adjusted so long as the Company continues to meet the accounting requirements for equity instruments.
The Company may elect to settle the forward equity sale agreement by means of a physical share settlement, net cash settlement, or net share settlement, on a settlement date or dates, no later than August 10, 2021. The forward equity sale agreement provides that the forward price will be computed based upon the initial forward price of these utility systems consisted of $5,518 in cash, which resulted in $1,756 of goodwill being recorded. The pro forma effect$46.00 per share, and is subsequently adjusted for a floating interest rate factor equal to a specified daily rate less a spread and scheduled dividends during the term of the businesses acquired is not material either individuallyagreement. As of March 31, 2021, the forward price was $45.08 per share. Under limited circumstances or collectivelycertain unanticipated events, the forward purchaser also has the ability to require the Company to physically settle the forward equity sale agreement in shares prior to the Company’s resultsmaturity date. As of operations.
Note 4 – Assets Held for Sale
In the first quarter of 2017,March 31, 2021, the Company decided to market forhas not settled any portion of the forward equity sale a water system that serves approximately 265 customers. This water system is reported as assets held for sale in the Company’s consolidated balance sheet.agreement.
In the second quarter of 2016,Private Placement
On March 29, 2019, the Company decidedentered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Canada Pension Plan Investment Board (the “Investor”), pursuant to market for sale two business units that are reported within the Company’s market-based subsidiary, Aqua Resources. One business unit installed and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, for which the sale was completedCompany agreed to issue and sell to the Investor in January 2017.a private placement (the “Private Placement”) 21,661,095 newly issued shares of common stock, par value $0.50 per share (the “Common Stock”). On March 16, 2020, in connection with the closing of the Peoples Gas Acquisition, the Company closed on the Private Placement and received gross proceeds of $749,907, less expenses of $20,606. The other business unit repairs and performs maintenance on water and wastewater systems,Investor has agreed to certain transfer restrictions for whicha period of 15 months from the sale was completed in June 2017.March 16, 2020 closing date of the Peoples Gas Acquisition.
]
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 5 – Capitalization
The shares issued and sold to the Investor pursuant to the Private Placement were to be priced at the lower of (1) $34.62, which represents a 4.5% discount to the trailing 20 consecutive trading day volume weighted average price of the Common Stock ending on, and including, March 28, 2019, and (2) the volume weighted average price per share in the Company’s subsequent public offering of Common Stock to fund a portion of the Peoples Gas Acquisition.
The Stock Purchase Agreement contains customary representations, warranties and covenants of the Company and the Investor, and the parties have agreed to indemnify each other for losses related to breaches of their respective representations and warranties. At the closing of the Private Placement, the Company reimbursed the Investor for reasonable out-of-pocket diligence expenses of $4,000.
Tangible Equity Unit Issuances
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 per unit. This issuance was part of the permanent financing to close the Peoples Gas Acquisition.
Each Unit consists of a prepaid stock purchase contract and an amortizing note due April 30, 2022, each issued by the Company. Unless earlier settled or redeemed, each stock purchase contract will automatically settle on April 30, 2022 (subject to postponement in limited circumstances) for between 1.1790 and 1.4442 shares of the Company’s common stock, subject to adjustment, based upon the applicable market value of the common stock, as described in the final prospectus supplement relating to the Units. During the first three months of 2021, there were no stock purchase contracts early settled by the holders of the contracts. As of March 31, 2021, 6,088,862 stock purchase contracts have been early settled by the holders of the contracts, resulting in the issuance of 7,182,255 shares of the Company’s common stock. The balance of stock purchase contracts is 7,711,138. The amortizing notes have an initial principal amount of $8.62909, or $119,081 in aggregate, and bear interest at a rate of 3.00% per year, and pay equal quarterly cash installments of $0.75000 per amortizing note (except for the July 30, 2019 installment payment, which was $0.80833 per amortizing note), that will constitute a payment of interest and a partial repayment of principal, and which cash payment in the aggregate will be equivalent to 6.00% per year with respect to each $50 stated amount of the Units. The amortizing notes represent unsecured senior obligations of the Company.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In October 2017,thousands of dollars, except per share amounts)
(UNAUDITED)
Long-term Debt and Loans Payable
On April 15, 2021, the Company’s operating subsidiary, Aqua PennsylvaniaOhio, Inc., issued $75,000$100,000 of first mortgage bonds, of which $35,000$50,000 is due in 2054, $20,0002031 and $50,000 is due in 2055, and $20,000 is due in 20572051, with interest rates of 4.06%, 4.07%,2.37% and 4.09%3.35%, respectively. The proceeds from these bonds were used for general corporate purposes and to repay existing indebtedness and for general corporate purposes.
In July 2017, Aqua Illinoisindebtedness. Further, on April 19, 2021, the Company issued $100,000$400,000 of first mortgage bonds consistinglong-term debt, less expenses of $4,010, which is due in 2031 with an interest rate of 2.40%. The Company used the following:
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Amount | Interest Rate | Maturity |
$25,000 | 3.64% | 2032 |
$6,000 | 3.89% | 2037 |
$15,000 | 3.90% | 2038 |
$10,000 | 4.18% | 2047 |
$22,000 | 4.22% | 2049 |
$22,000 | 4.24% | 2050 |
The proceeds from these bonds werethis issuance to repay $50,000 of borrowings under our Aqua Pennsylvania revolving credit facility, and the balance was used to repay in full the borrowings under its existing five-year unsecured revolving credit agreement.
The Company completed the Peoples Gas Acquisition on March 16, 2020, which resulted in the assumption of $1,101,091 of indebtedness, which includes $920,091 of senior notes and for general corporate purposes.
In July 2017, Aqua Pennsylvania issued $80,000$181,000 of first mortgage bonds, of which $40,000 is due in 2055short-term debt. The senior notes have maturities ranging from 2020 to 2032 and $40,000 is due in 2057 with interest rates of 4.04% and 4.06%, respectively.that range from 2.90% to 6.42%. The short-term debt assumed at closing was repaid with the proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes. the Company’s subsequent April 2020 long-term debt issuance.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In January 2017, Aqua Pennsylvania issued $50,000thousands of first mortgage bonds, of which $10,000 is due in 2042 and $40,000 is due in 2044 with interest rates of 3.65% and 3.69%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.dollars, except per share amounts)
(UNAUDITED)
Note 67 – Fair Value of Financial Instruments
The Company follows the FASB’s accounting guidance for fair value measurements and disclosures, which defines fair value and establishes a framework for using fair value to measure assets and liabilities. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
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Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;
12
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)Level 3: inputs that are unobservable and significant to the fair value measurement.
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. 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 quarter ended September 30, 2017. March 31, 2021.
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.
The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of September 30, 2017March 31, 2021 and December 31, 2016,2020, the carrying amount of the Company’s loans payable was $20,990$74,893 and $6,535,$78,198, 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 March 31, 2021, and December 31, 2020, the carrying amounts of the Company's cash and cash equivalents was $18,046 and $4,827, respectively, which equates to their fair value. The Company’s assets underlying the deferred compensation plan liability isand 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, 2017March 31, 2021, and December 31, 2016,2020, the carrying amount of these securities was $18,145$26,783, and $17,072,$25,780, respectively, which equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assets.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Unrealized gain and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:
Three Months Ended | ||||||
March 31, | ||||||
2021 | 2020 | |||||
Net gain (loss) recognized during the period on equity securities | $ | 248 | $ | (54) | ||
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 | $ | 248 | $ | (54) | ||
The fair value of cash and cash equivalents, whichnet gain (loss) recognized on equity securities is comprised of a money market fund, is determined basedpresented on the net asset value per unit utilizing Level 2 methodsconsolidated statements of operations and assumptions. As of September 30, 2017 and December 31, 2016,comprehensive income on the carrying amounts of the Company's cash and cash equivalents was $4,139 and $3,763, respectively, which equates to their fair value.line item “Other.”
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
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| December 31, | ||
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Carrying Amount |
| $ | 2,059,031 |
| $ | 1,910,633 |
Estimated Fair Value |
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| 2,185,051 |
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| 2,018,933 |
March 31, | December 31, | |||||
2021 | 2020 | |||||
Carrying amount | $ | 5,665,596 | $ | 5,630,243 | ||
Estimated fair value | 5,908,503 | 6,366,030 | ||||
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 $107,715$102,830 as of September 30, 2017,March 31, 2021, and $91,843$99,014 as of December 31, 2016.2020. 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 rate increases.rates. Portions of these non-interest bearingnon-interest-bearing instruments are payable annually through 20272031 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 bearingnon-interest-bearing feature.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 78 – Net Income per Common Share
Basic net income per common share is based on the weighted average number of common shares outstanding.outstanding and the minimum number of shares to be 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.shares, and the expected number of shares to be issued upon settlement of the stock purchase contracts issued under the tangible equity units, based on the applicable market value of our common stock. The dilutive effect of employee stock-based
13
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
compensation isand shares issuable under the forward equity sale agreement (from the date the Company entered into the forward equity sale agreement to the settlement date) are included in the computation of diluted net income per common share. The dilutive effect of stock-based compensation isand shares issuable under the forward equity sale agreement are calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.compensation and settlement of the forward equity sale agreement. The treasury stock method assumes that the proceeds from stock-based compensation and settlement of the forward equity sale agreement are used to purchase the Company’s common stock at the average market price during the period. The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share:
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| Nine Months Ended | Three Months Ended | |||||||
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| September 30, | March 31, | |||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | 2021 | 2020 | ||
Average common shares outstanding during the period for basic computation |
| 177,660 |
| 177,336 |
| 177,583 |
| 177,243 | 254,565 | 236,122 | ||
Dilutive effect of employee stock-based compensation |
| 464 |
| 481 |
| 520 |
| 538 | ||||
Effect of dilutive securities: | ||||||||||||
Forward equity sale agreement | 3 | - | ||||||||||
Issuance of common stock from private placement | - | 17,853 | ||||||||||
Tangible equity units | - | 607 | ||||||||||
Employee stock-based compensation | 401 | 472 | ||||||||||
Average common shares outstanding during the period for diluted computation |
| 178,124 |
| 177,817 |
| 178,103 |
| 177,781 | 254,969 | 255,054 | ||
|
|
|
|
|
|
|
|
| ||||
For the three and nine months ended September 30, 2017March 31, 2020, the average common shares outstanding during the period for diluted computation reflects the impact of the issuance of common stock from the March 16, 2020 private placement as if the shares were issued on January 1, 2020.
For the three months ended March 31, 2021 and 2016,2020, the average common shares outstanding during the period for basic computation includes the weighted-average impact of 9,091,179 and 10,215,189 shares, respectively, based on the minimum number of shares of 9,091,179 to be issued in April 2022 upon settlement of the stock purchase contracts issued in April 2019 under the tangible equity units. Further, for the three months ended March 31, 2020, average common shares outstanding during the period for diluted computation includes the impact of the additional shares to be issued in April 2022 upon settlement of the stock purchase contracts based on the threshold appreciation price of $42.41.
For the three months ended March 31, 2021 and 2020, all of the Company’s employee stock options were included in the calculations of diluted net income per share as the calculated cost to exercise the employee
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
stock options was less than the average market price of the Company’s common stock during these periods. 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 89 – Stock-based Compensation
Under the Company’s 2009 OmnibusAmended and Restated Equity Compensation Plan as amended as of February 27, 2014 (the “2009 Plan”“Plan”), as approved by the Company’s shareholders on May 2, 2019, to replace the 2004 Equity Compensation Plan, (the “2004 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 2009 Plan authorizes 6,250,000 shares for issuance under the plan.Plan. A maximum of 3,125,000 shares under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the 2009 Plan. During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the 2009 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 2009 Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the 2009 Plan. Awards to employees and consultants under the 2009 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, 2017, 3,741,526March 31, 2021, 2,130,087 shares were still available for issuance under the 2009 Plan. NoNaN further grants may be made under the Company’s 2004 Equity Compensation Plan.
14
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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-yearthree 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 costs for stock-based compensation related to PSUs:
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| |||||||
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| Three Months Ended |
| Nine Months Ended | Three Months Ended | |||||||||||||
|
| September 30, |
| September 30, | March 31, | |||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2021 | 2020 | ||||||||
Stock-based compensation within operations and maintenance expenses |
| $ | 1,035 |
| $ | 1,012 |
| $ | 2,875 |
| $ | 2,504 | $ | 1,641 | $ | 510 | ||
Income tax benefit |
|
| 420 |
|
| 411 |
|
| 1,167 |
| 1,013 | 462 | 144 | |||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes the PSU transactions for the ninethree months ended September 30, 2017:March 31, 2021:
|
|
|
|
| ||||||||
|
|
|
|
|
| |||||||
|
| Number |
| Weighted | Number | Weighted | ||||||
|
| of |
| Average | of | Average | ||||||
|
| Share Units |
| Fair Value | Share Units | Fair Value | ||||||
Nonvested share units at beginning of period |
| 476,896 |
| $ | 27.96 | 283,007 | $ | 34.57 | ||||
Granted |
| 125,202 |
|
| 30.79 | 151,931 | 43.23 | |||||
Performance criteria adjustment |
| (64,398) |
|
| 27.75 | 28,548 | 53.49 | |||||
Forfeited |
| (16,306) |
|
| 28.26 | (1,078) | 46.31 | |||||
Share units vested in prior period and issued in current period |
| 32,400 |
|
| 25.31 | |||||||
Share units issued |
| (125,999) |
|
| 36.37 | (141,329) | 31.26 | |||||
Nonvested share units at end of period |
| 427,795 |
| $ | 26.13 | 321,079 | 41.61 | |||||
|
|
|
|
|
| |||||||
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 ninethree months ended September 30, 2017March 31, 2021 and 20162020 was $30.79$43.23 and $28.89, respectively.$52.09. 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.
15
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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 cost and income tax benefit for stock-based compensation related to RSUs:
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| |||||||
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| ||||||
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended | |||||||||||||
|
| September 30, |
| September 30, | March 31, | |||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2021 | 2020 | ||||||||
Stock-based compensation within operations and maintenance expenses |
| $ | 311 |
| $ | 299 |
| $ | 915 |
| $ | 763 | $ | 604 | $ | 486 | ||
Income tax benefit |
|
| 129 |
|
| 124 |
|
| 378 |
|
| 315 | 169 | 136 | ||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes the RSU transactions for the ninethree months ended September 30, 2017: March 31, 2021:
|
|
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| ||||||||
|
|
|
|
|
| |||||||
|
| Number |
| Weighted | Number | Weighted | ||||||
|
| of |
| Average | of | Average | ||||||
|
| Stock Units |
| Fair Value | Stock Units | Fair Value | ||||||
Nonvested stock units at beginning of period |
| 109,273 |
| $ | 28.48 | 163,906 | $ | 40.80 | ||||
Granted |
| 41,293 |
| 30.37 | 85,717 | 44.44 | ||||||
Stock units vested and issued |
| (26,914) |
| 26.18 | (47,735) | 35.03 | ||||||
Forfeited |
| (2,287) |
| 30.52 | (746) | 40.10 | ||||||
Nonvested stock units at end of period |
| 121,365 |
| $ | 29.60 | 201,142 | 43.71 | |||||
The per unit weighted-average fair value at the date of grant for RSUs granted during the ninethree months ended September 30, 2017March 31, 2021 and 20162020 was $30.37$44.44 and $32.09,$47.10, 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.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:
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|
| Three Months Ended |
| Nine Months Ended | Three Months Ended | |||||||||||||
|
| September 30, |
|
| September 30, | March 31, | ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2021 | 2020 | ||||||||
Stock-based compensation within operations and maintenance expenses |
| $ | 73 |
| $ | - |
| $ | 177 |
| $ | - | $ | 211 | $ | 501 | ||
Income tax benefit |
|
| 43 |
|
| 15 |
|
| 167 |
|
| 249 | 60 | 142 | ||||
The Company did 0t grant stock options for the three months ended March 31, 2021.
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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:
| |
| |
| |
| |
| |
|
|
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.
For the nine months ended September 30, 2016, there were no compensation costs for stock-based compensation related to stock options, as the previous stock option grant that occurred in 2010 became fully amortized in 2013. Additionally, there were no stock options granted during the nine months ended September 30, 2016.
The following table summarizes stock option transactions for the ninethree months ended September 30, 2017:March 31, 2021:
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| Weighted |
| Weighted |
|
|
| Weighted | Weighted | |||||||||
|
|
|
| Average |
| Average |
| Aggregate | Average | Average | Aggregate | |||||||||
|
|
|
| Exercise |
| Remaining |
| Intrinsic | Exercise | Remaining | Intrinsic | |||||||||
|
| Shares |
| Price |
| Life (years) |
| Value | Shares | Price | Life (years) | Value | ||||||||
Outstanding at beginning of period |
| 427,335 |
| $ | 15.55 |
|
|
|
|
| 947,680 | $ | 35.22 | |||||||
Granted |
| 120,127 |
| 30.47 |
|
|
|
|
| - | - | |||||||||
Forfeited |
| (2,439) |
| 30.47 |
|
|
|
|
| (1,427) | 35.77 | |||||||||
Expired / Cancelled |
| (2,812) |
| 14.26 |
|
|
|
|
| |||||||||||
Expired | (773) | 34.87 | ||||||||||||||||||
Exercised |
| (157,621) |
| 16.51 |
|
|
|
|
| (20,201) | 35.34 | |||||||||
Outstanding at end of period |
| 384,590 |
| $ | 19.73 |
| 3.9 |
| $ | 5,175 | 925,279 | $ | 35.21 | 7.6 | $ | 8,823,580 | ||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Exercisable at end of period |
| 266,902 |
| $ | 15.00 |
| 1.4 |
| $ | 4,855 | 685,964 | $ | 34.95 | 7.4 | $ | 6,719,789 | ||||
Restricted Stock – Restricted stock awards provide the grantee with the rights of a shareholder, including the right to receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction period. Restricted stock awards result in compensation expense that is equal to the fair market value of the stock on the date of the grant and is amortized ratably over the restriction period. The Company expects forfeitures of restricted stock to be de minimis. The following table provides the compensation cost and income tax benefit for stock-based compensation related to restricted stock:
Three Months Ended | ||||||
March 31, | ||||||
2021 | 2020 | |||||
Stock-based compensation within operations and maintenance expenses | $ | 93 | $ | 18 | ||
Income tax benefit | 27 | 5 | ||||
17
The following table summarizes restricted stock transactions for the three months ended March 31, 2021:
Number | Weighted | ||||
of | Average | ||||
Shares | Fair Value | ||||
Nonvested restricted stock at beginning of period | 13,228 | $ | 34.02 | ||
Granted | 0 | 0 | |||
Vested | (11,952) | 33.47 | |||
Nonvested restricted stock at end of period | 1,276 | $ | 39.19 | ||
The Company did 0t grant restricted stock for the three months ended March 31, 2021.
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. The issuance of stock awards results in compensation expense whichthat is equal to the fair market value of the stock on the grant date and is expensed immediately upon grant. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock awards:
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| |||||||
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| ||||||
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended | |||||||||||||
|
| September 30, |
| September 30, | March 31, | |||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2021 | 2020 | ||||||||
Stock-based compensation within operations and maintenance expenses |
| $ | 150 |
| $ | 131 |
| $ | 412 |
| $ | 375 | $ | 175 | $ | 175 | ||
Income tax benefit |
|
| 62 |
|
| 54 |
|
| 171 |
|
| 155 | 51 | 51 | ||||
The following table summarizes stock award transactions for the ninethree months ended September 30, 2017:March 31, 2021:
|
|
|
|
| ||||||
|
|
|
|
|
| |||||
|
| Number |
| Weighted | Number | Weighted | ||||
|
| of |
| Average | of | Average | ||||
|
| Stock Awards |
| Fair Value | Stock Awards | Fair Value | ||||
Nonvested stock awards at beginning of period |
| - |
| $ | - | - | $ | - | ||
Granted |
| 12,529 |
| 32.92 | 3,927 | 44.54 | ||||
Vested |
| (12,529) |
| 32.92 | (3,927) | (44.54) | ||||
Nonvested stock awards at end of period |
| - |
| $ | - | - | - | |||
The per unit weighted-average fair value at the date of grant for stock awards granted during the ninethree months ended September 30, 2017March 31, 2021 and 20162020 was $32.92$44.54 and $32.57,$41.58, respectively.
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 910 – 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 net periodic benefit cost is based on estimated values and an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover, and medical costs. The following tables provide the components of net periodic benefit cost:cost for the Company’s legacy pension and other postretirement benefit plans:
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| |||||||
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| ||||||
|
| Pension Benefits | ||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended | ||||||||||||||
|
| September 30, |
| September 30, | ||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||||
Service cost |
| $ | 794 |
| $ | 784 |
| $ | 2,382 |
| $ | 2,394 | ||||||
Interest cost |
|
| 3,108 |
|
| 3,251 |
|
| 9,324 |
| 9,787 | |||||||
Expected return on plan assets |
|
| (4,270) |
|
| (4,215) |
|
| (12,810) |
| (12,696) | |||||||
Amortization of prior service cost |
|
| 145 |
|
| 145 |
|
| 435 |
| 435 | |||||||
Amortization of actuarial loss |
|
| 2,001 |
|
| 1,797 |
|
| 6,003 |
| 5,354 | |||||||
Settlement charge |
|
| - |
|
| - |
|
| - |
| 3,028 | |||||||
Special termination benefit charge |
|
| - |
|
| - |
|
| - |
|
| 302 | ||||||
Net periodic benefit cost |
| $ | 1,778 |
| $ | 1,762 |
| $ | 5,334 |
| $ | 8,604 | ||||||
|
|
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|
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| ||||||
|
| Other | ||||||||||||||||
|
| Postretirement Benefits | Pension Benefits | |||||||||||||||
|
|
| Three Months Ended |
|
| Nine Months Ended | Three Months Ended | |||||||||||
|
|
| September 30, |
|
| September 30, | March 31, | |||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2021 | 2020 | ||||||||
Service cost |
| $ | 255 |
| $ | 253 |
| $ | 765 |
| $ | 761 | $ | 1,078 | $ | 763 | ||
Interest cost |
|
| 737 |
|
| 726 |
|
| 2,211 |
| 2,202 | 3,061 | 2,540 | |||||
Expected return on plan assets |
|
| (647) |
|
| (645) |
|
| (1,941) |
| (2,001) | (5,907) | (3,938) | |||||
Amortization of prior service cost |
|
| (127) |
|
| (137) |
|
| (381) |
| (411) | 140 | 148 | |||||
Amortization of actuarial loss |
|
| 291 |
|
| 220 |
|
| 873 |
|
| 707 | 1,071 | 1,992 | ||||
Net periodic benefit cost |
| $ | 509 |
| $ | 417 |
| $ | 1,527 |
| $ | 1,258 | $ | (557) | $ | 1,505 | ||
Other | ||||||||||||||||||
Postretirement Benefits | ||||||||||||||||||
Three Months Ended | ||||||||||||||||||
March 31, | ||||||||||||||||||
2021 | 2020 | |||||||||||||||||
Service cost | $ | 203 | $ | 217 | ||||||||||||||
Interest cost | 561 | 677 | ||||||||||||||||
Expected return on plan assets | (690) | (675) | ||||||||||||||||
Amortization of prior service credit | (108) | (116) | ||||||||||||||||
Amortization of actuarial loss | 95 | 156 | ||||||||||||||||
Net periodic benefit cost | $ | 61 | $ | 259 | ||||||||||||||
Effective July 1, 2015,The Company presents the Company added a permanent lump sum option tocomponents of net periodic benefit cost other than service cost in the formconsolidated statements of benefit payments offered to participants ofoperations and comprehensive income on the qualified defined benefit pension plan and non-qualified retirement plans upon retirement or termination. During the first quarter of 2016, the lump sum payments paid to participants who elected this option for payments from the non-qualified retirement plans resulted in a settlement charge. line item “Other.”
The Company made cash contributions of $15,421$6,332 to its Pension Plan during the first sixthree months of 2017, which2021, and intends to make cash contributions of $8,443 to the Pension Plan during the remainder of 2021.
On March 16, 2020, we completed the Peoples Gas Acquisition and assumed the pension and other postretirement benefit plans for its employees. The operating results of Peoples has been included in our consolidated financial statements since the date of acquisition. On April 1, 2020, the Company merged the pension plans acquired in the Peoples Gas Acquisition into the Company’s 2017 cash contributions. Pension Plan. As such, the following table presents the components of net periodic benefit costs for the period since March 16, 2020 that are related to the Peoples’ other postretirement benefit plans acquired:
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Other | ||||||
Postretirement Benefits | ||||||
Three Months Ended | ||||||
March 31, | ||||||
2021 | 2020 | |||||
Service cost | $ | 496 | $ | 77 | ||
Interest cost | 278 | 54 | ||||
Expected return on plan assets | (349) | (76) | ||||
Amortization of actuarial loss | (40) | - | ||||
Net periodic benefit cost | $ | 385 | $ | 55 | ||
Note 1011 – Water and Wastewater RatesRate Activity
During the first ninethree months of 2017,2021, the Company’s water and wastewater utility operating divisions in IndianaNew Jersey, Ohio and OhioIndiana were granted base rate increases designed to increase total operating revenues on an annual basis by $7,403.$1,559 and one of its gas utility operating divisions in Kentucky was granted a base rate increase designed to increase annual revenues by $747. Further, during the first ninethree months of 2017,2021, the Company’s operating divisions in Illinois, New Jersey, and North CarolinaCompany received approval to bill infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $3,659.$10,725 in its water and wastewater utility operating divisions in Pennsylvania and North Carolina, offset partially by a decrease of $277 in its gas utility operating divisions in Pennsylvania.
On February 1, 2021, the Company initiated billing interim rates in Virginia, which has a base rate case filing in progress. The interim rates are designed to increase annual revenues by $1,733. As of March 31, 2021, billings of $242 have been collected and remain subject to refund based on the outcome of the final base rate case order, which is expected to be received later in 2021.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 1112 – Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes:
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| |||||||
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| ||||||
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended | |||||||||||||
|
| September 30, |
| September 30, | March 31, | |||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2021 | 2020 | ||||||||
Property |
| $ | 6,955 |
| $ | 7,007 |
| $ | 20,608 |
| $ | 20,119 | $ | 7,714 | $ | 7,033 | ||
Gross receipts, excise and franchise |
|
| 3,969 |
|
| 3,409 |
|
| 10,507 |
|
| 9,468 | 3,684 | 3,122 | ||||
Payroll |
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| 2,066 |
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| 2,140 |
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| 7,322 |
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| 7,775 | 6,756 | 4,280 | ||||
Regulatory assessments |
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| 674 |
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| 639 |
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| 1,933 |
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| 1,991 | 838 | 700 | ||||
Pumping fees |
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| 1,526 |
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| 1,442 |
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| 3,820 |
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| 3,501 | 1,126 | 1,081 | ||||
Other |
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| 44 |
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| 75 |
|
| 200 |
|
| 240 | 923 | 220 | ||||
Total taxes other than income |
| $ | 15,234 |
| $ | 14,712 |
| $ | 44,390 |
| $ | 43,094 | $ | 21,041 | $ | 16,436 | ||
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Note 1213 – Segment Information
On March 16, 2020, the Company completed the Peoples Gas Acquisition, marking the Company’s entrance into the regulated natural gas business. The operating results of Peoples are included in the consolidated financial statements for the period since the acquisition date. As a result, the Company now has ten12 operating segments and one2 reportable segment.segments. The Regulated segment, the Company’s single reportableWater segment is comprised of eight8 operating segments representing its water and wastewater regulated utility companies, which are organized by the states where the Company provides water and wastewater services. TheseThe 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.
TwoIn addition to the Company’s 2 reportable segments, we include 3 of our operating segments are included within the Other category below. These segments are not quantitatively significant and are comprised of our non-regulated natural gas operations, Aqua ResourcesInfrastructure, and Aqua Infrastructure. Aqua Resources provides water and wastewaterResources. Our non-regulated natural gas operations consist of utility service through operating and maintenance contracts with municipal authorities and other parties close to its utility companies’ service territories; and offers, through a third party, water and sewer line repair service and protection solutions and repair services to households.households and the operation of gas marketing and production entities. Prior to our October 30, 2020 sale of investment in joint venture, Aqua Infrastructure providesprovided non-utility raw water supply services for firms in the natural gas drilling industry. 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 other business activities not included in the reportable segment,segments, including corporate costs that have not been allocated to the Regulated segmentWater and Regulated Natural Gas segments and intersegment eliminations. Corporate costs include general and administrative expenses, and interest expense. Additionally, containedThe Company reports these corporate costs within total assets forOther as they relate to corporate-focused responsibilities and decisions and are not included in internal measures of segment operating performance used by the Other category, inCompany to measure the table below, is a regulatory asset for postretirement benefits for the underfunded statusunderlying performance of the Company’s pension and other postretirement benefit plans and an intercompany receivable. operating segments.
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table presents information about the Company’s reportable segment:segments, including the operating results and capital expenditures of the Regulated Natural Gas segment for the period since the completion of the Peoples Gas Acquisition on March 16, 2020:
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| Three Months Ended |
| Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||
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| September 30, 2017 |
| September 30, 2016 | March 31, 2021 | March 31, 2020 | |||||||||||||||||||||||||||||||||||||
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| Regulated |
| Other |
| Consolidated |
| Regulated |
| Other |
| Consolidated | Regulated Water | Regulated Natural Gas | Other | Consolidated | Regulated Water | Regulated Natural Gas | Other | Consolidated | |||||||||||||||||||||||
Operating revenues |
| $ | 214,032 |
| $ | 976 |
| $ | 215,008 |
| $ | 222,231 |
| $ | 4,362 |
| $ | 226,593 | $ | 228,353 | $ | 343,115 | $ | 12,097 | $ | 583,565 | $ | 216,197 | $ | 38,544 | $ | 844 | $ | 255,585 | |||||||||
Operations and maintenance expense |
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| 70,772 |
|
| (2,790) |
| 67,982 |
|
| 73,013 |
| 6,799 |
| 79,812 | 78,347 | 51,326 | (4,598) | 125,075 | 73,694 | 8,823 | 24,120 | 106,637 | ||||||||||||||||||||
Depreciation |
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| 34,533 |
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| (269) |
| 34,264 |
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| 34,025 |
| (144) |
| 33,881 | ||||||||||||||||||||||||||||
Purchased gas | - | 122,888 | 9,265 | 132,153 | - | 12,770 | - | 12,770 | |||||||||||||||||||||||||||||||||||
Depreciation and amortization | 45,138 | 27,590 | 216 | 72,944 | 41,511 | 4,569 | 165 | 46,245 | |||||||||||||||||||||||||||||||||||
Operating income (loss) |
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| 94,142 |
|
| 3,344 |
| 97,486 |
|
| 100,563 |
| (2,764) |
| 97,799 | 89,447 | 136,864 | 6,041 | 232,352 | 86,506 | 11,715 | (24,724) | 73,497 | ||||||||||||||||||||
Interest expense, net |
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| 20,753 |
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| 1,658 |
| 22,411 |
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| 19,167 |
| 1,001 |
| 20,168 | 26,460 | 17,296 | 6,626 | 50,382 | 25,495 | 1,887 | 2,705 | 30,087 | ||||||||||||||||||||
Allowance for funds used during construction |
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| 3,914 |
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| - |
| 3,914 |
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| 2,267 |
| - |
| 2,267 | 3,247 | (313) | - | 2,934 | 2,912 | 36 | - | 2,948 | ||||||||||||||||||||
Income tax expense (benefit) |
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| 3,138 |
|
| 262 |
| 3,400 |
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| 9,027 |
| (616) |
| 8,411 | ||||||||||||||||||||||||||||
Net income (loss) |
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| 74,208 |
|
| 2,017 |
| 76,225 |
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| 74,681 |
| (1,511) |
| 73,170 | ||||||||||||||||||||||||||||
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| Nine Months Ended |
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
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| September 30, 2017 |
| September 30, 2016 | |||||||||||||||||||||||||||||||||||||||
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| Regulated |
| Other |
| Consolidated |
| Regulated |
| Other |
| Consolidated | |||||||||||||||||||||||||||||||
Operating revenues |
| $ | 602,341 |
| $ | 3,872 |
| $ | 606,213 |
| $ | 606,323 |
| $ | 16,753 |
| $ | 623,076 | |||||||||||||||||||||||||
Operations and maintenance expense |
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| 210,842 |
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| (2,879) |
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| 207,963 |
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| 210,014 |
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| 17,333 |
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| 227,347 | |||||||||||||||||||||||||
Depreciation |
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| 102,340 |
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| (832) |
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| 101,508 |
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| 98,445 |
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| (800) |
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| 97,645 | |||||||||||||||||||||||||
Operating income (loss) |
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| 246,361 |
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| 5,633 |
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| 251,994 |
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| 255,431 |
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| (1,808) |
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| 253,623 | |||||||||||||||||||||||||
Interest expense, net |
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| 60,277 |
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| 4,847 |
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| 65,124 |
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| 57,061 |
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| 3,075 |
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| 60,136 | |||||||||||||||||||||||||
Allowance for funds used during construction |
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| 10,570 |
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| - |
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| 10,570 |
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| 6,446 |
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| - |
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| 6,446 | |||||||||||||||||||||||||
Income tax expense (benefit) |
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| 12,243 |
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| (344) |
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| 11,899 |
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| 18,610 |
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| (1,677) |
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| 16,933 | |||||||||||||||||||||||||
Equity (loss) earnings in joint venture | - | - | - | - | - | - | (127) | (127) | |||||||||||||||||||||||||||||||||||
Provision for income taxes (benefit) | 3,633 | 432 | 701 | 4,766 | 3,127 | (3,448) | (6,803) | (7,124) | |||||||||||||||||||||||||||||||||||
Net income (loss) |
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| 184,733 |
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| 1,532 |
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| 186,265 |
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| 186,579 |
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| (2,046) |
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| 184,533 | 64,030 | 119,251 | 408 | 183,689 | 59,934 | 13,398 | (21,551) | 51,781 | |||||||||||||||||
Capital expenditures |
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| 337,321 |
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| 410 |
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| 337,731 |
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| 269,046 |
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| 973 |
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| 270,019 | 113,793 | 64,114 | 102 | 178,009 | 110,606 | 8,128 | - | 118,734 | |||||||||||||||||
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| September 30, |
| December 31, | March 31, | December 31, | ||||||
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| 2017 |
| 2016 | 2021 | 2020 | ||||||
Total assets: |
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Regulated |
| $ | 6,355,896 |
| $ | 5,953,702 | ||||||
Regulated water | $ | 7,957,080 | $ | 7,838,034 | ||||||||
Regulated natural gas | 5,374,760 | 5,303,507 | ||||||||||
Other |
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| 189,485 |
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| 205,289 | 490,075 | 563,736 | ||||
Consolidated |
| $ | 6,545,381 |
| $ | 6,158,991 | $ | 13,821,915 | $ | 13,705,277 | ||
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Note 1314 – 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, 2017,March 31, 2021, the aggregate amount of $16,898$17,627 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, the Company has insurance coverage for certain of these loss contingencies, and as of March 31, 2021, estimates that approximately $3,294 of the amount accrued for these matters are probable of recovery through
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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 water customers in one division served by the Company’s Illinois subsidiary. Although the Company has determined that it is reasonably possible that a fine or penalty may be incurred, it cannot estimate the possible range of loss at this time and 0 liability has been accrued for these future costs. In addition, on September 3, 2019, two individuals, on behalf of themselves and those similarly situated, commenced an action against the Company’s Illinois subsidiary in the State court in Will County, Illinois related to this do not consume advisory. The complaint seeks class action certification, attorney's fees, and "damages, including, but not limited to, out of pocket damages, and discomfort, aggravation, and annoyance” based upon the water provided by the Company’s subsidiary to a discrete service area in University Park Illinois. The complaint contains allegations of damages as a result of supplied water that exceeded the standards established by the federal Lead and Copper Rule. The complaint is in the discovery phase and class certification has not been granted. The Company plans to vigorously defend against this claim. A claim for the expenses incurred has been submitted to the Company’s insurance carrier for potential recovery of a portion of these costs, and on August 3, 2020, the Company received $2,874 in insurance proceeds. The Company continues to assess the potential loss contingency on this matter. While the final outcome of these loss contingenciesthis 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 these matters arethis matter is not expected to have a material adverse effect on the Company’s financial position, results of operations or
21
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
cash flows. Further,
Although the results of legal proceedings cannot be predicted with certainty, other than disclosed above, there are no other pending legal proceedings to which the Company has insurance coverage for certainor any of these loss contingencies, and asits subsidiaries is a party or to which any of September 30, 2017, estimatesits properties is the subject that approximately $5,415 of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported inmaterial or are expected to have a material effect on the Company’s consolidated balance sheet as deferred charges and other assets.financial position, results of operations, or cash flows.
In addition to the aforementioned loss contingencies, the Company self-insures 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 $1,451$1,535 at September 30, 2017March 31, 2021 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.
Note 14 – Income Taxes
DuringAssociated with the nine months ended September 30, 2017, the Company’s Federal net operating loss (“NOL”) carryforward decreased by $31,935. In addition, during the nine months ended September 30, 2017, the Company’s state NOL carryforward increased by $23,173. As of September 30, 2017, the balanceapproval of the Company’s Federal NOL was $81,208. The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires no valuation allowance. As of September 30, 2017, the balance of the Company’s gross state NOL was $600,358, a portion of which is offset by a valuation allowance because the Company does not believe the state NOLs are more likely than not to be realized. The Company’s Federal and state NOL carryforwards begin to expire in 2032 and 2023, respectively. The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of $64,738 and $85,523, respectively. The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were $145,947 and $685,880 respectively. The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability.
In accordance with a 2012 settlement agreement withPeoples Gas Acquisition from the Pennsylvania Public Utility Commission, the Company has committed to addressing the replacement of gathering pipe over a seven year timeframe for an estimated cost of $120,000, which will be recoverable through customer rates. Additionally, the Company committed to provide $23,004 of one-time customer rate credits to its Pennsylvania natural gas utility customers and water and wastewater customers served by Aqua Pennsylvania, expenses, for tax purposes, qualifying utility asset improvement costs, which results in a substantial reduction in income tax expense and greater net income and cash flows. The Company’s effective income tax rate forInc. In the third quarter of 20172020, the Company granted $4,080 of customer rate credits to its water and 2016wastewater customers served by Aqua Pennsylvania and $18,924 was 4.3% and 10.3%, respectively, and forgranted to its Pennsylvania natural gas utility customers in the first nine monthsfourth quarter of 2017 and 2016 was 6.0% and 8.4%, respectively. 2020.
AsNote 15 – Income Taxes
On March 16, 2020, the Company completed the Peoples Gas Acquisition. On March 31, 2020, the Company changed the method of September 30, 2017 regulatory assets increased by $96,140, as compared to the beginning of the year, primarily due to the effect of additional tax deductionsaccounting for certain qualifying infrastructure improvements, which results in differences between costs capitalized for book and deducted as an expense for tax purposes.
As of September 30, 2017, the total gross unrecognized tax benefit was $28,938, of which $23,700, if recognized, would affect the Company’s effective tax rate as a result of the regulatory treatment afforded for qualifying infrastructure improvementsinvestments at its Peoples Natural Gas subsidiary, its largest natural gas subsidiary in Pennsylvania. At December 31, 2016, the Company had unrecognized tax benefits of $28,099. This change allows a
Accounting rules for uncertain tax positions specify that tax positions for which the timing of resolution is uncertain should be classified as long-term liabilities. Judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes. Management believes that an adequate provision has been made for any adjustments that may result from tax
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
examinations. Althoughtax deduction for qualifying utility asset improvement costs that were formerly capitalized for tax purposes. The Company is performing an analysis to determine the timingultimate amount of income tax audit resolutionsqualifying utility asset improvement costs eligible to be deducted under the IRS’s final tangible property regulations that will be reflected on its 2021 and negotiations with taxing authorities is highly uncertain,2020 Federal Tax Return. As a result, the Company does not anticipatehas estimated a significant changeportion of its infrastructure investment at Peoples Natural Gas since the acquisition date that will qualify as a utility system repairs deduction for 2021 and 2020. Consistent with the Company’s accounting for differences between book and tax expenditures in Pennsylvania, the Company is utilizing the flow-through method to the total amountaccount for this timing difference. The Company completed its analysis of unrecognizedthe income tax benefits withinfor qualifying capital expenditures made prior to March 16, 2020 (“catch-up adjustment”) and recorded a regulatory liability of $160,655 for these tax benefits which will remain on the consolidated balance sheet pending regulatory guidance. In August 2020, the Company filed a petition with the Pennsylvania Public Utility Commission proposing treatment of the catch-up adjustment. On March 11, 2021, the Company and the statutory advocates filed a Joint Petition of Settlement (“Settlement”) representing a Settlement of the parties and on May 6, 2021 it was approved by the Pennsylvania Public Utility Commission. The Settlement proposes, among other points, that the catch-up adjustment be provided to utility customers over a five-year period, and the Company can continue to use flow-through accounting for the current tax repair benefit until its next 12 months.base rate case.
The Company’s effective tax rate was 2.5% and (16.0)% for the three months ended March 31, 2021 and 2020, respectively. The increase in the effective tax rate for the first quarter can be attributed to an increase in our income before income taxes as compared to the prior period, offset by an increase in the income tax benefit recognized due to additional tax deductions for qualifying infrastructure recognized in the first quarter of 2021. The statutory Federal tax rate is 21% for three months ended March 31, 2021 and 2020. 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. In determining its interim tax provision, the Company reflects its estimated permanent and flow-through tax differences for the taxable year, including the basis difference for the adoption of the tangible property regulations. Qualifying utility asset improvement costs and the amortization of excess deferred income taxes caused the year-to-date effective tax rate to be significantly different from the statutory rate.
In connection with the completion of the Peoples Gas Acquisition, the Company identified changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the one year measurement period, which related to new information obtained about facts and circumstances that existed as of the acquisition date. Those changes are considered a measurement-period adjustment, and an offset was recorded as an adjustment to goodwill. The Company records all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current-period income tax expense.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 (CAA) on December 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The CAA modifies the employee retention credit
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
(introduced under the CARES Act), extended paid sick and child-care leave through March 31, 2021, and expands the business meal deduction to 100% of business-related restaurant meals in 2021 and 2022. We evaluated the provisions of the CARES and CAA Acts and do not anticipate that the impacts will have a material effect on our consolidated financial statements.
On March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) was signed into law. The ARPA includes business tax provisions, including the extension of the employee retention credit, expansion of the Families First Coronavirus Response Act with respect to Family and Medical Leave Act tax credits, expanded limits on executive compensation deductions, repeal of the worldwide interest allocation, changes to pension funding requirements, and extension of the limitation on excess business losses for non-corporate taxpayers. We evaluated the provisions of the ARPA Act and do not anticipate that the impacts will have a material effect on our consolidated financial statements.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 1516 – Recent Accounting Pronouncements
Pronouncements to be adopted upon the effective date:
In March 2017,August 2020, the FASB issued updated accounting guidance on accounting for convertible instruments and contracts in an entity’s own equity. The updated guidance reduces the presentationnumber of net periodic pensionaccounting models for convertible debt and postretirement benefit cost (net benefit cost). Historically, net benefit cost is reportedconvertible preferred stock instruments and makes certain disclosure amendments intended to improve the information provided to users. Additionally, the guidance also amends the derivative guidance for the “own stock” scope exception, which exempts qualifying instruments from being accounted for as an employee cost within operating income, net of amounts capitalized.derivatives if certain criteria are met. Further, the standard changes the way certain convertible instruments are treated when calculating earnings per share. The guidance requires the bifurcation of net benefit cost. The service cost component will be presented with other employee compensation costs in operating income and the other components of net benefit cost will be reported separately outside of operating income, and will not be eligible for capitalization. Theupdated accounting guidance is effective for annual reporting periodsfiscal years beginning after December 15, 2017, and interim periods within that reporting period, and is to be applied retrospectively for the presentation of the service cost component and the other components of net benefit cost, and on a prospective basis for the capitalization of only the service cost component of net benefit cost.2021 with early adoption permitted beginning in 2021. The Company is evaluating the requirements of the updated guidance to determine the impact of adoption,adoption.
In March 2020, the FASB issued accounting guidance that provides companies with optional guidance, including expedients and does not believe it will have a material impact on its results of operations or financial position.
exceptions for applying generally accepted accounting principles to contracts and other transactions affected by reference rate reform, such as the London Interbank Offered Rate (LIBOR). In January 2017,2021, the FASB clarified the scope of that accounting standards update with additional guidance for reference rate reform on financial reporting. The accounting guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is evaluating the impact of this accounting guidance.
Pronouncement adopted during the year:
In December 2019, the FASB issued updated accounting guidance that eliminates step 2simplifies the accounting for income taxes. The updated guidance removes certain exceptions to the general principles of accounting for income taxes to reduce the current goodwill impairment test, which requirescost and complexity of its application, including the accounting for intraperiod tax allocation when there is a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured atfrom continuing operations and income or a gain from other items, deferred tax liabilities for equity method investments when a foreign subsidiary becomes an equity method investment or when a foreign equity method investment becomes a subsidiary, and calculating income taxes in an interim period when a year-to-date loss exceeds the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceedanticipated loss for the carrying amount of goodwill. The guidance will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The Company has elected to early adopt the provisions ofyear. Additionally, the updated guidance clarifies and amends the existing guidance over accounting for its annual impairment valuation performedfranchise taxes and other taxes partially based on income, an entity’s tax basis of goodwill, separate entity financial statements, interim recognition of enactment of tax laws or rate changes, and improvements to the Codification for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the third quarter of 2017, and the provisions of theequity method. As permitted, we adopted this updated guidance on January 1, 2021, which did not have ana material impact on its results of operations orour consolidated financial position. statements.
In August 2016, the FASB issued updated accounting guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company has elected to early adopt the provisions of the updated guidance, which resulted in the reclassification of $375 debt extinguishment costs, for the nine months ended September 30, 2016, from cash flows from operating to financing activities to conform to the new classification.
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL STATEMENTS (continued)CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
In March 2016, the FASB issued updated accounting guidance on simplifying the accounting for share-based payments, which includes several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The updated guidance was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption available. On January 1, 2017, the Company adopted the updated guidance, prospectively, and recognized a previously unrecognized windfall tax benefit for stock-based compensation of $982 associated with the Company’s 2012 Federal net operating loss, which was recorded as an adjustment to deferred income taxes and retained earnings (refer to the presentation of “cumulative effect of change in accounting principle - windfall tax benefit” on the Company’s Consolidated Statement of Equity). Additionally, income tax benefits in excess of compensation costs or tax deficiencies for share-based compensation are now recorded to the Company’s income tax provision, instead of historically to stockholder’s equity, which impacts its effective tax rate. Lastly, all tax-related cash flows resulting from share-based payments are reported prospectively as operating activities on the statement of cash flows, a change from the historical requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities.
In February 2016, the FASB issued updated accounting guidance on accounting for leases, which requires lessees to establish a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. For income statement purposes, leases will be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The updated accounting guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption available. The Company is evaluating the requirements of the updated guidance to determine the impact of adoption.
In January 2016, the FASB issued updated accounting guidance on the recognition and measurement of financial assets and financial liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The updated guidance is effective for interim and annual periods beginning after December 31, 2017. The Company does not expect the provisions of the updated guidance to have a material impact on its results of operations or financial position.
24
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
In May 2014, the FASB issued updated accounting guidance on recognizing revenue from contracts with customers, which outlines a single comprehensive model that an entity will apply to determine the measurement of revenue and timing of recognition. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The updated guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Additionally, the accounting for contributions in aid of construction may be impacted by the updated accounting guidance if the contributions are determined to be in scope. In July 2015, the FASB approved a one year deferral to the original effective date of this guidance. The updated guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the updated guidance in each prior reporting period, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the updated guidance recognized through retained earnings at the date of adoption. In 2016, the Company performed an evaluation of the requirements of the updated guidance and based on current interpretations of the updated guidance believes that the impact of adoption will not result in a material change in the Company’s measurement of revenue and timing of recognition if contributions in aid of construction are determined to not be in scope. In 2017, the American Institute of Certified Public Accountants (AICPA) power and utility entities revenue recognition task force has determined that contributions in aid of construction are not in the scope of the new standard, and submitted its recommendation to the AICPA’s revenue recognition working group for approval. The Company plans to implement the updated guidance using the modified retrospective approach on January 1, 2018.
25
AQUA AMERICA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: the expected timing of closing of our acquisitions; the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “estimates,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among others:others, the effects of the COVID-19 pandemic, the effects of regulation, abnormal weather, changes in capital requirements and funding, our ability to close acquisitions, changes to the capital markets, 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, 20162020 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such report.report and those included under the captions “Risk Factors” and this Quarterly Report. 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.
Aqua America,Essential Utilities, Inc. (“we”, “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or wastewaternatural gas services to what we estimate to be almost threean estimated five million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Virginia. OurKentucky under the Aqua and Peoples brands. One of our largest operating subsidiary,subsidiaries, Aqua Pennsylvania, Inc. (“Aqua Pennsylvania”), provides water or wastewater services to approximately one-half of the total number of peoplewater 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 otheradditional states. In addition,Additionally, pursuant to the Company’s growth strategy, 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. Lastly, the Company’s market-based activities are conducted through Aqua Infrastructure, LLC and Aqua Resources, Inc. and certain other non-regulated subsidiaries of Peoples. Prior to our October 30, 2020 sale of our investment in a joint venture, Aqua Infrastructure providesprovided non-utility raw water supply services for firms in the natural gas drilling industry. Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to our utility companies’ service territories; and offers, through a third party, water and wastewater line repair service and protection solutions to households. Following the October 30, 2020
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
During 2016, we completedclosing, Aqua Infrastructure does not provide any services to the sale of business units withinnatural gas drilling industry. Aqua Resources which provided liquid waste haulingoffers, through a third party, water and disposal sewer service line protection solutions and repair
services and inspection, cleaningto households.
The non-regulated subsidiaries of Peoples provide utility service line protection solutions and repair of stormservices to households and sanitary wastewater lines. Additionally, in 2016, we decided to market for sale two business units that are reported within the Company’s market-based subsidiary, Aqua Resources. One business unit installedoperates gas marketing and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, for which the sale was completed in January 2017. The other business unit repairs and performs maintenance on water and wastewater systems, for which the sale was completed in June 2017. production entities.
Aqua America,Essential Utilities, Inc., which prior to its name change in 2004February 2020 was known as Philadelphia Suburban Corporation,Aqua America, Inc., was formed in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania, formerly known as Philadelphia Suburban Water Company. In the early 1990s, we embarked on a growth-through-acquisition strategy focused on water and wastewater operations.strategy. Our most significant transactions to date have been the merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition of American Water Works Company, Inc.’s regulated operations in Ohio in 2012. Since2012, and the March 16, 2020 acquisition of Peoples, a Pittsburgh, Pennsylvania based natural gas distribution company. For many years, starting in the early 1990s, our business strategy has been primarily directed toward the regulated water and wastewater utility industry, where we have more than quadrupled the number of regulated customers we serve, and hashave extended our regulated operations from southeastern Pennsylvania to include our current regulated utility operations in seven other states. Currently,On March 16, 2020, the Company completed the Peoples Gas Acquisition, a natural gas distribution utility, marking its entrance into the regulated natural gas business. The Company seeks to acquire businesses in the U.S. regulated sector, which includes water and wastewater utilities, natural gas utilities, and other regulated utilities, and to opportunistically pursue growth ventures in select market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated utility businesses.
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.
COVID-19 Pandemic
We provide a critical service to our customers, which means that it is paramount that we keep our employees who operate the business safe and informed. We continue to monitor the outbreaks of COVID-19 and continue to take steps to mitigate the potential risks to our employees. We also continue to work with our suppliers to monitor potential impacts to our supply chain. At this time, no material risks to our supply chain have been identified. We continue to implement strong physical and cyber-security measures in an effort to ensure that our systems remain functional in order to both serve our operational needs with a remote workforce, if needed, and maintain uninterrupted service to our customers.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
We will continue to monitor developments affecting our business, workforce, and suppliers and take additional precautions as we believe are warranted. We are actively monitoring our utility billings and have noticed increases in residential customer usage offset by decreases in commercial and industrial usage. In response to concerns about customer economic hardship and affordability during the COVID-19 pandemic health crisis, our state regulators mandated the temporary curtailment of certain collection practices, such as disconnections from utility service. In addition, we are monitoring collections of customer utility accounts as to potential impacts on cash flows, and increased expenses for costs associated with workforce-related expenses, security and cleaning of company offices and operating facilities, as well as other one-time expenses above the expense amounts included in general rates. In most of the states where we operate, regulators have allowed utilities to resume disconnections from utility service for certain customers who have unpaid balances. In eight of the ten states in which we operate regulated utilities, public utility commissions issued guidance for utilities to defer COVID-19 expenses in anticipation of seeking recovery in a future rate proceeding, and we continue to evaluate the impact of this guidance. We are continuing with our capital investment program, and based on the current situation, continue to believe we are able to complete the planned projects and improvements to our utility infrastructure. Despite our efforts, the ultimate impact to the Company of the COVID-19 pandemic also depends on factors beyond our knowledge, control, or ability to predict, including the duration and severity of this pandemic, the emergence of new variants of the virus, the resurgence of positive cases, the development and availability of effective treatments and vaccines, the speed at which such vaccines are delivered, as well as third party actions taken to contain its spread and mitigate its public health effects. Although some of our customers are facing economic hardships due to various impacts of the COVID-19 pandemic and may be unable to pay for our utility services, we do not currently anticipate a significant impact to our financial position, results of operations or cash flows as a result of the COVID-19 pandemic.
Financial Condition
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.
During the first ninethree months of 2017,2021, we had $337,731incurred $178,009 of capital expenditures, expended $5,860 for the acquisition of water and wastewater utility systems, issued $441,294$85,000 of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of $293,270.$49,610. The capital expenditures were related to new and replacement water, wastewater, and natural gas mains, improvements to treatment plants, tanks, hydrants, and service lines, construction of natural gas fueled energy plants, well and booster improvements, information technology improvements, and other enhancements and improvements. The issuance of long-term debt was comprised principally of thefor funds borrowed under our revolving credit facility and used for capital expenditures.
In August 2020, we entered into a forward equity sale agreement for 6,700,000 shares of common stock with affiliates of a certain underwriter (“forward purchaser”). In connection with the issuancesforward equity sale agreement, the forward purchaser borrowed an equal number of $80,000shares of our common stock from stock
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
lenders and $50,000sold the borrowed shares to the public. We will not receive any proceeds from the sale of first mortgage bondsour common stock by the forward purchaser until settlement of all or a portion of the forward equity sale agreement. The actual proceeds to be received by us will vary depending upon the settlement date, the number of shares designated for settlement on that settlement date and the method of settlement. We intend to use any proceeds received by us upon settlement of the forward equity sale agreement for general corporate purposes, including for water and wastewater utility acquisitions, working capital and capital expenditures.
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the Company has committed to addressing the replacement of gathering pipe over a seven year timeframe for an estimated cost of $120,000, which will be recoverable through customer rates. Additionally, the Company has committed to provide $23,004 of one-time customer rate credits to its Pennsylvania natural gas utility customers and water and wastewater customers served by Aqua PennsylvaniaPennsylvania. The Company granted $4,080 of customer rate credits to its water and wastewater customers during the third quarter of 2020, and $18,924 was granted to its natural gas utility customers in July and January 2017 and $100,000the fourth quarter of first mortgage bonds by Aqua Illinois in July 2017. 2020.
At September 30, 2017,March 31, 2021 we had $4,139$18,046 of cash and cash equivalents compared to $3,763$4,827 at December 31, 2016.2020. During the first ninethree months of 2017,2021, we used the proceeds from the issuance of long-term debt and internally generated funds to fund the cash requirements discussed above and to pay dividends.
27
AQUA AMERICA, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
At September 30, 2017,March 31, 2021 our $250,000$1,000,000 unsecured revolving credit facility, which expires in February 2021,December 2023, had $183,547$536,543 available for borrowing. At September 30, 2017,Additionally, at March 31, we had short-term lines of credit of $135,500,$235,500, of which $114,510$160,607 was available for borrowing. One of our short-term lines of credit is an Aqua Pennsylvania $100,000 364-day unsecured revolving credit facility with four banks, which is used to provide working capital, and as of September 30, 2017, $80,000March 31, $35,107 was available for borrowing. In July we issued $180,000Another one of long-term debt, the proceedsour short-term lines of credit is a Peoples Natural Gas Companies $100,000 364-day unsecured revolving credit facility with two banks, which wereis used to reduce our borrowings under our revolving credit facilities. Subsequently, in October we issued $75,000provide working capital, and as of long-term debt, the proceeds of which were used to reduce our borrowings under our revolving credit facilities.
March 31, 2021, $90,000 was available for borrowing. Our short-term lines of credit of $135,500$235,500 are subject to renewal on an annual basis. Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
On April 15, 2021, the Company’s operating subsidiary Aqua Ohio, Inc. issued $100,000 of first mortgage bonds, of which $50,000 is due in 2031 and $50,000 is due in 2051, with interest rates of 2.37% and 3.35%, respectively. The Company’s consolidated balance sheet historically has had a negative working capital position whereby routinely our current liabilities exceed our current assets. Management believes that internally generated funds alongproceeds from these bonds were used for general corporate purposes and to repay existing indebtedness. Further on April 19, 2021, the Company issued $400,000 of long-term debt, less expenses of $4,010, which is due in 2031 with existing credit facilities andan interest rate of 2.40%. The Company used the proceeds from this issuance to repay $50,000 of borrowings under our Aqua Pennsylvania five- year revolving credit facility, and the issuance of long-term debt will be adequatebalance was used to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at leastrepay in full the next twelve months. borrowings under its existing five-year unsecured revolving credit agreement.
Consolidated Results of Operations
Revenues decreasedincreased by $11,585$327,980 or 5.1%128%, primarily due to a decrease in customer water consumption, and a decrease in market-based activities revenueto:
additional natural gas revenues of $3,431$315,840 associated with the dispositions of business units, offset by Peoples Gas Acquisition which closed on March 16, 2020, and which reflects a full quarterly result for 2021;
an increase in water and wastewater rates, andincluding infrastructure rehabilitation surcharges, of $1,759, and $6,549;
additional water and wastewater revenues of $505$3,275 associated with a larger customer base due to utility acquisitions. acquisitions and organic growth; and
an increase in customer water consumption associated with increased residential usage, which is offset by a decrease in customer water consumption for commercial customers; offset by foregone water revenue of $347 as a result of an advisory for some of our water utility customers served by our Illinois subsidiary. We expect this impact on revenues resulting from the advisory to continue in the second quarter of 2021.
Operations and maintenance expenses decreasedincreased by $11,830$18,438 or 14.8%17%, primarily due to a reduction into:
incremental operating expenses for Aqua Resourcescosts of $4,249$42,864 associated with the completionPeoples Gas Acquisition, which closed on March 16, 2020;
additional expenses of $839 associated with the dispositionCOVID-19 pandemic for our water utility operations consisting primarily of business units,bad debt expense of $902, which was finalizedare partially offset by decreases in June 2017, a decrease intravel expenses;
additional operating costs associated with acquired and pending acquisitions of water production costsand wastewater utility systems of $2,928, a decrease$778;
expenses of $669 associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary, which is offset by the prior year effect of expenses of $605 recognized in the Company’s self-insured employee medical benefit program expensefirst quarter of $2,425, and a decrease2020. We expect the expenses associated with remediating the advisory to continue in postretirement benefits expensethe second quarter of $1,011. The decrease in water production costs is due to a reduction in purchased water expense of $1,907 due to replacing a purchased water supply coincident with the Company securing its own water supply source. 2021; offset by
Depreciation expense increased by $383 or 1.1%, primarily due to the utility plant placed in service since September 30, 2016.
Interest expense increased by $2,243 or 11.1%, primarily due to an increase in average borrowings.
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
lower insurance expense of $4,025 for reduced insurance claim reserve requirements; and
the prior year effect of transaction expenses of $25,397 in the first quarter of 2020 for the Peoples Gas Acquisition, primarily representing expenses associated with investment banking fees, employee related expenses, obtaining regulatory approvals, legal expenses, and integration planning.
Purchased gas increased by $119,383 primarily due to the closing of the Peoples Gas Acquisition on March 16, 2020, and a reflection of full first quarter results in the first quarter of 2021. Purchased gas represents the cost of gas sold by Peoples.
Depreciation expense increased by $26,071 or 57%, primarily due to depreciation expense of $22,707 associated with our completion of the Peoples Gas Acquisition on March 16, 2020 and the utility plant placed in service since March 31, 2020.
Amortization increased by $628 primarily due to amortization expense associated with our completion of the Peoples Gas Acquisition.
Taxes other than income taxes increased by $4,605 or 28%, primarily due to increases in payroll taxes of $2,476 and property taxes resulting from additional expenses associated with acquired operations primarily the Peoples Gas Acquisition.
Interest expense increased by $15,647 or 45%, primarily due to the following items:
an increase in average borrowings; and
interest on debt assumed in the Peoples Gas Acquisition; offset by
a decrease in our effective interest rate.
Equity loss (earnings) in joint venture was $127 in 2020 and our investment in the joint venture was sold in October 2020.
Other expense decreased by $5,150 primarily due to the probable recovery of a previously incurred cost that resulted in the recognition of a regulatory asset, and a decrease in the non-service cost components of our net benefit cost for pension benefits.
Our effective income tax rate was 2.5% in the first quarter of 2021 and (16.0)% in the first quarter of 2020. The effective income tax rate increased due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied, andpre-tax income, offset by an increase in the AFUDC rate as a resultincome tax benefit recognized due to additional tax deductions for qualifying
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
infrastructure investments recognized in the amountfirst quarter of AFUDC related to equity.
Our effective2021. The Company’s provision for income taxes represented an income tax rate was 4.3%benefit in the thirdfirst quarter of 2017 and 10.3% in the third quarter of 2016. The effective income tax rate decreased2020 due to the effecteffects of additional tax deductions recognized in the third quarter of 2017 for certain qualifying infrastructure improvements for Aqua Pennsylvania. and lower pre-tax income during the period.
Net income increased by $3,055 or 4.2%,$131,908 primarily as a result of the factors described above.
AnalysisResults of First Nine MonthsOperations – Regulated Water Segment
Our Regulated Water segment is comprised of 2017 Compared to First Nine Months of 2016
Revenues decreased by $16,863 or 2.7%, primarily due to a decrease in market-based activities revenue of $12,970 associated with the dispositions of business units, and a decrease in customer water consumption, offset by an increase ineight operating segments representing its water and wastewater rates and infrastructure rehabilitation surcharges of $4,586, additionalregulated utility companies which are organized by the states where the Company provides water and wastewater revenues from organic growth of $2,296,services. The Regulated Water segment is aggregated into one reportable segment and additional waterfor a discussion and wastewater revenues of $1,257 associated with a larger customer base due to utility acquisitions.
Operations and maintenance expenses decreased by $19,384 or 8.5%, primarily due to a reduction in operating expenses for Aqua Resources of $12,981 associated with the completionanalysis of the dispositionsegment operating results, refer to the consolidated results of business units,operations.
Results of Operations – Regulated Natural Gas Segment
Our Regulated Natural Gas segment is affected by the prior year effectcost of natural gas, which is passed through to customers using a gain on sale of a utility system of $1,215. The gain on sale of a utility system is reportedpurchased gas adjustment clause and includes commodity price, transportation and storage costs. These costs are reflected in the consolidated statement of netoperations and comprehensive income as a component of operations and maintenance expense. The decrease in water production costs is due to a reduction in purchased water expense of $2,886 due to replacing a purchased water supply coincident with the Company securing its own water supply source.
Depreciation expense increased by $3,863 or 4.0%, primarily due to the utility plant placed in service since September 30, 2016.
Taxes other than income taxes increased by $1,296 or 3.0% primarily due to an increase in property taxes of $489 primarily due to the effect of a benefit recorded in 2016 for Ohio based on the final settlement of a property tax bill, and an increase in pumping fees of $319 in Texas due to higher rates and water production.
Interest expense increased by $4,988 or 8.3%, primarily due to an increase in average borrowings.
AFUDC increased by $4,124, due to an increasegas expenses. Therefore, fluctuations in the average balancecost of purchased gas impact operating revenues on dollar-for-dollar basis, but do not impact gross margin. Management uses gross margin, a non-GAAP financial measure, defined as operating revenues less purchased gas expense, to analyze the financial performance of our Regulated Natural Gas segment, as management believes gross margin provides a meaningful basis for evaluating our natural gas utility plant construction workoperations since purchased gas expenses are included in progress,operating revenues and passed through to which AFUDC is applied, and an increase incustomers. The following table includes the AFUDC rate as a resultoperating results for our Regulated Natural Gas segment for the period since the acquisition date of an increase inMarch 16, 2020, including the amountreconciliation of AFUDC relatedgross margin (non-GAAP) to equity. operating revenues (GAAP):
AQUA AMERICA,ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Our effective
Three Months Ended | |||||
March 31, | |||||
2021 | 2020 | ||||
Operating revenues (GAAP) | $ | 343,115 | $ | 38,544 | |
Purchased gas | 122,888 | 12,770 | |||
Gross margin (non-GAAP) | 220,227 | 25,774 | |||
The term gross margin is not intended to represent operating revenues, the most comparable GAAP financial measure, as an indicator of operating performance. In addition, our measurement of gross margin is not necessarily comparable to similarly titled measures reported by other companies.
On March 31, 2020, we changed the method of tax accounting for certain qualifying infrastructure investments at Peoples Natural Gas, our largest natural gas subsidiary in Pennsylvania, which provided for a reduction to income tax rate was 6.0% in the first nine months of 2017 and 8.4% in the first nine months of 2016. The effective income tax rate decreasedexpense due to the effectflow-through treatment of additionalthe current tax deductionsbenefits. As a result, current tax benefits of $34,069 and $5,923 in the Regulated Natural Gas segment were recognized in the first nine monthsquarter of 2017 for certain qualifying infrastructure improvements for Aqua Pennsylvania. 2021 and 2020, respectively.
Net income increased by $1,732 or 0.9%, primarily as a result of the factors described above.
We describe the impact of recent accounting pronouncements in Note 15, 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. There have been no significant changes in our exposure to market risks since December 31, 2016. Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 20162020, filed March 1, 2021, for additional information.information on market risks.
Item 4 – Controls and Procedures
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(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.
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No change(b)Changes in Internal Control over Financial Reporting
On March 16, 2020, we completed the Peoples Gas Acquisition. For additional information refer to Note 3 – Acquisitions to the consolidated financial statements included in this report. We consider this acquisition material to our business, financial condition, and results of operations, and believe the changes in our internal controls and procedures as a result of the Peoples Gas Acquisition have a material effect on our internal control over financial reporting. During the time since acquisition, we have assessed the control environment and made certain changes in our internal control over financial reporting, occurred duringincluding design changes, and we have performed testing of operating effectiveness over many of Peoples’ internal controls. We now consider the Peoples’ business to be included in the scope of our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, ourassessment over internal control over financial reporting.controls.
We are party to various legal proceedings.proceedings in the ordinary course of business. Although the results of these legal proceedings cannot be predicted with certainty, there are no 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.
There have been no material changes toPlease review the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 20162020, under “Part 1, Item 1A – Risk Factors.”
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, 2017:March 31, 2021:
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July 1-31, 2017 |
| 196 |
| $ | 33.46 |
| - |
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| 513 |
| $ | 33.86 |
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| - |
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| $ | 33.75 |
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January 1 - 31, 2021 | - | $ | - | - | - | ||||
February 1 - 28, 2021 | 71,650 | $ | 42.81 | - | - | ||||
March 1 - 31, 2021 | 4,455 | $ | 43.80 | - | - | ||||
Total | 76,105 | $ | 42.87 | - | - | ||||
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(1)These amounts consist of 76,105 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.
The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference.
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4.4 | Form of Global Note of the Company issued April 19, 2021 (included in Exhibit 4.3) | |
31.1* | ||
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32.1* | Certification of Chief Executive Officer, furnished pursuant to 18 U.S.C. Section | |
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32.2* | Certification of Chief Financial Officer, furnished pursuant to 18 U.S.C. Section | |
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| 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 | |
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
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101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
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101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
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101.PRES | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL (included in Exhibit 101) |
*Filed herewith
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 2, 2017May 10, 2021
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Registrant | |||
/s/ Christopher H. Franklin | |||
Christopher H. Franklin | |||
Chairman, President and | |||
Chief Executive Officer | |||
/s/ | |||
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Executive Vice President and | |||
Chief Financial Officer | |||