Integrity
Respect
Excellence
Essential Utilities Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010
NYSE: WTRG
877.987.2782
www.Essential.co
2019
Annual Report
Essential Utilities Inc.
Providing
Natural
Resources
for Life
NYSE: WTRG
Corporate
Information
Board of Directors
Christopher Franklin
Chairman, Chief Executive Officer
and President
Essential Utilities Inc.
Director since 2015
Nicholas DeBenedictis
Chairman Emeritus
Essential Utilities Inc.
Director since 1992
Francis Idehen
Chief Operating Officer
GCM Grosvenor
Director since 2019
Lee C. Stewart
Private Financial
Consultant
Director since 2018
Elizabeth B. Amato
Sr. Vice President and Chief Human
Resources Officer
United Technologies Corporation
Director since 2018
Daniel J. Hilferty
President and Chief Executive Officer
Independence Health Group
Director since 2017
Ellen T. Ruff
Former President
Duke Energy
Director since 2006
Christopher C. Womack
President of External Affairs
Southern Company
Director since 2019
Officers
Christopher Franklin
Chairman, Chief Executive Officer and President
Richard S. Fox
Executive Vice President
Chief Operating Officer
Christopher P. Luning
Executive Vice President
General Counsel and Secretary
Robert A. Rubin
Senior Vice President
Chief Accounting Officer
Matthew Rhodes
Executive Vice President
Strategy and Corporate Development
Daniel J. Schuller
Executive Vice President
Chief Financial Officer
Forward-Looking Statements
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which generally include words
such as “believes,” “expects,” “intends,” “anticipates,” “estimates” and similar expressions. The Company can give no assurance that any actual or future results
or events discussed in these statements will be achieved. Any forward-looking statements represent its views only as of today and should not be relied upon as
representing its views as of any subsequent date. Readers are cautioned that such forward-looking statements are subject to a variety of risks and uncertainties
that could cause the company’s actual results to differ materially from the statements contained in this release. There are important factors that could cause actual
results to differ materially from those expressed or implied by such forward-looking statements including the factors discussed in our Annual Report on Form 10-K
and our Quarterly Reports on Form 10-Q, which are filed with the Securities and Exchange Commission. For more information regarding risks and uncertainties
associated with the Company’s business, please refer to the Company’s annual, quarterly and other SEC filings. The Company is not under any obligation - and
expressly disclaims any such obligation - to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.
Introducing Essential Utilities,
which is a unique pairing of utility companies positioned to play an important
role in solving today’s water, wastewater, and natural gas infrastructure
challenges to create a better quality of life, now, and for our future.
A Natural Fit
130+
year-old companies
Pennsylvania-based
home
natural gas
Water
Wells
home
Water Main
natural gas
water
Water
Vehicles
Storage Tanks
Wells
wastewater
Wastewater
treatment
Water Main
home
Surface Water
Filtration Plants
natural gas
natural gas
Vehicles
Water
Storage Tanks
Wells
Wastewater
treatment
Surface Water
Water Main
Filtration Plants
Vehicles
Storage Tanks
Wastewater
treatment
Surface Water
Filtration Plants
Mission: To improve quality of life and economic
prosperity by safely and reliably delivering Earth’s
most essential resources.
Growing Together
*Approximation
home
natural gas
Water
Wells
Water Main
home
Customer
Connections
Vehicles
natural gas
Storage Tanks
1,026,704
Aqua
Water
Employee
Base
Wastewater
treatment
2x
nearly double
home
natural gas
Water
Wells
Water Main
Vehicles
Storage Tanks
746,549
Peoples
Wastewater
treatment
Aqua 1,600*
Peoples 1,500*
Surface Water
Filtration Plants
+2
New States
Vehicles
Storage Tanks
Wastewater
treatment
Surface Water
Filtration Plants
Wells
Surface Water
Filtration Plants
Water Main
Annual Pipe
Replacement
185* miles
Aqua
150* miles
Peoples
Kentucky
West Virginia
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2019
Financial Highlights
In thousands, except per-share amounts
2019
2018
% Change
Operating revenues
Regulated water segment:
Operating revenues
$889,692
$838,091
6.2%
$886,430
$834,638
6.2%
Operating and maintenance expense
$315,052
$292,232
7.8%
Net income
$224,543
$191,988
17.0%
Diluted net income per common share
$1.04
$1.08
-3.7%
Exclude:
Transaction costs and other items related to the Peoples acquisition
$66,066
$73,963
Pre-acquisition interest expense for funds borrowed for acquisition of Peoples, net
$5,961
Overlapping net interest expense on refinanced debt
$452
Interest income earned on proceeds from April 2019 equity offerings
($23,377)
–
–
–
Income tax effect of Non-GAAP adjustments
($10,149)
($15,127)
Adjusted income (a) (Non-GAAP financial measure)
$263,496
$250,824
5.1%
Adjusted income per common share (a) (b) (Non-GAAP financial measure)
$1.47
$1.41
4.3%
Annualized dividend rate per common share (12/31)
$0.9372
$0.8760
7.0%
Total assets
$9,361,985
$6,964,496
34.4%
Number of utility customers served
1,026,704
1,005,590
2.1%
(a) The GAAP financial measures are net income and net income per share.
(b) Shares used in calculating adjusted income per common share exclude the effect of the shares issued in April 2019 for our common share (25,903) and tangible
equity unit issuances (11,278) for our acquisition of Peoples, since the acquisition for which the equity offerings were issued was not yet complete as of Dec. 31, 2019.
Please see the investor relations page of Essential.co for a reconciliation of GAAP to non-GAAP financial measures.
2019 Annual Report | 2
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Diluted
Adjusted Income
per Common Share
$1.35
$1.32
$1.26
$1.47
$1.41
Capital
Spending
(existing operations, thousands)
‘15*
‘16
‘17
‘18†
‘19††
$478,089
$495,737
$550,273
$364,689
$382,996
‘15
‘16
‘17
‘18
‘19
1,026,704
1,005,590
Utility Customer
Connections
972,265
982,849
957,866
‘15
‘16
‘17
‘18
‘19
$0.937
$0.876
$0.818
Dividends per Share
(annualized)
$0.765
$0.712
‘15
‘16
‘17
‘18**
‘19
* 2015 Net income per share was $1.14 (GAAP). 2015 adjusted for joint venture impairment charge (Non-GAAP).
† 2018 Net income per share was $1.08 (GAAP). 2018 adjusted for transaction costs and other items related to the Peoples transaction (Non-GAAP).
†† 2019 Net income per share was $1.04 (GAAP). 2019 adjusted for transaction costs and other items related to the Peoples transaction (Non-GAAP).
Please see the investor relations page of Essential.co for a reconciliation of GAAP to non-GAAP financial measures.
2019 Annual Report | 3
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A Message
from the
Chairman & CEO
Christopher H. Franklin
Chairman, President and CEO
Dear Shareholder,
It is a privilege to share this historic moment with
gas utilities are intrinsically well-suited partners.
you and present the very first annual report with our
Welcoming a natural gas provider into our organization
new name—Essential Utilities Inc. (“Essential”),
aligns directly with our growth strategy and our
NYSE: WTRG—formerly Aqua America Inc., NYSE:
core competencies of building and rehabilitating
WTR. Essential is comprised of a water and wastewater
infrastructure, regulatory expertise and operational
division (“Aqua”) and a natural gas distribution division
excellence. In fact, the day-to-day operations of water
(“Peoples”).
Our new family of companies has experienced exciting
and momentous change this year. The acquisition of
Peoples on March 16, 2020 marks a historic chapter in
our story and unites two highly respected companies,
each with more than 130 years of industry expertise
and service, into the largest publicly traded water and
natural gas distribution company in the United States.
Essential now serves more than 1 million water and
wastewater utility customer connections and nearly
747,000 gas utility customer connections in 10 states.
Together, we provide utility services to more than 5
million people. With this expanded portfolio, Essential
offers shareholders new opportunities for added value,
as we focus intently on growth, delivering vital water
and gas services to our customers and making prudent
infrastructure investments in the communities where we
operate.
A Natural Fit
From the day we announced our intent to acquire
Peoples, I have said repeatedly that water and natural
and natural gas utilities look incredibly similar: both
specialize in delivering a natural resource under pressure
through a pipe network to serve customers; both monitor
customer usage via a meter; both are subject to the same
regulatory process for setting customer rates; and both
invest a significant percentage of capital each year in
infrastructure maintenance, including pipe replacement.
Essential is now uniquely positioned to have a powerful
positive impact on communities via our utility services,
and it is our mission to improve quality of life and
economic prosperity by safely and reliably delivering
Earth’s most essential resources.
Inclusion
Our mission doesn’t come to life without dedicated,
talented people with commitment and purpose. Every
day, more than 3,000 employees come to work in pursuit
of something bigger than themselves, guided by our core
values of integrity, respect and the pursuit of excellence. I
am especially proud to see our values echoed through the
growth and development of our diversity and inclusion
program. In 2019, the Forum of Executive Women
recognized us twice – first as a Champion of Board
2019 Annual Report | 4
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Diversity for our commitment to diversity in board
Pennsylvania; three systems previously served by
governance, and second with its Advancing Women
Phoenixville Borough, Pennsylvania; the Skyline water
Company Award for our focus on fostering a workplace
and wastewater systems in South Elgin, Illinois; the
where women can achieve and grow. We were also
Village of Grant Park, Illinois; and the City of Campbell,
recognized as a Winning ‘W’ Company by 2020 Women
Ohio.
on Boards for having 20% or more of our board seats
held by women. Women now constitute 23% of our
workforce and 24% of our management team. People
of color constitute 18% of our workforce.
In addition to closing these acquisitions, Essential
made history in 2019 when we announced the largest
municipal transaction in the company’s 134-year
history. In September, Aqua Pennsylvania signed an
Our work in this area is critical and continuous.
asset purchase agreement with the Delaware County
Together, we work to create an inclusive workplace
Regional Water Quality Control Authority (DELCORA)
and actively seek out diverse voices in all areas of our
to acquire the municipal authority’s wastewater assets
organization, recognizing the unbridled power of
for $276.5 million. DELCORA serves the equivalent
these perspectives in driving Essential forward.
of nearly 198,000 customers in 42 municipalities in
Environmental, Social and
Governance (ESG)
Many of our investors and customers are thinking
about how companies impact the broader world
and the ways in which they reduce environmental
footprints by leaving handprints with their positive
actions. At Essential, we are conscious of both
corporate footprints and handprints.
We are shrinking our environmental footprint. By 2022,
Aqua will purchase 65% of its energy from renewable
sources and will thereby meet the Paris Accord nearly
eight years early. Further, in the coming years our
natural gas subsidiary, Peoples, will replace more than
2,700 miles of gas main, dramatically reducing methane
gas emissions. This work will be captured in our
updated sustainability report later in 2020.
Our board of directors has taken affirmative positions
on social issues such as human trafficking and the
human right to water. Additionally, the board has spent
time considering and implementing modern board
governance standards such as board refreshment, term
limits and committee chair rotation. You can find a
summary of all of our ESG work on our website.
Continued Strategic Growth
Essential will also continue to set its sights on growth
through municipal acquisitions. In 2019, the company
welcomed more than 12,280 customers through eight
water and wastewater acquisitions: Cheltenham,
Southeastern Pennsylvania.
Thanks to our combined expertise and capabilities,
Essential has limitless potential and a strong position
for continued disciplined growth into the future.
Investing in Infrastructure
While 2019 was a landmark year for growth, it was
also a milestone year for capital investments across
the enterprise. The company invested a record $550
million in water and wastewater infrastructure
projects, repairing or replacing water mains across our
footprint. We are proud of the significant role we play
in rehabilitating our nation’s aging infrastructure and
look forward to continuing this critical work in 2020
and beyond. With our increased size, Essential has an
enhanced ability to access capital to fund infrastructure
needs in the communities where we operate.
On behalf of the Essential leadership team, board
of directors and our employees, thank you for your
unwavering support of our mission. I look forward to a
prosperous 2020 leading Essential Utilities Inc.
Thank you,
Christopher H. Franklin
Chairman, President and CEO
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2019 Annual Report | 5
Acquisitions
Fuel Growth
and Strengthen
Communities
Eight water and wastewater system acquisitions
completed in 2019
Purchasing private and municipally owned systems is about more
than growth. It enables us to do our part to improve water and
wastewater infrastructure in the communities we serve, something
that’s vitally important for the future. Proceeds from the sale of a
water or wastewater system can enable municipal leaders to focus
on other important initiatives in their communities.
2019
New Customer
Connections
1,461
Water Connections
Water
Wells
Water Main
Vehicles
Storage Tanks
Wastewater
Water
treatment
Surface Water
Wells
Filtration Plants
Water Main
Vehicles
Storage Tanks
Wastewater
treatment
Surface Water
Filtration Plants
Water
Wells
Water Main
Vehicles
Storage Tanks
Wastewater
treatment
Surface Water
Filtration Plants
10,819
Wastewater
Connections
2019 Annual Report | 6
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1
$3.5 million
South Elgin, Ill.
2
$2.3 million
Village of Grant Park, Ill.
• Two systems - water and wastewater
• 376 water connections
• 376 wastewater connections
• Wastewater system
• 540 connections
1
2
3
4
3
$50.25 million
Cheltenham Township, Pa.
5
• Wastewater system
• 9,887 connections
4
$3.5 million
Phoenixville Borough, Pa.
• Three water systems
• 529 connections
5
$468,000
Northern Neck, Va.
• Water system
• 540 water connections
2019 Annual Report | 7
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A Record Capital Investment
Over the past five years the company has invested $2.3 billion in infrastructure improvements,
including hundreds of miles of pipe replacement and significant plant upgrades. In 2019, a
record $550 million was invested in infrastructure projects across all eight states to ensure the
reliable delivery of safe drinking water for our customers.
Projects highlights:
Aqua Illinois
Aqua New Jersey
$23 million
capital
improvement
$14 million
capital
improvement
• Lake Vermilion dam
• Structural dam modifications to
protect this critical water source
• Replaced 11 floodgates
• Expected completion in 2020
• Three new iron removal treatment facilities
• Removes naturally occurring minerals from
groundwater supply wells
• Treats 1.4 million gallons of water per day
Aqua North Carolina
Aqua Ohio
$3.8 million
capital
improvement
$12 million
renovation
• 11 new filter systems
• Removes naturally occurring minerals
from groundwater supply wells
• Struthers water treatment plant
• New treatment systems, storage and
buildings to improve service efficiency
• Three new 146,000-gallon contact clarifier
tanks
Aqua Pennsylvania
$136 million
main replacement program
• Customers benefit from a notable
reduction in service interruptions
caused by main breaks
• 105 miles of aging main replaced
Aqua Texas
$6.1 million
project
• Aqua Texas’ first-ever surface water
treatment plant
• Meets the challenges of drought and
heavy rain
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Aqua Pennsylvania
$136 million
Main Replacement Program
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2019 Annual Report | 9
Uniting
Across Utilities
Our commitment to strengthen communities
as we expand our service area led us to
explore the possibility of how a natural gas
distribution company could complement
these objectives.
Water and natural gas utilities each
specialize in delivering pressurized natural
resources through pipes and meters into
customers’ homes and businesses. Both
follow similar processes for meter reading,
billing, collections and customer service.
These essential services are subject to the
same regulatory processes for establishing
customer rates. Both require significant
annual capital investment for infrastructure
rehabilitation, primarily for pipe replacement.
These operational similarities made natural
gas the preferred utility as we contemplated
expanding beyond water and wastewater.
Peoples, a Pittsburgh-based natural gas
distribution company, was the ideal choice.
Each utility lends more than 130 years
of experience in infrastructure expertise,
regulatory compliance, operational efficiency
and environmental stewardship. Together,
we will play an important role in solving
today’s water and natural gas infrastructure
challenges to ensure a better quality of life
now and in the future.
2019 Annual Report | 10
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Investing in
Customer Satisfaction
J.D. Power conducted its inaugural Voice of
the Customer study to measure satisfaction
among residential water utility customers
in 2016. The study revealed that customer
satisfaction is driven not only by the quality
of the product delivered, but how well the
utility focuses on its customers. J.D. Power
stated that water utilities need to understand
their customers, who can often be their most
effective advocates when it comes time for
necessary improvements.
Informed by this survey and industry trends,
Aqua embarked on an initiative to make
the customer experience a key part of
its culture by focusing employees on the
importance of customer centricity. Insights
were gathered across the customer journey
and a long-range plan was developed,
including progress milestones and
measurements. This initiative formalizes a
long-standing focus on providing superior
customer service and improves the consistency
of delivery throughout our utility systems.
Improvements to customer
billing-related transactions.
• Online account access, including daily
balance information, is available to all
customers. Previously this was only available
to eBilling enrollees.
• A one-time online payment option is
available within the WaterSmart eBilling site.
Customers no longer have to be formally
enrolled to take advantage of this option.
• Our new payment text reminder
functionality gives customers the option
to receive text reminders and easily make
payments. More than 14,000 customers are
using this convenient option.
“
Being able to offer a quality
customer experience is of paramount
importance to my entire team.
“
Georgetta Parisi
Vice President Customer Operations
2019 Annual Report | 11
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2019
Financial Data
Essential Utilities Inc.
NYSE: WTRG
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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In thousands of dollars, except per share amounts)
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report (the “Annual Report”) are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are made based
upon, among other things, our current assumptions, expectations, plans, and beliefs concerning future events and their
potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are
outside our control that may cause our actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you
can identify forward-looking statements where statements are preceded by, followed by or include the words “believes,”
“expects,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the
event” or the negative of such terms or similar expressions.
Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these forward-looking statements, including but not limited
to:
conditions to the completion of the Peoples Gas Acquisition may not be satisfied or waived on a timely basis,
or at all;
the diversion of our management’s time and resources caused by the pendency of the Peoples Gas
Acquisition;
our ability to manage the expansion of our business, including our ability to manage our expanded operations
following the closing of the Peoples Gas Acquisition;
our ability to treat and supply water or collect and treat wastewater;
the continuous and reliable operation of our information technology systems, including the impact of cyber
security attacks or other cyber-related events;
our ability to integrate and otherwise realize all of the anticipated benefits of businesses, technologies or
services which we may acquire;
changes in general economic, business, credit and financial market conditions;
changes in governmental laws, regulations and policies, including those dealing with taxation, the
environment, health and water quality, and public utility regulation;
the profitability of future acquisitions;
changes to the rules or our assumptions underlying our determination of what qualifies for an income tax
deduction for qualifying utility asset improvements;
the decisions of governmental and regulatory bodies, including decisions on rate increase requests and
decisions regarding potential acquisitions;
our ability to file rate cases on a timely basis to minimize regulatory lag;
abnormal weather conditions, including those that result in water use restrictions;
changes in, or unanticipated, capital requirements;
changes in our credit rating or the market price of our common stock;
changes in valuation of strategic ventures;
the phase-out of the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with a
different reference rate or modification of the method used to calculate LIBOR, which may adversely affect
interest rates;
the extent to which we are able to develop and market new and improved services;
the effect of the loss of major customers;
our ability to retain the services of key personnel and to hire qualified personnel as we expand;
labor disputes;
increasing difficulties in obtaining insurance and increased cost of insurance;
cost overruns relating to improvements to, or the expansion of, our operations;
increases in the costs of goods and services; civil disturbance or terroristic threats or acts;
changes in accounting pronouncements;
1
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)
litigation and claims; and
changes in environmental conditions, including the effects of climate change.
Given these risks and uncertainties, you should not place undue reliance on any forward-looking statements. You should
read this Annual Report completely and with the understanding that our actual future results, performance and
achievements may be materially different from what we expect. These forward-looking statements represent assumptions,
expectations, plans, and beliefs only as of the date of this Annual Report. Except for our ongoing obligations to disclose
certain information under the federal securities laws, we are not obligated, and assume no obligation, to update these
forward-looking statements, even though our situation may change in the future. For further information or other factors
which could affect our financial results and such forward-looking statements, see Item 1A – Risk Factors included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
OVERVIEW
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 included in this Annual Report. This discussion contains forward-
looking statements that are based on management’s current expectations, estimates and projections about our business,
operations and financial performance. All dollar amounts are in thousands of dollars, except per share amounts.
The Company
Essential Utilities, Inc., (referred to as “Essential Utilities”, the “Company”, “we”, “us”, or “our”), a Pennsylvania
corporation, is the holding company for regulated utilities providing water or wastewater services to an estimated
three million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, and Virginia. On
February 3, 2020, we changed our name from Aqua America, Inc. to Essential Utilities, Inc. to align the name of the
Company with the anticipated business plan of the Company following the pending Peoples Gas Acquisition and to reflect
the proposed combination of regulated water utilities and natural gas utilities that offer essential utility services to
customers. After completion of the acquisition, the water and wastewater utility services will be provided through
Essential Utilities’ Aqua companies and the natural gas utility services will be provided through its Peoples natural gas
companies. Essential Utilities plans to complete the Peoples Gas Acquisition on March 16, 2020. Our largest operating
subsidiary is Aqua Pennsylvania, Inc., which accounted for approximately 54% of our operating revenues and
approximately 72% of our Regulated water segment’s income for 2019. As of December 31, 2019, Aqua Pennsylvania
provided water or wastewater services to approximately one-half of the total number of water and wastewater customers
we serve. Aqua Pennsylvania’s service territory is 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 utility subsidiaries provide similar
services in seven additional states. In addition, the Company’s market-based activities are conducted through Aqua
Infrastructure, LLC and Aqua Resources, Inc. Aqua Infrastructure provides non-utility raw water supply services for
firms in the natural gas drilling industry. Aqua Resources manages a water system operating and maintenance contract;
and offers, through a third-party, water and sewer line protection solutions and repair services to households. In 2017 and
2016, Aqua Resources sold business units that had formerly provided non-regulated services related to the water and
wastewater utility businesses.
Industry Mission
The mission of the regulated water utility industry is to provide quality and reliable water service at reasonable rates to
customers, while earning a fair return for shareholders. A number of challenges face the industry, including:
strict environmental, health and safety standards;
aging utility infrastructure and the need for substantial capital investment;
economic regulation by state, and/or, in some cases, local government;
declining consumption per customer as a result of conservation;
lawsuits and the need for insurance; and
2
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)
the impact of weather and sporadic drought conditions on water sales demand.
Economic Regulation
Most of our water and wastewater utility operations are subject to regulation by their respective state utility commissions,
which have broad administrative power and authority to regulate billing rates, determine franchise areas and conditions of
service, approve acquisitions, and authorize the issuance of securities. The utility commissions also generally establish
uniform systems of accounts and approve the terms of contracts with affiliates and customers, business combinations with
other utility systems, and loans and other financings. The policies of the utility commissions often differ from state to
state and may change over time. A small number of our operations are subject to rate regulation by county or city
government. Over time, the regulatory party in a particular state may change, as was the case for our Texas operations
where, in 2014, economic regulation changed from the Texas Commission on Environmental Quality to the Public Utility
Commission of Texas. The profitability of our utility operations is influenced to a great extent by the timeliness and
adequacy of rate allowances in the various states in which we operate. One consideration we may undertake in evaluating
which states to focus our growth and investment strategy is whether a state provides for consolidated rates, a surcharge for
replacing and rehabilitating infrastructure, fair value treatment of acquired utility systems, and other regulatory policies
that promote infrastructure investment and efficiency in processing rate cases.
Rate Case Management Capability – We strive to achieve the industry’s mission by effective planning, efficient
investments, and productive use of our resources. We maintain a rate case management capability to pursue timely and
adequate returns on the capital investments that we make in improving our distribution system, treatment plants,
information technology systems, and other infrastructure. This capital investment creates assets that are used and useful
in providing utility service and is commonly referred to as rate base. Timely and adequate rate relief is important to our
continued profitability and in providing a fair return to our shareholders; thus, providing access to capital markets to help
fund these investments. Accordingly, the objective of our rate case management strategy is to provide that the rates of our
utility operations reflect, to the extent practicable, the timely recovery of increases in costs of operations (primarily labor
and employee benefits, electricity, chemicals, transportation, maintenance expenses, insurance and claims costs, and costs
to comply with environmental regulations), capital, and taxes. In pursuing our rate case strategy, we consider the amount
of net utility plant additions and replacements made since the previous rate decision, the changes in the cost of capital,
changes in our capital structure, and changes in operating and other costs. Based on these assessments, our utility
operations periodically file rate increase requests with their respective state utility commissions or local regulatory
authorities. In general, as a regulated enterprise, our water and wastewater rates are established to provide full recovery of
utility operating costs, taxes, interest on debt used to finance capital investments, and a return on equity used to finance
capital investments. Our ability to recover our expenses in a timely manner and earn a return on equity employed in the
business helps determine the profitability of the Company. As of December 31, 2019, the Company’s rate base is
estimated to be $5,000,000, which is comprised of:
$4,600,000 filed with respective state utility commissions or local regulatory authorities; and
$400,000 not yet filed with respective state utility commissions or local regulatory authorities.
Our water and wastewater operations are composed of 47 rate divisions, each of which requires a separate rate filing for
the evaluation of the cost of service and recovery of investments in connection with the establishment of tariff rates for
that rate division. When feasible and beneficial to our utility customers, we have sought approval from the applicable
state utility commission to consolidate rate divisions to achieve a more even distribution of costs over a larger customer
base. All of the eight states in which we operate currently permit us to file a revenue requirement using some form of
consolidated rates for some or all of the rate divisions in that state.
Revenue Surcharges – Seven states in which we operate water utilities, and six states in which we operate wastewater
utilities, permit us to add an infrastructure rehabilitation surcharge to their respective bills to offset the additional
depreciation and capital costs associated with capital expenditures related to replacing and rehabilitating infrastructure
systems. In our other states, water and wastewater utilities absorb all of the depreciation and capital costs of these
projects between base rate increases without the benefit of additional revenues. The gap between the time that a capital
project is completed and the recovery of its costs in rates is known as regulatory lag. This surcharge is intended to
3
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)
substantially reduce regulatory lag, which often acts as a disincentive for water and wastewater utilities to rehabilitate
their infrastructure. In addition, some states permit our subsidiaries to use a surcharge or credit on their bills to reflect
allowable changes in costs, such as changes in state tax rates, other taxes and purchased water costs, until such time as the
new costs are fully incorporated in base rates.
Effects of Inflation – Recovery of the effects of inflation through higher water and wastewater rates is dependent upon
receiving adequate and timely rate increases. However, rate increases are not retroactive and often lag increases in costs
caused by inflation. On occasion, our regulated utility companies may enter into rate settlement agreements, which
require us to wait for a period of time to file the next base rate increase request. These agreements may result in
regulatory lag whereby inflationary increases in expenses may not yet be reflected in rates, or a gap may exist between
when a capital project is completed and the start of its recovery in rates. Even during periods of moderate inflation, the
effects of inflation can have a negative impact on our operating results.
Growth-Through-Acquisition Strategy
Part of our strategy to meet the industry challenges is to actively explore opportunities to expand our utility operations
through acquisitions of water and wastewater and other utilities either in areas adjacent to our existing service areas or in
new service areas, and to explore acquiring market-based businesses that are complementary to our regulated water and
wastewater operations. To complement our growth strategy, we routinely evaluate the operating performance of our
individual utility systems, and in instances where limited economic growth opportunities exist or where we are unable to
achieve favorable operating results or a return on equity that we consider acceptable, we will seek to sell the utility system
and reinvest the proceeds in other utility systems. Consistent with this strategy, we are focusing our acquisitions and
resources in states where we have critical mass of operations in an effort to achieve economies of scale and increased
efficiency. Our growth-through-acquisition strategy allows us to operate more efficiently by sharing operating expenses
over more utility customers and provides new locations for future earnings growth through capital investment. Another
element of our growth strategy is the consideration of opportunities to expand by acquiring other utilities, including those
that may be in a new state if they provide promising economic growth opportunities and a return on equity that we
consider acceptable. Our ability to successfully execute this strategy historically and to meet the industry challenges has
largely been due to our core competencies, financial position, and our qualified and trained workforce, which we strive to
retain by treating employees fairly and providing our employees with development and growth opportunities.
On October 22, 2018, we entered into a purchase agreement to acquire, from LDC Funding LLC, the parent company of
PNG Companies, a natural gas distribution company consisting of Peoples Natural Gas Company LLC, Peoples Gas
Company LLC, Peoples Gas West Virginia, Inc., Peoples Gas Kentucky, Inc., and Delta Natural Gas Company Inc.
(“Peoples”) to expand the Company’s regulated utility business to include natural gas distribution. Peoples serves
approximately 747,000 gas utility customers in western Pennsylvania, West Virginia, and Kentucky. The Peoples Gas
Acquisition, once consummated, will expand our regulated utility business to include natural gas distribution. At the
closing of the Peoples Gas Acquisition, the Company will pay $4,275,000 in cash, subject to adjustments for working
capital, certain capital expenditures, transaction expenses and closing indebtedness as set forth in the acquisition
agreement. The Company expects to assume approximately $1,106,000 of Peoples’ indebtedness upon the closing of the
Peoples Gas Acquisition, which would reduce the cash purchase by approximately $1,106,000. The acquisition is subject
to customary closing conditions set forth in the acquisition agreement, and is expected to close on March 16, 2020.
During 2019, we completed eight acquisitions, which along with the organic growth in our existing systems, represents
21,613 new customers. During 2018, we completed nine acquisitions, which along with the organic growth in our
existing systems, represents 22,741 new customers. During 2017, we completed four acquisitions, which along with the
organic growth in our existing systems, represents 10,584 new customers.
We believe that utility acquisitions, organic growth, and a potential expansion of our market-based business will continue
to be the primary sources of growth for us. With approximately 50,000 community water systems in the U.S., 81% of
which serve less than 3,300 customers, the water industry is the most fragmented of the major utility industries (telephone,
natural gas, electric, water, and wastewater). In the states where we operate regulated water utilities, we believe there are
4
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)
approximately 14,000 community water systems of widely-varying size, with the majority of the population being served
by government-owned water systems.
Although not as fragmented as the water industry, the wastewater industry in the U.S. also presents opportunities for
consolidation. According to the U.S. Environmental Protection Agency’s (“EPA”) most recent survey of wastewater
treatment facilities (which includes both government-owned facilities and regulated utility systems) in 2012, there were
approximately 15,000 such facilities in the nation serving approximately 76% of the U.S. population. The remaining
population represents individual homeowners with their own treatment facilities; for example, community on-lot disposal
systems and septic tank systems. The vast majority of wastewater facilities are government-owned rather than regulated
utilities. The EPA survey also indicated that, in 2012, there were approximately 4,000 wastewater facilities in operation
in the states where we operate regulated utilities.
Because of the fragmented nature of the water and wastewater utility industries, we believe that there are many potential
water and wastewater system acquisition candidates throughout the United States. We believe the factors driving the
consolidation of these systems are:
the benefits of economies of scale;
the increasing cost and complexity of environmental regulations;
the need for substantial capital investment;
the need for technological and managerial expertise;
the desire to improve water quality and service;
limited access to cost-effective financing;
the monetizing of public assets to support, in some cases, the declining financial condition of municipalities; and
the use of system sale proceeds by a municipality to accomplish other public purposes.
We are actively exploring opportunities to expand our water and wastewater utility operations through regulated utility
acquisitions or otherwise, including the management of publicly-owned facilities in a public-private partnership. We
intend to continue to pursue acquisitions of government-owned and regulated water and wastewater utility systems that
provide services in areas near our existing service territories or in new service areas. It is our intention to focus on growth
opportunities in states where we have critical mass, which allows us to improve economies of scale through spreading our
fixed costs over more customers – this cost efficiency should enable us to reduce the size of future rate increases.
Currently, the Company seeks to acquire businesses in the U.S. regulated sector, which includes water and wastewater
utilities and other regulated utilities, and to pursue growth ventures in market-based activities, by acquiring businesses
that provide water and wastewater or other utility-related services and investing in infrastructure projects.
Sendout
Sendout represents the quantity of treated water delivered to our distribution systems. We use sendout as an indicator of
customer demand. Weather conditions tend to impact water consumption, particularly during the late spring, summer, and
early fall when discretionary and recreational use of water is at its highest. Consequently, a higher proportion of annual
operating revenues are realized in the second and third quarters. In general, during this period, an extended period of hot
and dry weather increases water consumption, while above-average rainfall and cool weather decreases water
consumption. Conservation efforts, construction codes that require the use of low-flow plumbing fixtures, as well as
mandated water use restrictions in response to drought conditions can reduce water consumption. We believe an increase
in conservation awareness by our customers, including the increased use of more efficient plumbing fixtures and
appliances, may continue to result in a long-term structural trend of declining water usage per customer. These gradual
long-term changes are normally taken into account by the utility commissions in setting rates, whereas significant short-
term changes in water usage, resulting from drought warnings, water use restrictions, or extreme weather conditions, may
not be fully reflected in the rates we charge between rate proceedings. In Illinois, our operating subsidiary has adopted a
revenue stability mechanism which allows us to recognize state PUC-authorized revenue for a period which is not based
upon the volume of water sold during that period, and effectively lessens the impact of weather and consumption
variability.
5
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 occasion, drought warnings and water use restrictions are issued by governmental authorities for portions of our
service territories in response to extended periods of dry weather conditions, regardless of our ability to meet unrestricted
customer water demands. The timing and duration of the warnings and restrictions can have an impact on our water
revenues and net income. In general, water consumption in the summer months is affected by drought warnings and
restrictions to a higher degree because discretionary and recreational use of water is highest during the summer months,
particularly in our northern service territories. At other times of the year, warnings and restrictions generally have less of
an effect on water consumption. Portions of our northern and central Texas service areas have conservation water
restrictions. Drought warnings and watches result in the public being asked to voluntarily reduce water consumption.
The geographic diversity of our utility customer base reduces the effect of our exposure to extreme or unusual weather
conditions in any one area of the country. During the year ended December 31, 2019, our operating revenues were
derived principally from the following states: approximately 54% in Pennsylvania, 12% in Ohio, 8% in Illinois, 8% in
Texas, and 6% in North Carolina.
Performance Measures Considered by Management
We consider the following financial measures (and the period to period changes in these financial measures) to be the
fundamental basis by which we evaluate our operating results:
earnings per share;
operating revenues;
earnings before interest, taxes, and depreciation (“EBITD”);
income adjusted to remove transaction-related expenses associated with the Peoples Gas Acquisition;
earnings before income taxes;
net income; and
the dividend rate on common stock.
In addition, we consider other key measures in evaluating our utility business performance within our Regulated water
segment:
our number of utility customers;
the ratio of operations and maintenance expense compared to operating revenues (this percentage is termed
“operating expense ratio”);
return on revenues (net income divided by operating revenues);
rate base growth;
return on equity (net income divided by stockholders’ equity); and
the ratio of capital expenditures to depreciation expense.
Some of these measures, like EBITD, are non-GAAP financial measures. The Company believes that the non-GAAP
financial measures provide management the ability to measure the Company’s financial operating performance across
periods and as contrasted to historical financial results, which are more indicative of the Company’s ongoing performance
and more comparable to measures reported by other companies. When the Company discloses such non-GAAP financial
measures, we believe they are useful to investors as a more meaningful way to compare the Company’s operating
performance against its historical financial results. We believe EBITD from continuing operations is a relevant and useful
indicator of operating performance, as we measure it for management purposes because it provides a better understanding
of our results of operations by highlighting our operations and the underlying profitability of our core business.
Furthermore, we review the measure of earnings before unusual items that are not directly related to our core business,
such as the measure of adjusted earnings to remove the Peoples Gas Acquisition expenses, such as transaction expenses
and the change in fair value of interest rate swap agreements, which were recognized in 2019 and 2018, as well as the
joint venture impairment charge (noncash), which was recognized in 2015. Refer to Note 11 – Long-term Debt and Loans
Payable in this Annual Report for information regarding the interest rate swap agreements and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Joint
6
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)
Venture” in this Annual Report for information regarding the impairment charge. We review these measurements
regularly and compare them to historical periods, to our operating budget as approved by our Board of Directors, and to
other publicly-traded water utilities.
Our operating expense ratio is one measure that we use to evaluate our operating efficiency and management effectiveness
of our regulated operations. Our operating expense ratio is affected by a number of factors, including the following:
Regulatory lag – Our rate filings are designed to provide for the recovery of increases in costs of operations
(primarily labor and employee benefits, electricity, chemicals, transportation, maintenance expenses, insurance and
claim costs, and costs to comply with environmental regulations), capital, and taxes. The revenue portion of the
operating expense ratio can be impacted by the timeliness of recovery of, and the return on capital investments.
The operating expense ratio is further influenced by regulatory lag (increases in operations and maintenance
expenses not yet recovered in rates or a gap between the time that a capital project is completed and the start of its
cost recovery in rates). The operating expense ratio is also influenced by decreases in operating revenues without a
commensurate decrease in operations and maintenance expense, such as changes in customer water consumption as
impacted by adverse weather conditions, or conservation trends. Commencing in 2012, as a result of utility rates
incorporating the effects of income tax benefits derived from deducting qualifying utility asset improvements for
tax purposes that are capitalized for book purposes in Aqua Pennsylvania and consequently forgoing operating
revenue increases until its next rate case became effective in May 2019. During periods of inflation, our operations
and maintenance expenses may increase, impacting the operating expense ratio, as a result of regulatory lag, since
our rate cases may not be filed timely and are not retroactive.
Acquisitions – In general, acquisitions of smaller undercapitalized utility systems in some areas may initially
increase our operating expense ratio if the operating revenues generated by these operations do not reflect the true
cost of service and are accompanied by a higher ratio of operations and maintenance expenses as compared to other
operational areas of the company that are more densely populated and have integrated operations. In these cases,
the acquired operations are characterized as having relatively higher operating costs to fixed capital costs, in
contrast to the majority of our operations, which generally consist of larger, interconnected systems, with higher
fixed capital costs (utility plant investment) and lower operating costs per customer. For larger acquisitions, such
as the Peoples Gas Acquisition, we have incurred significant transaction expenses, which increase operations and
maintenance expenses in periods prior to and in the period of the closing of the acquisition. In addition, we operate
market-based subsidiary companies, Aqua Resources and Aqua Infrastructure. The cost-structure of these market-
based companies differs from our utility companies in that, although they may generate free cash flow, these
companies may at times have a higher ratio of operations and maintenance expenses to operating revenues and a
lower capital investment and, consequently, a lower ratio of fixed capital costs versus operating revenues in
contrast to our regulated operations. As a result, the operating expense ratio is not comparable between the
businesses. These market-based subsidiary companies are not a component of our Regulated water segment.
We continue to evaluate initiatives to help control operating costs and improve efficiencies.
7
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)
Consolidated Selected Financial and Operating Statistics
Our selected five year consolidated financial and operating statistics follow:
Years ended December 31,
Utility customers:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Total utility customers
Operating revenues:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Other utility
Regulated water segment total
Other and eliminations
Consolidated operating revenues
Operations and maintenance expense
Change in fair value of interest rate swap agreements (1)
Joint venture impairment charge (2)
Loss on debt extinguishment (3)
Net income
Capital expenditures
Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance
Depreciation and amortization
Taxes other than income taxes
Interest expense
Net income
Return on Essential Utilities stockholders' equity
Ratio of capital expenditures to depreciation expense
Effective tax rate
2019
2018
2017
2016
2015
822,817
41,892
1,339
18,984
141,672
1,026,704
815,663
41,532
1,340
19,273
127,782
1,005,590
807,872
40,956
1,338
19,430
113,253
982,849
801,190
40,582
1,349
19,036
110,108
972,265
791,404
40,151
1,353
17,420
107,538
957,866
$
$
$
$
$
$
$
$
518,192 $
145,599
30,667
72,942
105,204
13,826
886,430
3,262
889,692 $
333,102 $
18,756 $
- $
14,637 $
224,543 $
550,273 $
130,373
27,880
65,324
87,560
9,903
804,905
4,620
131,170
27,916
62,983
82,780
10,357
800,107
19,768
482,946 $ 483,865 $ 484,901 $ 477,773
126,677
133,753
28,021
28,848
56,997
85,894
79,399
94,170
10,746
9,027
779,613
834,638
34,591
3,453
838,091 $ 809,525 $ 819,875 $ 814,204
308,478 $ 282,253 $ 297,184 $ 308,416
-
21,433
-
191,988 $ 239,738 $ 234,182 $ 201,790
495,737 $ 478,089 $ 382,996 $ 364,689
47,225 $
- $
- $
- $
- $
- $
- $
- $
- $
37.4%
17.6%
6.7%
14.1%
25.2%
5.8%
3.5
(6.2%)
36.8%
17.5%
7.1%
11.8%
22.9%
9.6%
3.4
(7.7%)
34.9%
16.9%
7.0%
10.9%
29.6%
12.2%
3.5
6.6%
36.2%
16.2%
6.9%
9.9%
28.6%
12.7%
2.9
8.2%
37.9%
15.8%
6.8%
9.4%
24.8%
11.7%
2.9
6.9%
(1) Represents a mark-to-market fair value adjustment expense for 2019 of $18,756 ($23,742 pre-tax) and 2018 of
$47,225 ($59,779 pre-tax) associated with our interest rate swap agreements that were entered into to mitigate interest
rate risk associated with our April 2019 issuance of long-term debt to fund a portion of the Peoples Gas Acquisition.
(2) Represents a $21,433 ($32,975 pre-tax) joint venture impairment charge. This amount represents our share of the
impairment charge recognized by our joint venture that operates a private pipeline to supply raw water to firms with
natural gas well drilling operations.
(3) Represents a $14,637 ($18,528 pre-tax) loss on debt extinguishment associated with the early redemption of $313,500
of the Company’s long-term debt that occurred in May 2019.
8
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)
RESULTS OF OPERATIONS
Net income varies over time as a result of increases in operating income, timing of transaction expenses for acquisitions,
including fluctuations in fair value adjustments for interest rate swap agreements entered into in connection with the
Peoples Gas Acquisition, and other factors described below. During the past five years, our operating revenues grew at a
compound rate of 2.7% and operating expenses grew at a compound rate of 3.4%. Operating revenues have not increased
over the past five years at the same levels historically experienced due to two factors. The Company’s Pennsylvania
operating subsidiary, Aqua Pennsylvania, had not filed a base rate case for an increase since 2011. Aqua Pennsylvania
filed a base rate case in August 2018, and new customer rates were implemented in May 2019. Also, the TCJA reduced
income tax expense as a result of a reduction in the corporate federal income tax rate. Operating revenues for 2019 were
reduced by income tax savings in our Regulated water segment, so as to provide our utility customers with the benefits of
the lower income tax expense. Operating expenses in 2019 grew higher than historic experience due to $22,891 of
transaction- related expenses for the Peoples Gas Acquisition.
Operating Segments
We have identified ten operating segments and we have one reportable segment based on the following:
Eight segments are composed of our water and wastewater regulated utility operations in the eight states where we
provide these services. These operating segments are aggregated into one reportable segment since each of these
operating segments has the following similarities: economic characteristics, nature of services, production
processes, customers, water distribution and/or wastewater collection methods, and the nature of the regulatory
environment. Our single reportable segment is named the Regulated water segment.
Two segments are not quantitatively significant to be reportable and are composed of Aqua Resources and Aqua
Infrastructure. These segments are included as a component of “Other,” in addition to corporate costs that have not
been allocated to the Regulated water segment, because they would not be recoverable as a cost of utility service,
and intersegment eliminations. Corporate costs include general and administrative expenses, and interest expense.
9
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)
The following table provides the Regulated water segment and consolidated information for the years ended
December 31, 2019, 2018, and 2017:
2019
Regulated
Water
Other and
Eliminations
Consolidated
Regulated
Water
2018
Other and
Operating revenues
Operations and maintenance expense
Taxes other than income taxes
Earnings (loss) before interest, taxes, depreciation and amortization
Depreciation and amortization
Operating income
Other expense (income):
$
$
886,430 $
315,052
57,671
513,707 $
3,262 $
18,050
2,284
(17,072)
$
$
889,692
333,102
59,955
496,635
156,476
340,159
125,383
(25,406)
(16,172)
23,742
18,528
(923)
(2,210)
5,691
(13,017)
224,543
834,638 $
292,232
57,140
485,266 $
3,453 $
Eliminations Consolidated
838,091
308,478
59,762
469,851
146,673
323,178
16,246
2,622
(15,415)
99,054
(152)
(13,023)
59,779
-
(714)
(2,081)
1,996
(13,669)
191,988
$
Interest expense
Interest income
Allowance for funds used during construction
Change in fair value of interest rate swap agreements
Loss on debt extinguishment
Gain on sale of other assets
Equity earnings in joint venture
Other
Provision for income taxes (benefit)
Net income
Operating revenues
Operations and maintenance expense
Taxes other than income taxes
Earnings before interest, taxes, depreciation and amortization
Depreciation and amortization
Operating income
Other expense (income):
Interest expense
Interest income
Allowance for funds used during construction
Gain on sale of other assets
Equity earnings in joint venture
Other
Provision for income taxes
Net income
$
2017
Regulated
Water
Other and
Eliminations
Consolidated
809,525
282,253
56,628
470,644
136,724
333,920
88,543
(202)
(15,211)
(484)
(331)
4,953
16,914
239,738
$
$
804,905 $
282,009
54,524
468,372 $
4,620 $
244
2,104
2,272
$
10
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)
Consolidated Results of Operations Comparison for 2019 and 2018
For the comparison of fiscal years 2018 and 2017, refer to Part II, Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K for our fiscal year ended December
31, 2018, filed with the SEC on February 26, 2019.
Operating Revenues – Operating revenues totaled $889,692 in 2019, $838,091 in 2018, and $809,525 in 2017. Our
Regulated water segment’s revenues totaled $886,430 in 2019, $834,638 in 2018, and $804,905 in 2017. The growth in
our Regulated water segment’s revenues over the past three years is a result of increases in our water and wastewater rates
and our customer base. Rate increases implemented during the past three years have provided additional operating
revenues of $55,658 in 2019, $8,362 in 2018, and $6,143 in 2017. In 2019, we experienced a decrease in water and
wastewater revenues of $1,419 as a result of a do not consume advisory we initiated in 2019 for some of our customers
served by our Illinois subsidiary, which we expect to continue into the second quarter of 2020. The number of customers
increased at an annual compound rate of 1.8% over the past three years due to acquisitions and organic growth, adjusted
to exclude customers associated with utility system dispositions. Acquisitions in our Regulated water segment have
provided additional water and wastewater revenues of $8,393 in 2019, $3,877, in 2018, and $1,695 in 2017.
On June 7, 2012, Aqua Pennsylvania reached a settlement agreement in its rate filing with the Pennsylvania Public Utility
Commission, which in addition to a water rate increase, provided for a reduction in current income tax expense as a result
of the recognition of qualifying income tax benefits upon Aqua Pennsylvania changing its tax accounting method to
permit the expensing of qualifying utility asset improvement costs that historically had been capitalized and depreciated
for book and tax purposes. In December 2012, Aqua Pennsylvania implemented this change which provides for the flow-
through of income tax benefits that resulted in a substantial reduction in income tax expense and greater net income and
cash flow. As a result, Aqua Pennsylvania was able to suspend its water Distribution System Improvement Charges from
January 1, 2013 to September 30, 2017, when it resumed the use of a water Distribution System Improvement Charge on
October 1, 2017. Aqua Pennsylvania was able to lengthen the amount of time until its next base rate case, which was filed
in August 2018. During 2019, 2018, and 2017, the income tax accounting change resulted in income tax benefits of
$66,816, $64,183, and $84,766 that reduced the Company’s current income tax expense and increased net income. The
Company recognized a tax deduction on its 2012 Federal tax return of $380,000 for qualifying capital expenditures made
prior to 2012. Based on the 2012 settlement agreement, beginning in 2013, the Company began to amortize 1/10th of
these expenditures, or $38,000 annually, which reduced income tax expense and increased the Company’s net income by
$16,274 for 2019, which is included in the income tax benefits noted previously. In accordance with the 2012 settlement
agreement, this amortization is expected to reduce income tax expense during periods when qualifying parameters are
met. In August 2018, Aqua Pennsylvania filed for a base rate increase in water and wastewater rates for its customers. In
February 2019, Aqua Pennsylvania filed a settlement for this base rate case. Incremental rates from this settlement of
approximately $47,000 went into effect in May 2019.
Our operating subsidiaries received rate increases representing estimated annualized revenues of $52,974 in 2019
resulting from four base rate decisions, $11,558 in 2018 resulting from five base rate decisions, and $7,558 in 2017
resulting from five base rate decisions. Revenues from these increases realized in the year of grant were $32,287 in 2019,
$7,270 in 2018, and $6,343 in 2017. As of December 31, 2019, our operating subsidiaries have filed three rate requests,
which are being reviewed by the state utility commissions, proposing an aggregate increase of $6,882 in annual revenues.
During 2020, we intend to file three additional rate requests proposing an aggregate of approximately $2,231 of increased
annual revenues; the timing and extent to which our rate increase requests may be granted will vary by state.
Currently, New Jersey allows for an infrastructure rehabilitation surcharge for water utilities, while Pennsylvania, Illinois,
Ohio, Indiana, Virginia, North Carolina allow for the use of an infrastructure rehabilitation surcharge for both water and
wastewater utility systems. The rate increases under this surcharge typically adjust periodically based on additional
qualified capital expenditures completed or anticipated in a future period. This surcharge is capped as a percentage of
base rates, generally at 5% to 12.75% of base rates, and is reset to zero when new base rates that reflect the costs of those
additions become effective or when a utility’s earnings exceed a regulatory benchmark. These surcharges provided
revenues of $16,007 in 2019, $31,836 in 2018, and $10,255 in 2017.
11
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)
Our Regulated water segment also includes operating revenues of $13,835 in 2019, $9,427 in 2018, and $9,903 in 2017
associated with revenues earned primarily from fees received from telecommunication operators that have put cellular
antennas on our water towers, fees earned from municipalities for our operation of their water or wastewater treatment
services or to perform billing services, and fees earned from developers for accessing our water mains.
In addition to the Regulated water segment operating revenues, we recognized market-based revenues that are associated
with Aqua Resources and Aqua Infrastructure of $3,395 in 2019, $3,590 in 2018, and $4,798 in 2017.
Operations and Maintenance Expenses – Operations and maintenance expenses totaled $333,102 in 2019, $308,478 in
2018, and $282,253 in 2017. Most elements of operating costs are subject to the effects of inflation and changes in the
number of customers served. Several elements are subject to the effects of changes in water consumption, weather, and
the degree of water treatment required due to variations in the quality of the raw water. The principal elements of
operating costs are labor and employee benefits, electricity, chemicals, transportation, maintenance expenses, insurance
and claims costs, and costs to comply with environmental regulations. Electricity and chemical expenses vary in
relationship to water consumption, raw water quality, and price changes. Maintenance expenses are sensitive to extremely
cold weather, which can cause water mains to rupture, resulting in additional costs to repair the affected main.
Operations and maintenance expenses increased in 2019, as compared to 2018, by $24,624 or 8.0%, primarily due to:
transaction expenses of $22,891, compared to expenses of $14,184 incurred in the prior year, for the Peoples Gas
Acquisition, primarily representing expenses associated with obtaining regulatory approvals, investment banking
fees, including bridge financing, legal expenses, and integration planning;
expenses of $4,487 associated with remediating a do not consume advisory we initiated in 2019 for some of our
customers served by our Illinois subsidiary. We expect that the expenses associated with remediating the
advisory to continue in the second quarter of 2020. Further, the Company has determined that it is reasonably
possible that a fine or penalty may be incurred, however, we cannot estimate the possible range of loss at this time
and no liability has been accrued for these future costs. We have filed a claim with our insurance carrier for costs
and losses incurred in 2019 related to the advisory, and while we anticipate recovery of a portion of the costs and
losses, no provision has yet been recognized for the insurance recovery;
the prior year effect of a favorable reduction to a regulatory liability of $3,899;
additional operating expenses associated with acquired utility systems and pending acquisitions of utility systems
of $3,385;
an increase in postretirement benefits of $1,973;
an increase in water production costs of $1,017; and
the prior year effect of the write-off of a reserve of $880 for the sale of a water system;
offset by a decrease in insurance expenses of $1,976 due to lower claims.
Taxes Other than Income Taxes – Taxes other than income taxes totaled $59,995 in 2019, $59,762 in 2018, and $56,628
in 2017.
Depreciation and Amortization Expenses – Depreciation expense was $158,179 in 2019, $146,032 in 2018, and
$136,302 in 2017, and has increased principally as a result of the significant capital expenditures made to expand and
improve our utility facilities, and our acquisitions of new utility systems.
Amortization expense (credit) was $(1,703) in 2019, $641 in 2018, and $422 in 2017, and decreased in 2019 primarily due
to the favorable effects of a one-time adjustment of $3,385 resulting from a rate order received for our Pennsylvania
12
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)
subsidiary. Expenses associated with filing rate cases are deferred and amortized over periods that generally range from
one to three years.
Interest Expense – Interest expense was $125,383 in 2019, $99,054 in 2018, and $88,543 in 2017. Interest expense
increased in 2019 primarily due to the following items:
pre-acquisition interest expense of $12,933 from the issuance of $900,000 of long-term debt and $119,081 of
amortizing notes in April 2019 partially for funding of the Peoples Gas Acquisition;
an increase in average borrowings; and
overlapping interest expense incurred in the second quarter of 2019 of $858 associated with $313,500 of existing
debt that was subsequently refinanced in May 2019 after receipt of the proceeds from the April 2019 issuance of
$900,000 of long-term debt;
offset by a decrease in our effective interest rate.
The weighted average cost of fixed rate long-term debt was 4.09% at December 31, 2019, 4.31% at December 31, 2018,
and 4.35% at December 31, 2017. The weighted average cost of fixed and variable rate long-term debt was 4.09% at
December 31, 2019, 4.23% at December 31, 2018, and 4.29% at December 31, 2017.
Interest Income – Interest income was $25,406 in 2019, $152 in 2018, and $202 in 2017. The increase in 2019 is
primarily due to interest of $23,377 earned on the proceeds from our April 2019 equity offerings. The decrease in 2018 is
due to lower investment rates.
Allowance for Funds Used During Construction – The allowance for funds used during construction (“AFUDC”) was
$16,172 in 2019, $13,023 in 2018, and $15,211 in 2017, and varies as a result of changes in the average balance of utility
plant construction work in progress, to which AFUDC is applied, changes in the AFUDC rate which is based
predominantly on short-term interest rates, changes in the balance of short-debt, and changes in the amount of AFUDC
related to equity. The increase in 2019 is primarily due to an increase in the average balance of utility plant construction
work in progress, to which AFUDC is applied. The amount of AFUDC related to equity was $11,941 in 2019, $9,691 in
2018, and $11,633 in 2017.
Change in Fair Value of Interest Rate Swap Agreements – The change in fair value of interest rate swap agreements of
$23,742 for 2019 and $59,779 for 2018 represents the mark-to-market adjustment of our interest rate swap agreements
that were entered into on October 23, 2018 to mitigate interest rate risk associated with an anticipated $850,000 of debt
issuances to fund a portion of the Peoples Gas Acquisition. The interest rate swap agreements did not qualify for hedge
accounting, and any changes in the fair value of the swaps were included in earnings. On April 24, 2019, the Company
settled the interest rate swap agreements upon issuance of $900,000 of long-term debt to be used to finance $436,000 of
the purchase price of the Peoples Gas Acquisition, redeem $313,500 of the Company’s existing debt, and fund other
corporate expenses.
Loss on Debt Extinguishment – The loss on debt extinguishment of $18,528 results from the extinguishment of $313,500
of existing debt that was refinanced in May 2019.
Gain on Sale of Other Assets – Gain on sale of other assets totaled $923 in 2019, $714 in 2018, and $484 in 2017, and
consists of the sales of property, plant and equipment.
Equity Earnings in Joint Venture – Equity earnings in joint venture totaled $2,210 in 2019, $2,081 in 2018, and $331 in
2017. The equity earnings in 2019 primarily resulted from the sale of raw water to firms in the natural gas drilling
industry.
13
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)
Other – Other totaled $5,691 in 2019, $1,996 in 2018, and $4,953 in 2017, and represents the non-service cost
components of our net periodic pension and postretirement benefit costs and, commencing in 2018, the change in fair
value of our equity investments in the non-qualified pension plan. The increase in 2019 is primarily due to a decrease in
the expected return on plan assets assumption for our pension plan.
Income Taxes – Our effective income tax rate was (6.2)% in 2019, (7.7)% in 2018, and 6.6% in 2017. The effective
income tax rate for 2019, 2018, and 2017 was affected by the 2012 income tax accounting change for qualifying utility
asset improvements at Aqua Pennsylvania which resulted in a $66,816, $64,183, and $84,766 net reduction to the
Company’s 2019, 2018, and 2017 Federal and state income tax expense, respectively. As of December 31, 2019, the
Company has an unrecognized tax benefit related to the Company’s change in its tax accounting method for qualifying
utility asset improvement costs, of which up to $31,015 of these tax benefits would further reduce the Company’s
effective income tax rate in the event the Company does sustain all, or a portion, of its tax position in the period this
information is determined. Additionally, as a result of the TCJA, the reversal of excess deferred taxes of $6,323 and
$313, which resulted in a reduction in base rates charged to customers, for our regulated subsidiaries contributed to the
decrease in our effective income tax rate in 2019 and 2018, respectively.
Summary –
Operating income
Net income
Diluted net income per share
$
Years ended December 31,
2018
2019
2017
340,159 $
224,543
1.04
323,178 $
191,988
1.08
333,920
239,738
1.35
The changes in diluted net income per share in 2019 and 2018 over the previous years were due to the aforementioned
changes.
While the importance to the future realization of improved profitability relies on continued adequate rate increases
reflecting increased operating costs and new capital improvements, other factors such as transaction expenses for
acquisitions will likely cause changes in operating income, net income and diluted net income per share.
Although we have experienced increased income in the recent past, continued adequate rate increases reflecting increased
operating costs and new capital investments, are important to the future realization of improved profitability.
14
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)
Fourth Quarter Results – The following table provides our fourth quarter results:
Operating revenues
Operations and maintenance
Depreciation
Amortization
Taxes other than income taxes
Operating income
Other expense (income):
Interest expense
Interest income
Allowance for funds used during construction
Change in fair value of interest rate swap agreements
Gain on sale of other assets
Equity earnings in joint venture
Other
Income (loss) before income taxes
Provision for income tax benefit
Net income (loss)
Three Months Ended
December 31,
2019
226,042 $
2018
205,747
$
85,321
40,066
437
14,917
140,741
92,393
35,995
163
14,402
142,953
85,301
62,794
33,142
(7,287)
(3,892)
-
(480)
(292)
1,006
63,104
(1,123)
64,227 $
26,388
(39)
(4,513)
59,779
(116)
(573)
631
(18,763)
(15,106)
(3,657)
$
The increase in operating revenues of $20,295 was primarily due to:
an increase in water and wastewater rates, net of infrastructure rehabilitation surcharges, of $14,322;
an increase in customer water consumption; and
additional revenues of $1,809 associated with a larger customer base due to organic growth and utility
acquisitions, and other growth ventures;
offset by a decrease in water and wastewater revenues of $302 as a result of a do not consume advisory we
initiated in 2019 for some of our customers served by our Illinois subsidiary. We expect this decrease in revenues
to continue into the second quarter of 2020.
The decrease in operations and maintenance expense of $7,072 was primarily due to:
the effect of transaction expenses of $14,184 incurred in the prior year quarter, compared to expenses incurred in
the current year quarter of $1,005, for the Peoples Gas Acquisition, primarily representing expenses associated
with obtaining regulatory approvals, investment banking fees, legal expenses, and integration planning;
offset by an increase in postretirement benefits of $1,933;
expenses of $1,217 associated with remediating a do not consume advisory we initiated in 2019 for some of our
customers served by our Illinois subsidiary. We expect that the expenses associated with remediating the
advisory to continue in the second quarter of 2020; and
additional operating costs associated with acquired utility systems of $569.
15
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)
Depreciation expense increased by $4,071 primarily due to the utility plant placed in service since December 31, 2018.
Interest expense increased by $6,754 primarily due to:
pre-acquisition interest expense of $4,684 from the issuance of $900,000 of long-term debt and $119,081 of
amortizing notes in April 2019 partially for the Peoples Gas Acquisition; and
an increase in our effective interest rate.
Interest income increased by $7,248 primarily due to interest income of $6,898 earned on the proceeds from our April
2019 equity offerings.
Allowance for funds used during construction (“AFUDC”) decreased by $621, due to a decrease in the average balance of
utility plant construction work in progress, to which AFUDC is applied.
The change in fair value of interest rate swap agreements of $59,779 represents expense recognized in the fourth quarter
of 2018 on the mark-to-market adjustment of our interest rate swap agreements that were entered into on October 23,
2018 to mitigate interest rate risk associated with an anticipated $850,000 of debt issuances to fund a portion of the
Peoples Gas Acquisition. The interest rate swap agreements did not qualify for hedge accounting, and any changes in the
fair value of the swaps were included in earnings. On April 24, 2019, the Company settled the interest rate swap
agreements upon issuance of $900,000 of long-term debt to be used to finance $436,000 of the purchase price of the
Peoples Gas Acquisition, redeem $313,500 of the Company’s existing debt, and fund other corporate purposes.
Equity earnings in joint venture decreased by $281 due to a decrease in the sale of raw water to firms in the natural gas
drilling industry.
Other increased by $375 primarily due to a decrease in the expected return on plan assets assumption for our pension plan.
The provision for income taxes increased by $13,983 primarily as a result of the increase in income before income taxes
as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flow and Capital Expenditures
Net operating cash flows, dividends paid on common stock, capital expenditures, including allowances for funds used
during construction, and expenditures for acquiring water and wastewater systems for the five years ended December 31,
2019 were as follows:
Net Operating Cash
Flows
Dividends
Capital Expenditures
Acquisitions
2015
2016
2017
2018
2019
$
$
370,794 $
396,163
381,318
368,522
338,523
1,855,320 $
121,248 $
130,923
140,660
150,736
188,512
732,079 $
364,689 $
382,996
478,089
495,737
550,273
2,271,784 $
28,989
9,423
5,860
145,693
59,687
249,652
Net cash flows from operating activities decreased from 2018 to 2019 primarily due to the payment for the settlement of
the interest rate swap agreements of $83,520, offset by an increase in net income. Net cash flows from operating activities
16
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)
decreased from 2017 to 2018 primarily due to a reduction in deferred income taxes and a change in working capital. Net
income in 2018 was comparable to 2017, when excluding the after-tax effect of the change in the fair value of the interest
rate swap agreements. Net cash flows from operating activities decreased from 2016 to 2017 due to an increase in
pension and other postretirement benefits contributions, changes in deferred income taxes and an increase in the amount
of AFUDC related to equity funds of $5,072 in 2017 compared to 2016. Net cash flows from operating activities
increased from 2015 to 2016 primarily due to an increase in net income, a change in working capital, and a decrease in
pension and other postretirement benefits contributions.
Included in capital expenditures for the five year period are: expenditures for the rehabilitation of existing water and
wastewater systems, the expansion of our water and wastewater systems, modernization and replacement of existing
treatment facilities, water meters, office facilities, information technology, vehicles, and equipment. During this five year
period, we received $37,029 of customer advances and contributions in aid of construction to finance new water mains
and related facilities that are not included in the capital expenditures presented in the above table. In addition, during this
period, we have made repayments of debt, which includes the net effect of borrowings and repayments under our long-
term revolving credit facility, of $1,733,743 and have refunded $27,318 of customers’ advances for construction.
Dividends increased during the past five years as a result of annual increases in the dividends declared and paid and
increases in the number of shares outstanding.
Our planned 2020 capital program, excluding the costs of new mains financed by advances and contributions in aid of
construction, and including planned capital expenditures for Peoples after a planned closing on March 16, 2020, is
estimated to be approximately $921,000 in infrastructure improvements for the communities we serve. The 2020 capital
program is expected to include $475,100 for infrastructure rehabilitation surcharge qualified projects. On January 1,
2013, Aqua Pennsylvania reset its water infrastructure rehabilitation surcharge to zero resulting from the change in its tax
method of accounting for qualifying utility asset improvements as described below. Although we were not eligible to use
an infrastructure rehabilitation surcharge with our Aqua Pennsylvania water customers from January 1, 2013 to
September 30, 2017, we were able to use the income tax savings derived from the qualifying utility asset improvements to
maintain Aqua Pennsylvania’s capital investment program. Our planned 2020 capital program in Pennsylvania is
estimated to be approximately $314,000, a portion of which is expected to be eligible as a deduction for qualifying utility
asset improvements for Federal income tax purposes. Our overall 2020 capital program, including the Peoples Gas
Acquisition, along with $105,051 of debt repayments and $99,080 of other contractual cash obligations, as reported in the
section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Contractual Obligations”, has been, or is expected to be, financed through internally-generated funds, our revolving credit
facilities, and the issuance of long-term debt.
Future utility construction in the period 2021 through 2022, including recurring programs, such as the ongoing
replacement or rehabilitation of water meters and water mains, water treatment plant upgrades, storage facility
renovations, natural gas distribution meters and mains, pipes, service lines, and additional transmission mains to meet
customer demands, excluding the costs of new mains financed by advances and contributions in aid of construction, is
estimated to require aggregate expenditures of approximately $1,806,000. We anticipate that approximately more than
one-half of these expenditures will require external financing. We expect to refinance $88,232 of long-term debt during
this period as they become due with new issues of long-term debt, internally-generated funds, and our revolving credit
facilities. The estimates discussed above do not include any amounts for possible future acquisitions of water and
wastewater systems or the financing necessary to support them.
17
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 primary sources of liquidity are cash flows from operations (including the allowed deferral of Federal income tax
payments), borrowings under various short-term lines of credit and other credit facilities, and customer advances and
contributions in aid of construction. Our cash flow from operations, or internally-generated funds, is impacted by the
timing of rate relief, water consumption, and changes in Federal tax laws with respect to the reduction in the corporate
income tax rate, and accelerated tax depreciation or deductions for utility construction projects. We fund our capital and
typical acquisitions through internally-generated funds, supplemented by short-term lines of credit. Over time, we
partially repay or pay-down our short-term lines of credit with long-term debt. We financed a portion of the Peoples Gas
Acquisition purchase price, and refinanced certain debt of the Company, with a mix of common equity, equity-linked
securities, and debt financing, which included senior notes issued in capital markets transactions, and credit facilities. The
ability to finance our future construction programs, as well as our acquisition activities, depends on our ability to attract
the necessary external financing and maintain internally-generated funds. Timely rate orders permitting compensatory
rates of return on invested capital will be required by our operating subsidiaries to achieve an adequate level of earnings
and cash flow to enable them to secure the capital they will need to operate and to maintain satisfactory debt coverage
ratios.
Acquisitions
Pursuant to the Company’s growth strategy, on October 22, 2018, the Company entered into a purchase agreement to
acquire, from LDC Funding LLC, the parent company of PNG Companies, a natural gas distribution company
headquartered in Pittsburgh, Pennsylvania, serving approximately 747,000 gas utility customers in western Pennsylvania,
West Virginia, and Kentucky. At the closing of the Peoples Gas Acquisition, the Company will pay $4,275,000 in cash,
subject to adjustments for working capital, certain capital expenditures, transaction expenses and closing indebtedness as
set forth in the acquisition agreement. The Company expects to assume approximately $1,106,000 of Peoples’
indebtedness upon closing of the Peoples Gas Acquisition, which would reduce the cash purchase price by approximately
$1,106,000. The Company financed this acquisition through the April 2019 issuances of $1,293,750 of common stock,
$900,000 of senior notes, $690,000 of tangible equity units, and upon closing of the issuance of $750,000 of common
stock through a private placement, and borrowings on our revolving credit facility. On October 22, 2018, the Company
obtained the Bridge Commitment from certain banks to provide senior unsecured bridge loans in an aggregate amount of
up to $5,100,000 to, among other things, backstop the Peoples Gas Acquisition purchase price and the refinancing of
certain debt of the Company and of Peoples. As of December 31, 2019, we had terminated $4,350,000 of commitments
under the Bridge Commitment in connection with, among other things, the replacement of our unsecured revolving credit
facility and the issuances of common stock, tangible equity units, and senior notes in April 2019. The obligation of an
investor to fund the remaining amount under the Bridge Commitment is subject to the satisfaction of customary closing
conditions. On October 23, 2018, the Company entered into interest rate swap agreements to mitigate interest rate risk
associated with our planned issuance of long-term debt to fund a portion of the Peoples Gas Acquisition. The interest rate
swaps were settled in April 2019 in conjunction with the issuance of long-term debt used to finance a portion of the
purchase price of this acquisition. The interest rate swap agreements did not qualify for hedge accounting and any changes
in the fair value of the swaps were included in our earnings. Approval from the United States Federal Trade Commission
was obtained in December 2018, and approvals from the public utility commissions of Kentucky, West Virginia, and
Pennsylvania were obtained in March 2019, April 2019, and January 2020, respectively. This acquisition is expected to
close on March 16, 2020, once closing conditions are met, and it is anticipated that this transaction will result in the
recording of goodwill. In the event that this acquisition is terminated due to certain breaches by the Company, a fee of
$120,000 would be payable to the seller as a reverse termination fee.
During the past five years, we have expended cash of $249,652 and issued 439,943 shares of common stock, valued at
$12,845 at the time of acquisition, related to the acquisition of both water and wastewater utility systems.
In December 2019, the Company acquired the wastewater utility system assets of Cheltenham Township, Pennsylvania,
which serves 9,887 customers. The total cash purchase price for the utility system was $50,250. The purchase price
allocation for this acquisition consisted primarily of acquired property, plant and equipment of $44,558 and goodwill of
$5,692. Additionally, during 2019, we completed seven acquisitions of water and wastewater utility systems for $9,437 in
cash in four of the states in which we operate, adding 2,393 customers.
18
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)
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 consist of approximately 16,000
customers, or the equivalent of 198,000 retail customers, in 42 municipalities in Southeast Pennsylvania for $276,500.
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. The Company expects to finance
this acquisition with a mix of common equity and debt financing.
In November 2018, the Company entered into a purchase agreement to acquire the wastewater utility system assets of East
Norriton Township, Pennsylvania, which serves approximately 4,950 customers for $21,000. 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.
In addition to the Company’s pending acquisitions of DELCORA and East Norriton Township, as part of the Company’s
growth-through-acquisition strategy, the Company has entered into purchase agreements to acquire the water or
wastewater utility system assets of two municipalities, which will add approximately 5,306 customers in two of the states
in which the Company operates, for a total combined purchase price in cash of $37,000. We plan to finance the purchase
price of these acquisitions by the issuance of long-term debt. The purchase price for these pending acquisitions is subject
to certain adjustments at closing, and the pending acquisitions are subject to regulatory approvals, including the final
determination of the fair value of the rate base acquired. Closings for our remaining acquisitions, with the exception of
DELCORA and East Norriton Township, are expected to occur in the first half of 2020, respectively, subject to the timing
of the regulatory approval process.
In July 2018, the Company acquired the wastewater utility system assets of Limerick Township, Pennsylvania which
serves 5,497 customers. The total cash purchase price for the utility system was $74,836. The purchase price allocation
for this acquisition consisted primarily of acquired property, plant and equipment of $64,759 and goodwill of $10,790.
Additionally, during 2018, we completed seven acquisitions of water and wastewater utility systems for $42,519 in cash
in three of the states in which we operate, adding 8,661 customers. Further, in December 2018, the Company acquired the
Valley Creek Trunk Sewer System, serving area municipalities in Pennsylvania, from the Tredyffrin Township Municipal
Authority for $28,338. The purchase price allocation for this acquisition consisted primarily of property, plant and
equipment of $22,904 and goodwill of $5,434. The system receives untreated wastewater from area municipalities, which
is conveyed to the Valley Forge Treatment Plan. The system consists of 49,000 linear feet of gravity sewers, pump
stations, and force mains.
In 2017, we completed four acquisitions of water and wastewater utility systems for $5,860 in cash in two of the states in
which we operate, adding 1,003 customers.
In January 2016, we acquired the water utility system assets of Superior Water Company, Inc., which provided public
water service to 4,108 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 and $3,905 in cash. Additionally, during 2016, we completed 18 acquisitions of water and wastewater
utility systems for $5,518 in cash in eight of the states in which we operate, adding 2,469 customers.
In April 2015, we acquired the water and wastewater utility system assets of North Maine Utilities, located in the Village
of Glenview, Illinois serving 7,409 customers. The total purchase price consisted of $23,079 in cash. Additionally,
during 2015, we completed 14 acquisitions of water and wastewater utility systems for $5,210 in cash in six of the states
in which we operate, adding 3,170 customers.
We continue to pursue the acquisition of water and wastewater utility systems and explore other utility acquisitions that
may be in a new state. Our typical acquisitions are expected to be financed with short-term debt with subsequent
repayment from the proceeds of long-term debt, retained earnings, or equity issuances.
19
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)
Joint Venture
Aqua Infrastructure, LLC is a partner in a joint venture with a firm that operates natural gas pipelines and processing
plants for the operation of a private pipeline system to supply raw water to natural gas well drilling operations in the
Marcellus Shale in north-central Pennsylvania (the “Joint Venture”). We own 49% of the Joint Venture. The 56 mile
pipeline construction and permitted intake on the Susquehanna River cost $109,000. As of December 31, 2019, our
capital contributions since inception in 2011 totaled $53,643 in cash. This investment has been financed through the
issuance of long-term debt. Our 49% investment in the Joint Venture is an unconsolidated affiliate and is accounted for
under the equity method of accounting. Our initial investment is carried at cost. Subsequently, the carrying amount of
our investment is adjusted to reflect capital contributions or distributions, our equity in earnings and losses since the
commencement of the system’s operations, and a decline in the fair value of our investment. In 2015, an impairment
charge was recognized by the joint venture on its long-lived assets, of which the Company’s share totaled $32,975
($21,433 after-tax), representing our share of the noncash impairment charge as further described in Note 1 – Summary of
Significant Accounting Policies – Investment in Joint Venture in this Annual Report.
Dispositions
We routinely review and evaluate areas of our business and operating divisions and, over time, may sell utility systems or
portions of systems. In 2019, the Company sold a water system in Virginia that served approximately 500 customers,
which resulted in proceeds of $1,882, and recognized a gain on sale of $405. In 2017, the Company sold two business
units within Aqua Resources, which resulted in total proceeds of $867, and recognized a net loss of $324. In 2016, the
Company sold two business units within Aqua Resources, which resulted in total proceeds of $4,459, and recognized a net
loss of $543.
Sources of Capital
Since net operating cash flow plus advances and contributions in aid of construction have not been sufficient to fully fund
our cash requirements including capital expenditures and our growth through acquisitions program, which includes
financings planned for a portion of the Peoples Gas Acquisition, we issued $3,294,175 of long-term debt, and obtained
other short-term borrowings during the past five years. At December 31, 2019, we have a $550,000 long-term revolving
credit facility that expires in December 2023, of which $17,124 was designated for letter of credit usage, $532,876 was
available for borrowing, and no borrowings were outstanding at December 31, 2019. Additionally, the facility expands by
$150,000 of capacity upon closing of the Peoples Gas Acquisition, which amount will be available to repay certain
outstanding indebtedness and fees to close an existing credit facility of Peoples and for general corporate purposes.
Further, the Company may request to expand the facility by an additional amount of up to $300,000 upon the closing of
the Peoples Gas Acquisition. In addition, we have short-term lines of credit of $135,500, of which $109,776 was
available as of December 31, 2019. These short-term lines of credit are subject to renewal on an annual basis. Although
we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of
any such renewal will be.
In October 2018, we entered into a $5,100,000 syndicated, committed bridge facility to support our agreement to acquire
Peoples. Subsequently, $4,350,000 has been terminated as no longer required, and we expect to terminate the remaining
portion of the bridge facility as a result of a stock purchase agreement entered into to fund our acquisition. The bridge
facility expires the earlier of closing of the acquisition or April 2020.
We financed the purchase price of the Peoples Gas Acquisition and refinanced certain debt with a mix of common equity,
mandatory convertible equity units, debt financing, which included senior notes issued in capital markets transactions, and
credit facilities. The purchase price for this acquisition is $4,275,000, which will be reduced by the amount of outstanding
indebtedness at closing, which is estimated to be $1,106,000.
As a result of the proceeds raised from the April 2019 financings that were being held to fund the Peoples Gas Acquisition
the Company has a positive working capital position as of December 31, 2019. However, historically, our consolidated
balance sheet has had a negative working capital position, whereby routinely our current liabilities exceed our current
assets. Management believes that internally-generated funds along with existing credit facilities and the proceeds from
20
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)
the issuance of long-term debt will be adequate to provide sufficient working capital to maintain normal operations and to
meet our financing requirements for at least the next twelve months.
Our loan and debt agreements require us to comply with certain financial covenants, which among other things, subject to
specific exceptions, limit the Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and
require a minimum level of earnings coverage over interest expense. During 2019, we were in compliance with our debt
covenants under our credit facilities. Failure to comply with our debt covenants could result in an event of default, which
could result in us being required to repay or refinance our borrowings before their due date, possibly limiting our future
borrowings, and increasing our borrowing costs.
The Company has a universal “pay as you go” shelf registration statement, filed with the SEC in February 2018, which
allows for the potential future offer and sale by us, from time to time, in one or more public offerings, of an indeterminate
amount of our common stock, preferred stock, debt securities, and other securities specified therein at indeterminate
prices. In April 2019, the Company issued 37,370,017 shares of common stock totaling $1,263,099 and 13,800,000
tangible equity units totaling $673,642 to finance a portion of the pending Peoples Gas Acquisition. Each tangible equity
unit consists of a prepaid stock purchase contract and an amortizing note due April 30, 2022, each issued by the Company.
Refer to Note 13 – Stockholders’ Equity for further information regarding these financings.
In addition, we have an acquisition shelf registration statement, which was filed with the SEC on February 27, 2015, to
permit the offering from time to time of an aggregate of $500,000 of our common stock and shares of preferred stock in
connection with acquisitions. During 2016, we issued 439,943 shares of common stock totaling $12,845 to acquire a
water system. The balance remaining available for use under the acquisition shelf registration as of December 31, 2019 is
$487,155.
We will determine the form and terms of any further securities issued under the universal shelf registration statement and
the acquisition shelf registration statement at the time of issuance.
We offer a Dividend Reinvestment and Direct Stock Purchase Plan (the “Plan”) that provides a convenient and
economical way to purchase shares of the Company. Under the direct stock purchase portion of the Plan, shares are
issued throughout the year. The dividend reinvestment portion of the Plan offers a five percent discount on the purchase
of shares of common stock with reinvested dividends. As of the December 2019 dividend payment, holders of 7.3% of
the common shares outstanding participated in the dividend reinvestment portion of the Plan. The shares issued under the
Plan are either original issue shares or shares purchased by the Company’s transfer agent in the open-market. During the
past five years, we have sold 513,765 original issue shares of common stock for net proceeds of $17,640 through the
dividend reinvestment portion of the Plan, and we used the proceeds to invest in our operating subsidiaries, to repay short-
term debt, and for general corporate purposes. In 2019, 2018, and 2017, 183,731, 321,585, and 447,753 shares of
common stock were purchased under the dividend reinvestment portion of the Plan by the Company’s transfer agent in the
open-market for $7,777, $11,343, and $15,168, respectively.
The Company’s Board of Directors had authorized us to repurchase our common stock, from time to time, in the open
market or through privately negotiated transactions. In December 2014, the Company’s Board of Directors authorized a
share buyback program of up to 1,000,000 shares to minimize share dilution through timely and orderly share
repurchases. In December 2015, the Company’s Board of Directors added 400,000 shares to this program. In 2015, we
repurchased 805,000 shares of our common stock in the open market for $20,502. In 2016, we did not repurchase any
shares of our common stock in the open market under this program. This program expired on December 31, 2016.
Off-Balance Sheet Financing Arrangements
We do not engage in any off-balance sheet financing arrangements. We do not have any interest in entities referred to as
variable interest entities, which includes special purpose entities and other structured finance entities. For risk
management purposes, the Company uses interest rate swap agreements. Refer to Note 11 – Long-term Debt and Loans
Payable for further information regarding these agreements.
21
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)
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2019:
Long-term debt
Interest on fixed-rate, long-term debt (1)
Operating leases (2)
Unconditional purchase obligations (3)
Other purchase obligations (4)
Pension plan obligation (5)
Other obligations (6)
Total
$
$
Total
3,077,400$
125,840
21,764
29,595
73,764
13,542
9,476
3,351,381$
Less than 1
year
105,051$
3,745
1,816
5,211
73,764
13,542
1,002
204,131$
Payments Due By Period
1 - 3 years 3 - 5 years
88,232$
3,246
2,707
10,427
-
-
2,065
106,677$
33,040$
1,639
1,406
9,524
-
-
2,118
47,727$
More than 5
years
2,851,077
117,210
15,835
4,433
-
-
4,291
2,992,846
(1) Represents interest payable on fixed rate, long-term debt. Amounts reported may differ from actual due to future
refinancing of debt.
(2) Represents operating leases that are noncancelable, before expiration, for the lease of motor vehicles, buildings, land
and other equipment.
(3) Represents our commitment to purchase minimum quantities of water as stipulated in agreements with other water
purveyors. We use purchased water to supplement our water supply, particularly during periods of peak customer
demand. Our actual purchases may exceed the minimum required levels.
(4) Represents an approximation of the open purchase orders for goods and services purchased in the ordinary course of
business.
(5) Represents contributions to be made to pension plan.
(6) Represents expenditures estimated to be required under legal and binding contractual obligations.
In addition to these obligations, we pay refunds on customers’ advances for construction over a specific period of time
based on operating revenues related to developer-installed water mains or as new customers are connected to and take
service from such mains. After all refunds are paid, any remaining balance is transferred to contributions in aid of
construction. The refund amounts are not included in the above table because the refund amounts and timing are
dependent upon several variables, including new customer connections, customer consumption levels and future rate
increases, which cannot be accurately estimated. Portions of these refund amounts are payable annually through 2029 and
amounts not paid by the contract expiration dates become non-refundable.
Lastly, in addition to the obligations disclosed in the contractual obligations table above, we have uncertain tax positions
of $18,671. Although we believe our tax positions comply with applicable law, we have made judgments as to the
sustainability of each uncertain tax position based on its technical merits. Due to the uncertainty of future cash outflows,
if any, associated with our uncertain tax positions, we are unable to make a reasonable estimate of the timing or amounts
that may be paid. See Note 7 – Income Taxes in this Annual Report for further information on our uncertain tax positions.
We will fund these contractual obligations with cash flows from operations and liquidity sources held by or available to
us.
22
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)
The Company is routinely involved in legal matters, including both asserted and unasserted legal claims, during the
ordinary course of business. See Note 9 – Commitments and Contingencies in this Annual Report for a discussion of the
Company’s legal matters. It is not always possible for management to make a meaningful estimate of the potential loss or
range of loss associated with such litigation. Also, unanticipated changes in circumstances and/or revisions to the
assessed probability of the outcomes of legal matters could result in expenses being incurred in future periods as well as
an increase in actual cash required to resolve the legal matter.
Capitalization
The following table summarizes our capitalization during the past five years:
December 31,
Long-term debt (1)
Essential Utilities stockholders' equity
2019
2018
2017
2016
2015
44.2%
55.8%
100.0%
56.1%
43.9%
100.0%
52.3%
47.7%
100.0%
50.8%
49.2%
100.0%
50.8%
49.2%
100.0%
(1) Includes current portion, as well as our borrowings under a variable rate revolving credit agreement of $0
at December 31, 2019, $370,000 at December 31, 2018, $60,000 at December 31, 2017, $25,000 at
December 31, 2016, and $60,000 at December 31, 2015.
Over the past five years, the changes in the capitalization ratios primarily resulted from the issuance of debt to finance our
acquisitions and capital program, changes in net income, the issuance of common stock, and the declaration of dividends.
INCOME TAX MATTERS
Tax Cuts and Jobs Act of 2017
On December 22, 2017, President Trump signed the TCJA into law. Substantially all of the provisions of the TCJA are
effective for tax years beginning after December 31, 2017, except as noted below. The TCJA includes significant changes
to the Code and the taxation of business entities, and includes specific provisions related to regulated public utilities.
Significant changes include a reduction in the corporate federal income tax rate from 35% to 21%, and a limitation on the
utilization of NOLs arising after December 31, 2017 to 80% of taxable income with an indefinite carryforward. The
specific provisions related to regulated public utilities in the TCJA generally allow for the continued deductibility of
interest expense, the elimination of full expensing for tax purposes of certain property acquired after September 27, 2017
and the continuation of certain rate normalization requirements for accelerated depreciation benefits. Our market-based
companies still qualify for 100% deductibility of qualifying property acquired after September 27, 2017.
The Company’s regulated operations accounting for income taxes are impacted by the Financial Accounting Standards
Board’s (“FASB”) accounting guidance for regulated operations. Reductions in accumulated deferred income tax
balances due to the reduction in the corporate income tax rates to 21% under the provisions of the TCJA results in
amounts previously collected from utility customers for these deferred taxes to be refundable to such customers, generally
through reductions in future rates. The TCJA includes provisions that stipulate how these excess deferred taxes are to be
passed back to customers for certain accelerated tax depreciation benefits. Potential refunds of other deferred taxes will
be determined by our state regulators. The Company has reserved $3,907 for amounts expected to be refundable to utility
customers. In 2018, Illinois, Virginia, Texas, New Jersey, and two operating divisions in Ohio which operate under
locally-negotiated contractual rates with their respective counties, the Company’s base rates have been adjusted or
surcredits have been added to customer bills to reflect the lower corporate income tax rate. In North Carolina, Indiana,
and our regulated operations in Ohio, no surcredits have been added to customer bills to reflect the lower corporate
income tax rate in 2018. These adjustments were reflected in customer bills beginning January 1, 2019. In Pennsylvania,
a 2019 procedural order resulting from the Company’s general rate case adjusted the Company’s base rate to reflect the
lower corporate income tax rate. In addition, through a reduction in base rates or surcredits, the Company has refunded
approximately $690 and $9,600 to utility customers during 2019 and 2018.
23
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)
As of December 31, 2017, resulting from the TCJA enactment, our deferred income tax assets and liabilities were
revalued based upon the new corporate income tax rate of 21%. The revaluation of our deferred income tax assets and
liabilities resulted in the recognition of additional income tax expense of $3,141 in 2017 to the extent revalued deferred
income taxes are not believed to be recoverable in utility customer rates.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial condition and results of operations are impacted by the methods, assumptions, and estimates used in the
application of critical accounting policies. The following accounting policies are particularly important to our financial
condition or results of operations and require estimates or other judgments of matters of uncertainty. Changes in the
estimates or other judgments included within these accounting policies could result in a significant change to the financial
statements. We believe our most critical accounting policies include the use of regulatory assets and liabilities, revenue
recognition, the valuation of our long-lived assets (which consist primarily of utility plant in service, regulatory assets,
and goodwill) our accounting for post-retirement benefits, and our accounting for income taxes. We have discussed the
selection and development of our critical accounting policies and estimates with the Audit Committee of the Board of
Directors.
Regulatory Assets and Liabilities ─ We defer costs and credits on the balance sheet as regulatory assets and liabilities
when it is probable that these costs and credits will be recognized in the rate-making process in a period different from
when the costs and credits were incurred. These deferred amounts, both assets and liabilities, are then recognized in the
income statement in the same period that they are reflected in our rates charged for water or wastewater service. We make
significant judgments and estimates to record regulatory assets and liabilities, such as for amounts related to income taxes,
pension and postretirement benefits, acquisitions and capital projects. For each regulatory jurisdiction with regulated
operations, we evaluate at the end of each reporting period, whether the regulatory assets and liabilities continue to meet
the probable criteria for future recovery or refund. The evaluation considers factors such as regulatory orders or
guidelines, in the same regulatory jurisdiction, of a specific matter or a similar matter, as provided to us in the past or to
other regulated utilities. In addition, the evaluation may be impacted by changes in the regulatory environment and
pending or new legislation that could impact the ability to recover costs through regulated rates. There may be multiple
participants to rate or transactional regulatory proceedings who might offer different views on various aspects of such
proceedings, and in these instances may challenge our prudence of business policies and practices, seek cost
disallowances or request other relief.
In the event that our assessment as to the probability of the inclusion in the rate-making process is incorrect, the associated
regulatory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval.
Revenue Recognition ─ Our utility revenues recognized in an accounting period include amounts billed to customers on a
cycle basis and unbilled amounts based on estimated usage from the last billing to the end of the accounting period. The
estimated usage is based on our judgment and assumptions; our actual results could differ from these estimates, which
would result in operating revenues being adjusted in the period that the revision to our estimates is determined.
In Virginia, we commence the billing of our utility customers, under new rates, upon authorization from the respective
utility commission and before the final commission rate order is issued. The revenue recognized reflects an estimate
based on our judgment of the final outcome of the commission’s ruling. We monitor the applicable facts and
circumstances regularly and revise the estimate as required. The revenue billed and collected prior to the final ruling is
subject to refund based on the commission’s final ruling.
Valuation of Long-Lived Assets, Goodwill and Intangible Assets ─ We review our long-lived assets for impairment,
including utility plant in service and investment in joint venture. We also review regulatory assets for the continued
application of the FASB accounting guidance for regulated operations. Our review determines whether there have been
changes in circumstances or events, such as regulatory disallowances, or abandonments, that have occurred that require
adjustments to the carrying value of these assets. Adjustments to the carrying value of these assets would be made in
instances where their inclusion in the rate-making process is unlikely. For utility plant in service, we would recognize an
impairment loss for any amount disallowed by the respective utility commission. For our equity method investment in
24
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)
joint venture, the Company evaluates whether it has experienced a decline in the value of its investment that is other than
temporary in nature. We would recognize an impairment loss if the fair value of our investment is less than the carrying
amount of the investment, and the decline in value is considered other than temporary. Additionally, the Company would
recognize its share of an impairment loss if the joint venture determines that the carrying amount of the joint venture’s
assets exceeds the sum of the joint venture’s undiscounted estimated cash flows.
Our long-lived assets, which consist primarily of utility plant in service, regulatory assets and investment in joint venture,
are reviewed for impairment when changes in circumstances or events occur. These circumstances or events could
include a decline in the market value or physical condition of a long-lived asset, an adverse change in the manner in which
long-lived assets are used or planned to be used, a change in historical trends, operating cash flows associated with the
long-lived assets, changes in macroeconomic conditions, industry and market conditions, or overall financial performance.
When these circumstances or events occur, we determine whether it is more likely than not that the fair value of those
assets is less than their carrying amount. If we determine that it is more likely than not (that is, the likelihood of more
than 50 percent), we would recognize an impairment charge if it is determined that the carrying amount of an asset
exceeds the sum of the undiscounted estimated cash flows. In this circumstance, we would recognize an impairment
charge equal to the difference between the carrying amount and the fair value of the asset. Fair value is estimated to be
the present value of future net cash flows associated with the asset, discounted using a discount rate commensurate with
the risk and remaining life of the asset. This assessment requires significant management judgment and estimates that are
based on budgets, general strategic business plans, historical trends and other data and relevant factors. These estimates
include significant inherent uncertainties, since they involve forecasting future events. If changes in circumstances or
events occur, or estimates and assumptions that were used in this review are changed, we may be required to record an
impairment charge on our long-lived assets.
We have an investment in a joint venture, for which we own 49%, and use the equity method of accounting to account for
this joint venture. The joint venture operates a private pipeline system to supply raw water to natural gas well drilling
operations in the Marcellus Shale in north central Pennsylvania. Refer to Note 1 – Summary of Significant Accounting
Policies – Property, Plant and Equipment and Depreciation, and Investment in Joint Venture in this Annual Report for
additional information regarding the review of long-lived assets for impairment.
We test the goodwill attributable for each of our reporting units for impairment at least annually on July 31, or more often,
if circumstances indicate a possible impairment may exist. When testing goodwill for impairment, we may assess
qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall
financial performance, and entity specific events, for some or all of our reporting units to determine whether it’s more
likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, based on our
assessment of the qualitative factors previously noted, we may perform a quantitative goodwill impairment test by
determining the fair value of a reporting unit based on a discounted cash flow analysis. If we perform a quantitative test
and determine that the fair value of a reporting unit is less than its carrying amount, we would record an impairment loss
for the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of
goodwill. The assessment requires significant management judgment and estimates that are based on budgets, general
strategic business plans, historical trends and other data and relevant factors. If changes in circumstances or events occur,
or estimates and assumptions that were used in our impairment test change, we may be required to record an impairment
charge for goodwill. Refer to Note 1 – Summary of Significant Accounting Policies – Goodwill in this Annual Report for
information regarding the results of our annual impairment test.
Accounting for Post-Retirement Benefits ─ We maintain a qualified and a non-qualified defined benefit pension plan and
plans that provide for post-retirement benefits other than pensions. Accounting for pension and other post-retirement
benefits requires an extensive use of assumptions including the discount rate, expected return on plan assets, the rate of
future compensation increases received by our employees, mortality, turnover and medical costs. Each assumption is
reviewed annually with assistance from our actuarial consultant, who provides guidance in establishing the assumptions.
The assumptions are selected to represent the average expected experience over time and may differ in any one year from
actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of
pension and other post-retirement benefits expense that we recognize.
25
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 discount rate assumption, which is used to calculate the present value of the projected benefit payments of our post-
retirement benefits, was determined by selecting a hypothetical portfolio of high quality corporate bonds appropriate to
match the projected benefit payments of the plans. The selected bond portfolio was derived from a universe of Aa-graded
corporate bonds. The discount rate was then developed as the rate that equates the market value of the bonds purchased to
the discounted value of the projected benefit payments of the plans. A decrease in the discount rate would generally
increase our post-retirement benefits expense and benefit obligation. After reviewing the hypothetical portfolio of bonds,
we selected a discount rate of 3.35% for our pension plan and 3.42% for our other post-retirement benefit plans as of
December 31, 2019, which represent a 95 and 92 basis-point decrease as compared to the discount rates selected at
December 31, 2018, respectively. Our post-retirement benefits expense under these plans is determined using the
discount rate as of the beginning of the year, which was 4.30% for our pension plan and 4.34% for our other-
postretirement benefit plans for 2019, and will be 3.35% for our pension plan and 3.42% for our other post-retirement
benefit plans for 2020.
Our expected return on plan assets is determined by evaluating the asset class return expectations with our advisors as
well as actual, long-term, historical results of our asset returns. The Company’s market-related value of plan assets is
equal to the fair value of the plans’ assets as of the last day of its fiscal year and is a determinant for the expected return
on plan assets, which is a component of post-retirement benefits expense. The allocation of our plans’ assets impacts our
expected return on plan assets. The expected return on plan assets is based on a targeted allocation of 50% to 70% return
seeking assets and 30% to 50% liability hedging assets. Our post-retirement benefits expense increases as the expected
return on plan assets decreases. We believe that our actual long-term asset allocations on average will approximate our
targeted allocations. Our targeted allocations are driven by our investment strategy to earn a reasonable rate of return
while maintaining risk at acceptable levels through the diversification of investments across and within various asset
categories. For 2019, we used a 6.50% expected return on plan assets assumption which will decrease to 6.0% for 2020.
Funding requirements for qualified defined benefit pension plans are determined by government regulations and not by
accounting pronouncements. In accordance with funding rules and our funding policy, during 2020 our pension
contribution is expected to be $13,542. Future years’ contributions will be subject to economic conditions, plan
participant data and the funding rules in effect at such time as the funding calculations are performed, though we expect
future changes in the amount of contributions and expense recognized to be generally included in customer rates.
Accounting for Income Taxes ─ We estimate the amount of income tax payable or refundable for the current year and the
deferred income tax liabilities and assets that results from estimating temporary differences resulting from the treatment of
specific items, such as depreciation, for tax and financial statement reporting. Generally, these differences result in the
recognition of a deferred tax asset or liability on our consolidated balance sheet and require us to make judgments
regarding the probability of the ultimate tax impact of the various transactions we enter into. Based on these judgments,
we may record tax reserves or adjustments to valuation allowances on deferred tax assets to reflect the expected
realization of future tax benefits. Actual income taxes could vary from these estimates and changes in these estimates can
increase income tax expense in the period that these changes in estimates occur.
Our determination of what qualifies as a capital cost versus a tax deduction, for qualifying utility asset improvements, as it
relates to our income tax accounting method change beginning in 2012, is subject to subsequent adjustment as well as IRS
audits, changes in income tax laws, including regulations regarding tax-basis depreciation as it applies to our capital
expenditures, or qualifying utility asset improvements, the expiration of a statute of limitations, or other unforeseen
matters could impact the tax benefits that have already been recognized. We establish reserves for uncertain tax positions
based upon management’s judgment as to the sustainability of these positions. These accounting estimates related to the
uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on
its technical merits. We believe our tax positions comply with applicable law and that we have adequately recorded
reserves as required. However, to the extent the final tax outcome of these matters is different than our estimates
recorded, we would then need to adjust our tax reserves which could result in additional income tax expense or benefits in
the period that this information is known.
26
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)
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
We describe the impact of recent accounting pronouncements in Note 1 – Summary of Significant Accounting Policies in
this Annual Report.
27
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Essential Utilities, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets, including the consolidated statements of capitalization,
of Essential Utilities, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related
consolidated statements of net income, comprehensive income, equity, and cash flows for each of the three years in the
period ended December 31, 2019, including the related notes and schedule of condensed parent company financial
statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019
appearing after the signature pages (collectively referred to as the “consolidated financial statements”). We also have
audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal
control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
29
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to
accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Rate Regulation and Regulatory Accounting
As described in Notes 1 and 6 to the consolidated financial statements, most of the operating companies of the Company
that are regulated public utilities are subject to regulation by the utility commissions of the states in which they
operate. Some of the operating companies that are regulated public utilities are subject to rate regulation by county or city
government. As of December 31, 2019, regulatory assets were $878 million and regulatory liabilities were $518 million.
Regulated public utilities follow the Financial Accounting Standards Board’s (FASB) accounting guidance for regulated
operations, which provides for the recognition of regulatory assets and liabilities as allowed by regulators for costs or
credits that are reflected in current rates or are considered probable of being included in future rates. The regulatory assets
represent costs that are probable to be fully recovered from customers in future rates while regulatory liabilities represent
amounts that are expected to be refunded to customers in future rates or amounts recovered from customers in advance of
incurring the costs. The regulatory assets or liabilities are then relieved as the cost or credit is reflected in the Company’s
rates charged for utility service. If, as a result of a change in circumstances, it is determined that the regulated operating
companies no longer meets the criteria to apply regulatory accounting, the operating company would have to discontinue
regulatory accounting and write-off the respective regulatory assets and liabilities. Management makes significant
judgments and estimates to record regulatory assets and liabilities. For each regulatory jurisdiction with regulated
operations, management evaluates at the end of each reporting period, whether the regulatory assets and liabilities
continue to meet the probable criteria for future recovery or refund. The evaluation considers factors such as regulatory
orders or guidelines, in the same regulatory jurisdiction, of a specific matter or a similar matter, as provided to the
Company in the past or to other regulated utilities. In addition, the evaluation may be impacted by changes in the
regulatory environment and pending or new legislation that could impact the ability to recover costs through regulated
rates. There may be multiple participants to rate or transactional regulatory proceedings who might offer different views
on various aspects of such proceedings, and in these instances may challenge our prudence of business policies and
practices, seek cost disallowances or request other relief.
The principal considerations for our determination that performing procedures relating to the Company’s rate regulation
and regulatory accounting is a critical audit matter are there was significant judgment by management in assessing the
potential outcomes and related accounting impacts associated with pending rate cases which in turn led to a high degree of
30
auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence obtained related to the
recovery of regulatory assets and the refund of regulatory liabilities.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls
relating to management’s evaluation of regulatory matters impacting regulatory assets and liabilities. These procedures
also included, among others (i) obtaining the Company’s correspondence with regulators and assessing the reasonableness
of management’s judgments regarding the probability of recovery of regulatory assets and refund of regulatory liabilities
in light of correspondence with regulators, among other factors, (ii) assessing the reasonableness of management’s
judgments regarding new and updated regulatory guidance and proceedings and the related accounting implications, and
(iii) testing the calculation of regulatory assets and liabilities based on provisions and formulas outlined in regulatory
orders and other correspondence.
Philadelphia, Pennsylvania
February 28, 2020
We have served as the Company’s auditor since 2000.
31
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
Assets
Property, plant and equipment, at cost
Less: accumulated depreciation
Net property, plant and equipment
Current assets:
Cash and cash equivalents
Accounts receivable, net
Unbilled revenues
Inventory, materials and supplies
Prepayments and other current assets
Assets held for sale
Total current assets
Regulatory assets
Deferred charges and other assets, net
Investment in joint venture
Goodwill
Operating lease right-of-use assets
Total assets
Essential Utilities stockholders' equity:
Liabilities and Equity
Common stock at $0.50 par value, authorized 300,000,000 shares, issued 223,871,284 and 181,151,827 as of December 31, 2019 and December 31, 2018
Capital in excess of par value
Retained earnings
Treasury stock, at cost, 3,112,565 and 3,060,206 shares as of December 31, 2019 and December 31, 2018
Total stockholders' equity
Long-term debt, excluding current portion
Less: debt issuance costs
Long-term debt, excluding current portion, net of debt issuance costs
Commitments and contingencies (See Note 9)
Current liabilities:
Current portion of long-term debt
Loans payable
Accounts payable
Book overdraft
Accrued interest
Accrued taxes
Interest rate swap agreements
Other accrued liabilities
Total current liabilities
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits
Customers' advances for construction
Regulatory liabilities
Operating lease liabilities
Other
Total deferred credits and other liabilities
Contributions in aid of construction
Total liabilities and equity
See accompanying notes to consolidated financial statements.
32
December 31,
2019
2018
$
8,201,936 $
1,856,146
6,345,790
7,648,469
1,718,143
5,930,326
1,868,922
67,137
40,483
18,379
16,259
1,558
2,012,738
878,132
42,652
5,984
63,822
12,867
3,627
65,825
35,400
15,844
23,337
3,139
147,172
788,076
39,237
6,959
52,726
-
$
9,361,985 $ 6,964,496
$
111,935 $
2,636,555
1,210,072
(77,702)
3,880,860
2,972,349
29,022
2,943,327
105,051
25,724
74,919
10,944
29,818
22,775
-
49,618
318,849
936,158
95,556
517,599
11,645
102,465
1,663,423
90,576
820,378
1,174,245
(75,835)
2,009,364
2,419,115
20,651
2,398,464
144,545
15,449
77,331
8,950
23,300
22,234
59,779
47,389
398,977
845,403
93,343
531,027
-
97,182
1,566,955
555,526
590,736
$
9,361,985 $ 6,964,496
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
Operating revenues
Operating expenses:
Operations and maintenance
Depreciation
Amortization
Taxes other than income taxes
Total operating expenses
Operating income
Other expense (income):
Interest expense
Interest income
Allowance for funds used during construction
Change in fair value of interest rate swap agreements
Loss on debt extinguishment
Gain on sale of other assets
Equity earnings in joint venture
Other
Income before income taxes
Provision for income taxes (benefit)
Net income
Net income per common share:
Basic
Diluted
Average common shares outstanding during the period:
Basic
Diluted
See accompanying notes to consolidated financial statements.
Years ended December 31,
2019
889,692 $
2018
838,091 $
2017
809,525
$
333,102
158,179
(1,703)
59,955
549,533
308,478
146,032
641
59,762
514,913
282,253
136,302
422
56,628
475,605
340,159
323,178
333,920
125,383
(25,406)
(16,172)
23,742
18,528
(923)
(2,210)
5,691
211,526
(13,017)
224,543 $
99,054
(152)
(13,023)
59,779
-
(714)
(2,081)
1,996
178,319
(13,669)
191,988 $
88,543
(202)
(15,211)
-
-
(484)
(331)
4,953
256,652
16,914
239,738
1.04 $
1.04 $
1.08 $
1.08 $
1.35
1.35
215,550
215,931
177,904
178,399
177,612
178,175
$
$
$
33
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
Years ended December 31,
2019
224,543 $
2018
191,988 $
2017
239,738
-
224,543 $
-
191,988 $
191
239,929
Net income
Other comprehensive income, net of tax:
Unrealized holding gain on investments, net of tax expense of $102
Comprehensive income
$
$
See accompanying notes to consolidated financial statements.
34
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
Essential Utilities stockholders' equity:
Common stock, $0.50 par value
Capital in excess of par value
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income
Total stockholders' equity
Long-term debt of subsidiaries (substantially collateralized by utility plant):
Interest Rate Range
0.00% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%
8.00% to 8.99%
9.00% to 9.99%
Maturity Date Range
2020 to 2033
2020 to 2039
2024 to 2033
2020 to 2056
2020 to 2059
2028 to 2043
2026 to 2036
2022 to 2027
2021 to 2025
2020 to 2026
December 31,
2019
2018
$
111,935 $
2,636,555
1,210,072
(77,702)
-
3,880,860
3,474
10,733
15,674
655,685
1,054,791
60,683
31,000
30,751
5,026
19,300
1,887,117
90,576
820,378
1,174,245
(75,835)
-
2,009,364
3,732
11,588
17,488
497,426
831,066
154,788
31,000
31,564
5,581
20,000
1,604,233
Notes payable to bank under revolving credit agreement, variable rate, due 2023
Unsecured notes payable:
-
370,000
Bank note at 2.48% due 2019
Bank note at 3.50% due 2020
Amortizing notes at 3.00% due 2022
Notes ranging from 3.01% to 3.59%, due 2029 through 2041
Notes at 4.28%, due 2049
Notes ranging from 5.64% to 5.95%, due 2020 through 2034
Total long-term debt
Current portion of long-term debt
Long-term debt, excluding current portion
Less: debt issuance costs
Long-term debt, excluding current portion, net of debt issuance costs
-
50,000
99,356
490,000
500,000
50,927
3,077,400
105,051
2,972,349
29,022
2,943,327
50,000
50,000
-
245,000
112,000
132,427
2,563,660
144,545
2,419,115
20,651
2,398,464
Total capitalization
$
6,824,187 $
4,407,828
See accompanying notes to consolidated financial statements.
35
Balance at December 31, 2016
Net income
Other comprehensive income, net of income tax of $102
Dividends declared ($0.7920 per share)
Issuance of common stock under dividend reinvestment
plan (45,121 shares)
Repurchase of stock (69,339 shares)
Equity compensation plan (169,258 shares)
Exercise of stock options (174,527 shares)
Stock-based compensation
Cumulative effect of change in accounting principle -
windfall tax benefit
Other
Balance at December 31, 2017
Net income
Dividends declared ($0.8474 per share)
Issuance of common stock under dividend reinvestment
plan (158,205 shares)
Repurchase of stock (73,898 shares)
Equity compensation plan (201,563 shares)
Exercise of stock options (91,808 shares)
Stock-based compensation
Cumulative effect of change in accounting principle -
financial instruments
Other
Balance at December 31, 2018
Net income
Dividends declared ($0.9066 per share)
Stock issued to finance acquisition (37,370,017 shares)
Proceeds from stock purchase contracts issued under
tangible equity units
Issuance of common stock from stock purchase
contracts (4,846,601 shares)
Issuance of common stock under dividend reinvestment
plan (236,666 shares)
Repurchase of stock (52,359 shares)
Equity compensation plan (146,867 shares)
Exercise of stock options (119,306 shares)
Stock-based compensation
Other
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
Common
stock
90,155 $
$
Capital in
excess of
par value
797,513 $
Retained
earnings
1,032,844 $
239,738
-
(140,660)
Treasury
stock
(71,113)$
-
-
-
Accumulated
Other
Comprehensive
Income
669 $
-
191
-
-
-
-
-
-
-
-
860
-
-
-
-
-
-
-
(860)
-
-
-
-
-
-
-
-
-
-
-
-
-
-$
Total
1,850,068
239,738
191
(140,660)
1,453
(2,167)
-
2,873
5,994
982
(851)
1,957,621
191,988
(150,736)
5,163
(2,555)
-
1,459
7,144
-
(720)
2,009,364
224,543
(188,512)
1,263,099
557,389
-
8,959
(1,867)
-
1,898
7,164
(1,177)
3,880,860
(2,167)
-
-
-
-
-
(73,280)
-
-
-
(2,555)
-
-
-
-
-
(75,835)
-
-
-
-
-
-
(1,867)
-
-
-
-
-
-
-
23
-
85
87
-
-
-
90,350
-
-
79
-
101
46
-
-
-
90,576
-
-
18,685
118
-
73
60
-
-
-
-
-
1,430
-
(85)
2,786
6,342
-
(851)
807,135
-
-
5,084
-
(101)
1,413
7,567
-
-
-
-
(348)
982
-
1,132,556
191,988
(150,736)
-
-
-
-
(423)
-
(720)
820,378
-
-
1,244,414
860
-
1,174,245
224,543
(188,512)
-
-
-
-
-
-
-
(204)
-
-
557,389
2,423
(2,423)
8,841
-
(73)
1,838
7,368
(1,177)
2,636,555 $
36
Balance at December 31, 2019
$
111,935 $
See accompanying notes to consolidated financial statements.
1,210,072 $
(77,702)$
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization
Deferred income taxes
Provision for doubtful accounts
Stock-based compensation
(Gain) loss on sale of utility system and market-based business unit
Loss on interest rate swap agreements
Loss on debt extinguishment
Settlement of interest rate swap agreements
Gain on sale of other assets
Net change in receivables, inventory and prepayments
Net change in payables, accrued interest, accrued taxes and other accrued liabilities
Pension and other postretirement benefits contributions
Other
Net cash flows from operating activities
Cash flows from investing activities:
Property, plant and equipment additions, including the debt component of allowance for funds used
during construction of $4,231, $3,332, and $3,578
Acquisitions of utility systems and other, net
Net proceeds from the sale of utility systems and other assets
Other
Net cash flows used in investing activities
Cash flows from financing activities:
Customers' advances and contributions in aid of construction
Repayments of customers' advances
Net proceeds (repayments) of short-term debt
Proceeds from long-term debt
Repayments of long-term debt
Extinguishment of long-term debt
Change in cash overdraft position
Proceeds from issuance of common stock under dividend reinvestment plan
Proceeds from stock issued to finance acquisition
Proceeds from tangible equity unit issuance
Proceeds from exercised stock options
Repurchase of common stock
Dividends paid on common stock
Other
Net cash flows from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash paid during the year for:
Interest, net of amounts capitalized
Income taxes
Non-cash investing activities:
Property, plant and equipment additions purchased at the period end, but not yet paid
Non-cash utility property contributions
See accompanying notes to consolidated financial statements.
Years ended December 31,
2019
2018
2017
$
224,543 $
191,988 $
239,738
156,476
(10,436)
5,306
7,368
(405)
23,742
18,528
(83,520)
(923)
(4,335)
5,108
(8,597)
5,668
338,523
(550,273)
(59,687)
2,893
2,464
(604,603)
9,092
(6,825)
10,275
1,434,506
(1,048,471)
(25,237)
1,993
8,959
1,263,099
673,642
1,898
(1,867)
(188,512)
(1,177)
2,131,375
1,865,295
3,627
1,868,922 $
89,228 $
970
60,628 $
30,693
146,673
(14,950)
5,305
7,567
-
59,779
-
-
(714)
(18,024)
567
(14,216)
4,547
368,522
(495,737)
(145,693)
716
899
(639,815)
7,458
(6,217)
11,799
1,331,868
(914,125)
-
(12,678)
5,163
-
-
1,459
(2,555)
(150,736)
(720)
270,716
(577)
4,204
3,627 $
93,630 $
2,103
65,285 $
24,660
136,724
13,780
4,986
6,342
774
-
-
-
(484)
(6,458)
(763)
(16,240)
2,919
381,318
(478,089)
(5,860)
1,342
2,223
(480,384)
7,312
(6,536)
(2,885)
591,024
(359,068)
-
9,012
1,453
-
-
2,873
(2,167)
(140,660)
(851)
99,507
441
3,763
4,204
81,771
3,177
45,385
39,220
$
$
$
Refer to Note 2 – Acquisitions, Note 11 – Long-term Debt and Loans Payable, and Note 15 – Employee Stock and
Incentive Plan for a description of non-cash activities.
37
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands of dollars, except per share amounts)
Note 1 – Summary of Significant Accounting Policies
Nature of Operations ─ Essential Utilities, Inc. (“Essential Utilities,” the “Company,” “we,” “our”, or “us”) is the holding
company for regulated utilities providing water or wastewater services concentrated in Pennsylvania, Ohio, Texas,
Illinois, North Carolina, New Jersey, Indiana, and Virginia. On February 3, 2020, we changed our name from Aqua
America, Inc. to Essential Utilities, Inc. to align the name of the Company with the anticipated business plan of the
Company following the pending Peoples Gas Acquisition and to reflect the proposed combination of regulated water
utilities and natural gas utilities that offer essential utility services to customers. After completion of the acquisition, the
water and wastewater utility services will be provided through Essential Utilities’ Aqua companies and the natural gas
utility services will be provided through its Peoples natural gas companies. Essential Utilities plans to complete the
Peoples Gas Acquisition on March 16, 2020. Our largest operating subsidiary is Aqua Pennsylvania, Inc., which
accounted for approximately 54% of our operating revenues and approximately 72% of our Regulated water segment’s
income for 2019. As of December 31, 2019, Aqua Pennsylvania provided water or wastewater services to approximately
one-half of the total number of people we serve. Aqua Pennsylvania’s service territory is located in the suburban areas
north and west of the City of Philadelphia and in 27 other counties in Pennsylvania. The Company’s other regulated
utility subsidiaries provide similar services in seven additional states. In addition, the Company’s market-based activities
are conducted through Aqua Infrastructure LLC and Aqua Resources, Inc. Aqua Infrastructure provides non-utility raw
water supply services for firms in the natural gas drilling industry. Aqua Resources manages a water system operating
and maintenance contract; and offers, through a third-party, water and sewer line protection solutions and repair services
to households. In 2017, we completed the sale of business units that were reported within the Company’s market-based
subsidiary, Aqua Resources, one which installed and tested devices that prevent the contamination of potable water and
another that constructed, maintained, and repaired water and wastewater systems.
The Company has identified ten operating segments and has one reportable segment named the Regulated water segment.
The reportable segment is comprised of eight operating segments for our water and wastewater regulated utility
companies which are organized by the states where we provide these services. These operating segments are aggregated
into one reportable segment since each of the Company’s 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. In addition, Aqua Resources and Aqua Infrastructure are not quantitatively
significant to be reportable and are included as a component of “Other,” in addition to corporate costs that have not been
allocated to the Regulated water segment, because they would not be recoverable as a cost of utility service, and
intersegment eliminations.
Regulation ─ Most of the operating companies that are regulated public utilities are subject to regulation by the utility
commissions of the states in which they operate. The respective utility commissions have jurisdiction with respect to
rates, service, accounting procedures, issuance of securities, acquisitions and other matters. Some of the operating
companies that are regulated public utilities are subject to rate regulation by county or city government. Regulated public
utilities follow the Financial Accounting Standards Board’s (“FASB”) accounting guidance for regulated operations,
which provides for the recognition of regulatory assets and liabilities as allowed by regulators for costs or credits that are
reflected in current rates or are considered probable of being included in future rates. Costs, for which the Company has
received or expects to receive prospective rate recovery, are deferred as a regulatory asset and amortized over the period
of rate recovery in accordance with the FASB’s accounting guidance for regulated operations. The regulatory assets or
liabilities are then relieved as the cost or credit is reflected in Company’s rates charged for utility service. If, as a result of
a change in circumstances, it is determined that the regulated operating companies no longer meets the criteria to apply
regulatory accounting, the operating company would have to discontinue regulatory accounting and write-off the
respective regulatory assets and liabilities. See Note – 6 Regulatory Assets and Liabilities for further information
regarding the Company’s regulatory assets.
The Company makes significant judgments and estimates to record regulatory assets and liabilities. For each regulatory
jurisdiction with regulated operations, the Company evaluates at the end of each reporting period, whether the regulatory
assets and liabilities continue to meet the probable criteria for future recovery or refund. The evaluation considers factors
such as regulatory orders or guidelines, in the same regulatory jurisdiction, of a specific matter or a similar matter, as
provided to the Company in the past or to other regulated utilities. In addition, the evaluation may be impacted by
changes in the regulatory environment and pending or new legislation that could impact the ability to recover costs
38
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
through regulated rates. There may be multiple participants to rate or transactional regulatory proceedings who might
offer different views on various aspects of such proceedings, and in these instances may challenge the prudence of our
business policies and practices, seek cost disallowances or request other relief.
Use of Estimates in Preparation of Consolidated Financial Statements ─ The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Basis of Presentation – The consolidated financial statements include the accounts of the Company and its subsidiaries.
All intercompany accounts and transactions have been eliminated. The following prior period amounts have been
reclassified to conform to the current period presentation:
In the consolidated balance sheet – the presentation of accounts receivable, net, and unbilled revenues, and
In the consolidated statements of net income – the presentation of interest expense and interest income.
Property, Plant and Equipment and Depreciation ─ Property, plant and equipment consist primarily of utility plant. The
cost of additions includes contracted cost, direct labor and fringe benefits, materials, overheads, and for additions meeting
certain criteria, allowance for funds used during construction. Water and wastewater systems acquired are typically
recorded at estimated original cost of utility plant when first devoted to utility service and the applicable depreciation is
recorded to accumulated depreciation. Further, water and wastewater systems acquired under fair value regulations would
be recorded based on the valuation of the utility plant as approved by the respective utility commission. The difference
between the estimated original cost, less applicable accumulated depreciation, and the purchase price may be recorded as
an acquisition adjustment within utility plant as permitted by the applicable regulatory jurisdiction. At December 31,
2019, utility plant includes a net credit acquisition adjustment of $15,248, which is generally being amortized from 2 to 59
years. Amortization of the acquisition adjustments totaled $6,076 in 2019, $2,645 in 2018, and $2,774 in 2017.
Utility expenditures for maintenance and repairs, including major maintenance projects and minor renewals, are charged
to operating expenses when incurred in accordance with the system of accounts prescribed by the utility commissions of
the states in which the company operates. The cost of new units of property and betterments are capitalized. Utility
expenditures for water main cleaning and relining of pipes are deferred and are presented in net property, plant and
equipment in accordance with the FASB’s accounting guidance for regulated operations. As of December 31, 2019,
$1,360 of these costs have been incurred since the last respective rate proceeding and the Company expects to recover
these costs in future rates.
The cost of software upgrades and enhancements are capitalized if they result in added functionality, which enables the
software to perform tasks it was previously incapable of performing. Information technology costs associated with major
system installations, conversions and improvements, such as software training, data conversion and business process
reengineering costs, are deferred as a regulatory asset if the Company expects to recover these costs in future rates. If
these costs are not deferred, then these costs are charged to operating expenses when incurred. As of December 31, 2019,
$16,680 of these costs have been deferred since the last respective rate proceeding as a regulatory asset, and the deferral is
reported as a component of net property, plant and equipment.
When units of utility property are replaced, retired or abandoned, the recorded value thereof is credited to the asset
account and such value, together with the net cost of removal, is charged to accumulated depreciation. To the extent the
Company anticipates recovery of the cost of removal or other retirement costs through rates after the retirement costs are
incurred, a regulatory asset is recorded as those costs are incurred. In some cases, the Company recovers retirement costs
through rates during the life of the associated asset and before the costs are incurred. These amounts, which are not yet
utilized, result in a regulatory liability being reported based on the amounts previously recovered through customer rates.
39
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The straight-line remaining life method is used to compute depreciation on utility plant. Generally, the straight-line
method is used with respect to transportation and mechanical equipment, office equipment and laboratory equipment.
Long-lived assets of the Company, which consist primarily of utility plant in service, regulatory assets, and investment in
joint venture, are reviewed for impairment when changes in circumstances or events occur. These circumstances or
events could include a disallowance of utility plant in service or regulatory assets by the respective utility commission, a
decline in the market value or physical condition of a long-lived asset, an adverse change in the manner in which long-
lived assets are used or planned to be used, a change in historical trends, operating cash flows associated with the long-
lived assets, changes in macroeconomic conditions, industry and market conditions, or overall financial performance.
When these circumstances or events occur, the Company determines whether it is more likely than not that the fair value
of those assets is less than their carrying amount. If the Company determines that it is more likely than not (that is, the
likelihood of more than 50 percent), the Company would recognize an impairment charge if it is determined that the
carrying amount of an asset exceeds the sum of the undiscounted estimated cash flows. In this circumstance, the
Company would recognize an impairment charge equal to the difference between the carrying amount and the fair value
of the asset. Fair value is estimated to be the present value of future net cash flows associated with the asset, discounted
using a discount rate commensurate with the risk and remaining life of the asset. During the period there has been no
change in circumstances or events that have occurred that require adjustments to the carrying values of the Company’s
long-lived assets.
40
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Allowance for Funds Used During Construction ─ The allowance for funds used during construction (“AFUDC”)
represents the capitalized cost of funds used to finance the construction of utility plant. In general, AFUDC is applied to
construction projects requiring more than one month to complete. No AFUDC is applied to projects funded by customer
advances for construction, contributions in aid of construction, or applicable state-revolving fund loans. AFUDC includes
the net cost of borrowed funds and a rate of return on other funds when used and is recovered through water rates as the
utility plant is depreciated. The amount of AFUDC related to equity funds in 2019 was $11,941, 2018 was $9,691, and
2017 was $11,633. No interest was capitalized by our market-based businesses.
Recognition of Revenues ─ The Company recognizes revenue as water and wastewater services are provided to our
customers, which happens over time as the services are delivered and the performance obligation is satisfied. The
Company’s utility revenues recognized in an accounting period includes amounts billed to customers on a cycle basis and
unbilled amounts based on estimated usage from the last billing to the end of the accounting period. Unbilled amounts are
calculated by deriving estimates based on average usage of the prior month. The Company’s actual results could differ
from these estimates, which would result in operating revenues being adjusted in the period that the revision to our
estimates are determined.
Generally, payment is due within 30 days once a bill is issued to a customer. Sales tax and other taxes we collect on
behalf of government authorities, concurrent with our revenue-producing activities, are primarily excluded from revenue.
The following table presents our revenues disaggregated by major source and customer class:
Revenues from contracts with customers:
$
Residential
Commercial
Fire protection
Industrial
Other water
Other wastewater
Other utility
Revenues from contracts with customers
Alternative revenue program
Other and eliminations
Consolidated
$
Water
Revenues
2019
Wastewater
Revenues
Years ended December 31,
Other
Revenues
Water
Revenues
2018
Wastewater
Revenues
Other
Revenues
518,192 $
145,599
33,589
30,667
39,353
-
-
767,400
80
-
767,480 $
83,561 $
15,222
-
1,765
-
4,656
-
105,204
(89)
-
105,115 $
-
-
-
-
-
-
13,835
13,835
-
3,262
17,097
$
$
482,946 $
133,753
32,236
28,848
53,658
-
-
731,441
(708)
-
730,733 $
73,418 $
13,147
-
1,857
-
5,748
-
94,170
308
-
94,478 $
-
-
-
-
-
-
9,427
9,427
-
3,453
12,880
Revenues from Contracts with Customers – These revenues are composed of three main categories: water, wastewater,
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 water supply. Other revenues are associated
fees that relate to the regulated business but are not water and wastewater revenues. See description below for a
discussion on the performance obligation for each of these revenue streams:
Tariff Revenues – These revenues are categorized by customer class: residential, commercial, fire protection,
industrial, other water, and other wastewater. The rates that generate these revenues are approved by the
respective state utility commissions, and revenues are billed cyclically and accrued for when unbilled. Other
water and other wastewater revenues consists primarily of fines, penalties, surcharges, and availability lot fees.
Our performance obligation for tariff revenues is to provide potable water or wastewater treatment service 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.
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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Other Utility Revenues – Other utility revenues represents revenues earned primarily from: antenna revenues,
which represents fees received from telecommunication operators that have put cellular antennas on our water
towers, operation and maintenance and billing contracts, which represents fees earned from municipalities for our
operation of their water or wastewater treatment services or performing billing services, and fees earned from
developers for accessing our water mains. The performance obligations vary for these revenues, but all are
primarily recognized over time as the service is delivered.
Alternative Revenue Program – These revenues represent the difference between the actual billed utility water
and wastewater revenues for Aqua Illinois and the revenues set in the last Aqua Illinois rate case. 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 refund
due to customers or a payment from customers. The cumulative annual difference is either refunded to customers
or collected from customers over a nine-month period. This revenue program represents a contract between the
utility and its regulators, not customers, and therefore is not within the scope of the FASB’s accounting guidance
for recognizing revenue from contracts with customers.
Other and Eliminations – Other and eliminations consists of our market-based revenues, which comprises: Aqua
Infrastructure and Aqua Resources (described below), and intercompany eliminations for revenue billed between
our subsidiaries. Aqua Infrastructure is the holding company for our 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. The joint venture earns revenues through providing non-utility raw water
supply services to natural gas drilling companies which enter into water supply contracts. The performance
obligation is to deliver non-potable water to the joint venture’s customers. Aqua Infrastructure’s share of the
revenues recognized by the joint venture is reflected, net, in equity earnings in joint venture on our consolidated
statements of net income. Aqua Resources earns revenues by providing non-regulated water and wastewater
services through an operating and maintenance contract, and third-party water and sewer service line repair. The
performance obligations are performing agreed upon services in the contract, most commonly operation of third-
party water or wastewater treatment services, or billing services, 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. The
Company’s market-based subsidiaries recognized revenues of $3,395 in 2019, $3,590 in 2018, and $4,798 in
2017.
Cash and Cash Equivalents ─ The Company considers all highly liquid investments with an original maturity of three
months or less, which are not restricted for construction activity, to be cash equivalents.
The Company had a book overdraft, which represents transactions that have not cleared the bank accounts at the end of
the period, for specific disbursement cash accounts of $10,944 and $8,950 at December 31, 2019 and 2018, respectively.
The Company transfers cash on an as-needed basis to fund these items as they clear the bank in subsequent periods. The
balance of the book overdraft is reported as book overdraft and the change in the book overdraft balance is reported as
cash flows from financing activities, due to our ability to fund the overdraft with the Company’s credit facility.
Accounts Receivable ─ Accounts receivable are recorded at the invoiced amounts, which consists of billed and unbilled
revenues. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in
our existing accounts receivable and is determined based on historical write-off experience and the aging of account
balances. The Company reviews the allowance for doubtful accounts quarterly. Account balances are written off against
the allowance when it is probable the receivable will not be recovered. When utility customers request extended payment
terms, credit is extended based on regulatory guidelines, and collateral is not required.
Inventories, Materials and Supplies ─ Inventories are stated at cost. Cost is determined using the first-in, first-out
method.
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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Investment in Joint Venture – The Company uses the equity method of accounting to account for our 49% investment in
a joint venture with a firm in the natural gas industry for the construction and operation of a private pipeline system to
supply raw water to natural gas well drilling operations in the Marcellus Shale in north-central Pennsylvania, which
commenced operations in 2012. Our initial investment is carried at cost. Subsequently, the carrying amount of our
investment is adjusted to reflect capital contributions or distributions, and our equity in earnings or losses since the
commencement of the system’s operations, as well as a decline in the fair value of our investment. Our share of equity
earnings in the joint venture is reported in the consolidated statements of net income as equity earnings in joint venture.
During 2019 and 2018 we received distributions of $3,185 and $1,793, respectively. For our equity method investment in
joint venture, the Company evaluates whether it has experienced a decline in the value of its investment that is other than
temporary in nature. We would recognize an impairment loss if the fair value of our investment is less than the carrying
amount of the investment, and the decline in value is considered other than temporary. Additionally, the Company would
recognize its share of an impairment loss if the joint venture determines that the carrying amount of the joint venture’s
assets exceeds the sum of the joint venture’s undiscounted estimated cash flows.
Goodwill ─ Goodwill represents the excess cost over the fair value of net tangible and identifiable intangible assets
acquired through acquisitions. Goodwill is not amortized but is tested for impairment annually, or more often, if
circumstances indicate a possible impairment may exist. When testing goodwill for impairment, we may assess
qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall
financial performance, and entity specific events, for some or all of our reporting units to determine whether it’s more
likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, based on our
assessment of the qualitative factors previously noted, we may perform a quantitative goodwill impairment test by
determining the fair value of a reporting unit based on a discounted cash flow analysis. If we perform a quantitative test
and determine that the fair value of a reporting unit is less than its carrying amount, we would record an impairment loss
for the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of
goodwill. The Company performed a qualitative assessment for its annual test of the goodwill attributable for each of our
reporting units for impairment as of July 31, 2019, and concluded that it is more likely than not that the fair value of each
reporting unit, which has goodwill recorded, exceeded its carrying amount, indicating that none of the Company’s
goodwill was impaired. The following table summarizes the changes in the Company’s goodwill:
Balance at December 31, 2017
Goodwill acquired
Reclassifications to utility plant acquisition adjustment
Other
Balance at December 31, 2018
Goodwill acquired
Reclassifications to utility plant acquisition adjustment
Balance at December 31, 2019
Regulated
Water
Other
$
$
37,389 $
10,790
(139)
(155)
47,885
11,126
(30)
58,981 $
4,841 $
-
-
-
4,841
-
-
4,841 $
Consolidated
42,230
10,790
(139)
(155)
52,726
11,126
(30)
63,822
The reclassification of goodwill to utility plant acquisition adjustment results from a mechanism approved by the
applicable utility commission. The mechanism provides for the transfer over time, and the recovery through customer
rates, of goodwill associated with some acquisitions upon achieving specific objectives.
Deferred Charges and Other Assets ─ Deferred charges and other assets consist primarily of assets held to compensate
employees in the future who participate in the Company’s deferred compensation plan and other costs.
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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Marketable equity securities are carried on the balance sheet at fair market value, and changes in fair value are included in
other expense (income).
Income Taxes ─ The Company accounts for some income and expense items in different time periods for financial and
tax reporting purposes. Deferred income taxes are provided on specific temporary differences between the tax basis of the
assets and liabilities, and the amounts at which they are carried in the consolidated financial statements. The income tax
effect of temporary differences not currently recovered in rates is recorded as deferred taxes with an offsetting regulatory
asset or liability. These deferred income taxes are based on the enacted tax rates expected to be in effect when such
temporary differences are projected to reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount more likely than not to be realized. Investment tax credits are deferred and amortized over the
estimated useful lives of the related properties. Judgment is required in evaluating the Company’s Federal and state tax
positions. Despite management’s belief that the Company’s tax return positions are fully supportable, the Company
establishes reserves when it believes that its tax positions are likely to be challenged and it may not fully prevail in these
challenges. The Company’s provision for income taxes includes interest, penalties and reserves for uncertain tax
positions.
In 2012, the Company changed its tax method of accounting for qualifying utility asset improvement costs in Aqua
Pennsylvania effective with the tax year ended December 31, 2012 and for prior tax years. The tax accounting method
was changed to permit the expensing of qualifying utility asset improvement costs that were previously being capitalized
and depreciated for book and tax purposes. This change was implemented in response to a June 2012 rate order issued by
the Pennsylvania Public Utility Commission to Aqua Pennsylvania, which provides for a reduction in current income tax
expense as a result of the recognition of income tax benefits for qualifying utility asset improvements. This change results
in a significant reduction in the effective income tax rate, a reduction in current income tax expense, and reduces the
amount of taxes currently payable. For qualifying capital expenditures made prior to 2012, the resulting tax benefits have
been deferred as of December 31, 2012 and, in accordance with the rate order, a ten year amortization of the income tax
benefits, which reduces future income tax expense, commenced in 2013.
Customers’ Advances for Construction and Contributions in Aid of Construction ─ Water mains, other utility property
or, in some instances, cash advances to reimburse the Company for its costs to construct water mains or other utility
property, are contributed to the Company by customers, real estate developers and builders in order to extend utility
service to their properties. The value of these contributions is recorded as customers’ advances for construction. Over
time, the amount of non-cash contributed property will vary based on the timing of the contribution of the non-cash
property and the volume of non-cash contributed property received in connection with development in our service
territories. The Company makes refunds on these advances over a specific period of time based on operating revenues
related to the property, or as new customers are connected to and take service from the applicable water main. After all
refunds are made, any remaining balance is transferred to contributions in aid of construction. Contributions in aid of
construction include direct non-refundable contributions and the portion of customers' advances for construction that
become non-refundable.
Based on regulatory conventions in states where the Company operates, generally our subsidiaries depreciate contributed
property and amortize contributions in aid of construction at the composite rate of the related property. Contributions in
aid of construction and customers’ advances for construction are deducted from the Company’s rate base for rate-making
purposes, and therefore, no return is earned on contributed property.
Stock-Based Compensation ─ The Company records compensation expense in the financial statements for stock-based
awards based on the grant date fair value of those awards. Stock-based compensation expense includes an estimate for
pre-vesting forfeitures and is recognized over the requisite service periods of the awards on either a straight-line basis, or
the graded vesting method, which is generally commensurate with the vesting term.
44
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Fair Value Measurements – 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:
Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the
ability to access;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices
in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in non-
active markets, or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities; or
Level 3: inputs that are unobservable and significant to the fair value measurement.
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. Additionally, assets that are measured at fair value using the net
asset value (“NAV”) per share practical expedient are not classified in the fair value hierarchy. 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 years ended December 31, 2019 and 2018.
Recent Accounting Pronouncements ─
Pronouncements to be adopted upon the effective date:
In December 2019, the FASB issued updated accounting guidance that simplifies the accounting for income taxes. The
updated guidance removes certain exceptions to the general principles of accounting for income taxes to reduce the cost
and complexity of its application, including the accounting for intraperiod tax allocation when there is a loss from
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 anticipated loss for the
year. Additionally, the updated guidance clarifies and amends the existing guidance over accounting for franchise 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 equity
method. The updated accounting guidance is effective for fiscal years beginning after December 15, 2020 and interim
periods within those fiscal years with early adoption permitted. The Company is evaluating the requirements of the
updated guidance to determine the impact of adoption.
In August 2018, the FASB issued updated accounting guidance on accounting for cloud computing arrangements. The
updated guidance requires entities that are customers in cloud computing arrangements to defer implementation costs if
they would be capitalized by the entity in software licensing arrangements under the internal-use software guidance. The
guidance may be applied retrospectively or prospectively to implementation costs incurred after the date of adoption. The
updated accounting guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within
those fiscal years. Upon adoption, we do not believe the new guidance will have an impact on our consolidated financial
statements.
45
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In August 2018, the FASB issued updated accounting guidance, which modifies the disclosures required for defined
benefit pension and other postretirement benefit plans. The modifications in this update remove disclosures that are no
longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements
identified as relevant. The updated accounting guidance is effective for fiscal years ending after December 15, 2020, with
early adoption available. Upon adoption, we do not believe the new guidance will have an impact on our consolidated
financial statements.
In August 2018, the FASB issued updated accounting guidance, which modifies the disclosure requirements on fair value
measurements. The modifications in this update eliminates, amends, and adds disclosure requirements for fair value
measurements, which is expected to reduce costs for preparers while providing more decision-useful information for
financial statement users. The updated accounting guidance is effective for fiscal years ending after December 15, 2019,
with early adoption available. Upon adoption, we do not believe the new guidance will have an impact on our
consolidated financial statements.
In June 2016, the FASB issued updated accounting guidance on accounting for impairments of financial instruments,
including trade receivables, which requires companies to estimate expected credit losses on trade receivables over their
contractual life. Historically, companies reserve for expected credit losses by applying historical loss percentages to
respective aging categories. Under the updated accounting guidance, companies will use a forward-looking methodology
that incorporates lifetime expected credit losses, which will result in an allowance for expected credit losses for
receivables that are either current or not yet due, which historically have not been reserved for. The updated accounting
guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years,
with early adoption available. Upon adoption, we do not believe the new guidance will have an impact on our
consolidated financial statements.
Pronouncements adopted during the fiscal year:
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. On January 1, 2019, the Company adopted the updated guidance as required using the modified
retrospective approach, which provides a method for recording existing leases at adoption and in comparative periods that
approximates the results of a full retrospective approach. Further, we elected the package of practical expedients
permitted under the transition guidance within the updated guidance, which among other things, allowed the Company to
carry forward its historical lease classification. The Company also elected the practical expedient related to land
easements, allowing the Company to carry forward its accounting treatment for land easements on existing agreements.
Adoption of the new guidance resulted in the recording, on the Company’s consolidated balance sheet, of a right-of-use
asset and lease liability of $14,028 as of January 1, 2019, and there was no cumulative impact adjustment to retained
earnings for prior periods accounted for under the previous lease guidance.
Note 2 – Acquisitions
Peoples Gas Acquisition
Pursuant to the Company’s growth strategy, on October 22, 2018, the Company entered into a purchase agreement with
LDC Parent LLC (“Seller”), to acquire its interests in LDC Funding LLC (“LDC”). LDC is the parent of LDC Holdings
LLC (“LDC Holdings”), and LDC Holdings is the parent of five natural gas public utility companies, which includes
Peoples Natural Gas Company, Peoples Gas Company, and Delta Natural Gas Company as well as other operating
subsidiaries. Collectively these businesses are referred to as “Peoples,” a natural gas distribution company headquartered
in Pittsburgh, Pennsylvania, serving approximately 747,000 gas utility customers in western Pennsylvania, West Virginia,
46
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
and Kentucky and the pending transaction is referred to as the Peoples Gas Acquisition. At the closing of the Peoples Gas
Acquisition, the Company will pay $4,275,000, in cash subject to adjustments for working capital, certain capital
expenditures, transaction expenses and closing indebtedness as set forth in the acquisition agreement. The Company
expects to assume approximately $1,106,000 of Peoples’ indebtedness upon the closing of the Peoples Gas Acquisition,
which would reduce the cash purchase price by approximately $1,106,000. The Company financed the Peoples Gas
Acquisition purchase price and refinanced certain debt of the Company with a mix of common equity, equity-linked
securities, and debt financing, which included senior notes issued in capital markets transactions, and credit facilities. On
October 22, 2018, the Company obtained a commitment (the “Bridge Commitment”) from certain banks to provide senior
unsecured bridge loans in an aggregate amount of up to $5,100,000 to, among other things, backstop the Peoples Gas
Acquisition purchase price and the refinancing of certain debt of the Company and of Peoples. As of December 31, 2019,
the Company had terminated $4,350,000 of commitments under the Bridge Commitment in connection with, among other
things, the replacement of the Company’s unsecured revolving credit facility and the issuances of common stock, tangible
equity units, and senior notes in April 2019.
On October 23, 2018, the Company entered into interest rate swap agreements to mitigate interest rate risk associated with
an anticipated $850,000 of debt issuances to fund a portion of the Peoples Gas Acquisition. The interest rate swaps were
settled on April 24, 2019 in conjunction with the issuance of long-term debt to be used to finance a portion of the purchase
price of this acquisition, which resulted in a payment by the Company of $83,520. Refer to Note 11 – Long-term Debt
and Loans Payable for further information. The interest rate swap agreements did not qualify for hedge accounting and
any changes in the fair value of the swaps was included in our earnings.
Approval from the United States Federal Trade Commission was obtained in December 2018, and approvals from the
public utility commissions of Kentucky, West Virginia, and Pennsylvania were obtained in March 2019, April 2019, and
January 2020, respectively. The Peoples Gas Acquisition is subject to customary closing conditions set forth in the
acquisition agreement. This acquisition is expected to close on March 16, 2020, and it is anticipated that this transaction
will result in the recording of goodwill. In the event that this acquisition is terminated due to certain breaches by the
Company, a fee of $120,000 would be payable to the Seller as a reverse termination fee.
Water and Wastewater Utility Acquisitions
In December 2019, the Company acquired the wastewater utility system assets of Cheltenham Township, Pennsylvania,
which serves 9,887 customers for $50,250. The preliminary purchase price allocation for this acquisition consisted
primarily of property, plant and equipment of $44,558 and goodwill of $5,692. Additionally, in 2019, the Company
completed seven acquisitions of water and wastewater utility systems in three states adding 2,393 customers. The total
purchase price of these utility systems consisted of $9,437 in cash. The purchase price allocation for these acquisitions
consisted primarily of acquired property, plant and equipment. The operating revenues included in the consolidated
financial statements of the Company during the period owned by the Company for the utility systems acquired in 2019 are
$506.
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 consist of approximately 16,000
customers, or the equivalent of 198,000 retail customers, in 42 municipalities in Southeast Pennsylvania for $276,500.
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.
In November 2018, the Company entered into a purchase agreement to acquire the wastewater utility system assets of East
Norriton Township, Pennsylvania, which serves approximately 4,950 customers for $21,000. 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.
47
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In addition to the Company’s pending acquisitions of DELCORA and East Norriton Township, as part of the Company’s
growth-through-acquisition strategy, the Company has entered into purchase agreements to acquire the water or
wastewater utility system assets of two municipalities, which will add approximately 5,306 customers in two of the states
in which the Company operates, for a total combined purchase price in cash of $37,000. The purchase price for these
pending acquisitions is subject to certain adjustments at closing, and the pending acquisitions are subject to regulatory
approvals, including the final determination of the fair value of the rate base acquired. Closings for our remaining
acquisitions, with the exception of DELCORA and East Norriton Township, are expected to occur in the first half of
2020, subject to the timing of the regulatory approval process.
In July 2018, the Company acquired the wastewater utility systems assets of Limerick Township, Pennsylvania which
serves 5,497 customers. The total cash purchase price for the utility system was $74,836. The purchase price allocation
for this acquisition consisted primarily of acquired property, plant and equipment of $64,759, and goodwill of $10,790.
Additionally, during 2018, the Company completed seven acquisitions of water and wastewater utility systems in three
states adding 8,661 customers. The total purchase price of these utility systems consisted of $42,519 in cash. The
purchase price allocation for these acquisitions consisted primarily of acquired property, plant and equipment. The
operating revenues included in the consolidated financial statements of the Company during the period owned by the
Company for the utility systems acquired were $8,905 in 2019 and in 2018 were $3,308. Further, in December 2018, the
Company acquired the Valley Creek Trunk Sewer System, serving area municipalities in Pennsylvania, from the
Tredyffrin Township Municipal Authority for $28,338. The purchase price allocation for this acquisition consisted
primarily of property, plant and equipment of $22,904 and goodwill of $5,434. The system receives untreated wastewater
from area municipalities, which is conveyed to the Valley Forge Treatment Plant. The system consists of 49,000 linear
feet of gravity sewers, pump stations, and force mains. The operating revenues included in the consolidated financial
statements of the Company for the Valley Creek Trunk Sewer System were $2,799 in 2019.
In 2017, the Company completed four acquisitions of water and wastewater utility systems in two 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 operating revenues included in the consolidated financial statements of the Company during the
period owned by the Company for the utility systems acquired were $878 in 2019, $846 in 2018, and in 2017 are $461.
The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results
of operations.
Note 3 –Dispositions
The following dispositions have not been presented as discontinued operations in the Company’s consolidated financial
statements as they do not qualify as discontinued operations, since their disposal does not represent a strategic shift that
has a major effect on our operations or financial results. The gains or loss disclosed below are reported in the
consolidated statements of net income as a component of operations and maintenance expense.
Dispositions Completed in 2019 and 2017
In the fourth quarter of 2018, the Company decided to market for sale a water system in Virginia that serves
approximately 500 customers. This water system was reported as assets held for sale in the Company’s December 31,
2018 consolidated balance sheet included in this Annual Report, and in April 2019, the Company completed the sale for
proceeds of $1,882 and recognized a gain on sale of $405.
In 2017, the Company completed the sale of two business units that were 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 the other business unit constructed, repaired, and performed maintenance on water and wastewater systems.
These transactions resulted in total proceeds of $867 and the recognition of a net loss of $324.
48
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Dispositions Reported as Assets Held for Sale at December 31, 2019
In the first quarter of 2017, the Company decided to market for sale a water system in Texas that serves approximately
265 customers. This water system is reported as assets held for sale in the Company’s consolidated balance sheet, and the
sale is expected to close in the first half of 2020.
Note 4 – Property, Plant and Equipment
Utility plant and equipment:
Mains and accessories
Services, hydrants, treatment plants and reservoirs
Operations structures and water tanks
Miscellaneous pumping and purification equipment
Meters, data processing, transportation and operating equipment
Land and other non-depreciable assets
Utility plant and equipment
Utility construction work in progress
Net utility plant acquisition adjustment
Non-utility plant and equipment
Total property, plant and equipment
Note 5 – Accounts Receivable
Billed utility revenue
Other
Less allowance for doubtful accounts
Net accounts receivable
December 31,
2019
2018
Approximate Range of
Useful Lives
Weighted Average
Useful Life
$
$
3,585,506 $
2,152,397
332,812
904,757
847,945
156,617
7,980,034
214,633
(15,248)
22,517
8,201,936 $
3,344,910
1,984,164
313,531
847,279
806,978
107,537
7,404,399
235,979
(20,832)
28,923
7,648,469
33 - 94 years
5 - 89 years
14 - 85 years
9 - 76 years
5 - 84 years
-
-
2 - 59 years
2 - 64 years
75 years
56 years
48 years
42 years
29 years
-
-
28 years
57 years
December 31,
2019
2018
69,205 $
5,285
74,490
7,353
67,137 $
68,347
4,392
72,739
6,914
65,825
$
$
The Company’s utility customers are located principally in the following states: 47% in Pennsylvania, 15% in Ohio, 10%
in North Carolina, 8% in Texas, and 8% in Illinois. No single customer accounted for more than one percent of the
Company's regulated operating revenues during the years ended December 31, 2019, 2018, and 2017. The following table
summarizes the changes in the Company’s allowance for doubtful accounts:
Balance at January 1,
Amounts charged to expense
Accounts written off
Recoveries of accounts written off
Balance at December 31,
2019
2018
2017
6,914$
5,306
(5,980)
1,113
7,353$
7,071$
5,305
(6,587)
1,125
6,914$
7,095
4,986
(6,135)
1,125
7,071
$
$
49
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 6 – Regulatory Assets and Liabilities
The regulatory assets represent costs that are probable to be fully recovered from customers in future rates while
regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or amounts recovered
from customers in advance of incurring the costs. Except for income taxes and utility plant retirement costs, regulatory
assets and regulatory liabilities are excluded from the Company’s rate base and do not earn a return. The components of
regulatory assets and regulatory liabilities are as follows:
Income taxes
Customer refunds resulting from TCJA
Utility plant retirement costs
Post-retirement benefits
Accrued vacation
Water tank painting
Fair value adjustment of long-term debt assumed in acquisition
Debt refinancing
Rate case filing expenses and other
December 31, 2019
December 31, 2018
Regulatory
Assets
736,120 $
$
-
7,873
110,661
2,439
6,175
2,166
6,564
6,134
878,132 $
$
Regulatory
Liabilities
389,424
3,907
43,742
78,557
-
1,928
-
-
41
517,599
Regulatory
Assets
657,378 $
$
-
6,743
110,719
2,447
2,864
2,533
-
5,392
788,076 $
$
Regulatory
Liabilities
414,787
4,593
38,435
71,285
-
1,855
-
-
72
531,027
Items giving rise to deferred state income taxes, as well as a portion of deferred Federal income taxes related to specific
differences between tax and book depreciation expense, are recognized in the rate setting process on a cash basis or as a
reduction in current income tax expense and will be recovered as they reverse. Amounts include differences that arise
between specific utility asset improvement costs capitalized for book and deducted as an expense for tax purposes.
Additionally, the recording of AFUDC for equity funds results in the recognition of a regulatory asset for income taxes,
which represents amounts due related to the revenue requirement.
A portion of the regulatory liability for income taxes is related to Aqua Pennsylvania’s income tax accounting change for
the tax benefits realized on the Company’s 2012 tax return, which have not yet reduced current income tax expense due to
the ten year amortization period which began in 2013. This amortization was stipulated in a June 2012 rate order issued
to Aqua Pennsylvania and was subject to specific parameters being met each year until the Aqua Pennsylvania rate order
of May 2019. Beginning in 2013, the Company amortized $38,000, annually, of its deferred income tax benefits, which
reduced current income tax expense and increased the Company’s net income by $16,274 for 2019, $16,734 for 2018, and
$16,734 for 2017. In 2019, the amortization of this tax benefit was incorporated into the Company’s cost of service by a
rate order issued in May 2019 and is no longer subject to the specific parameters from the 2012 rate order.
The regulatory liability for customer refunds resulting from the TCJA represents a revenue reserve for customer refunds
associated with the reduction in the Federal corporate income tax rate under the provisions of the TCJA. On
December 22, 2017, President Trump signed the TCJA into law, which reduced the Federal corporate income tax rate
from 35% to 21%. Reductions in accumulated deferred income tax balances due to the reduction in the corporate income
tax rate to 21% under the provisions of the TCJA will result in amounts previously collected from utility customers for
these deferred taxes to be refundable to such customers, generally through reductions in future rates. The TCJA includes
provisions that stipulate how these excess deferred taxes relating to certain accelerated tax depreciation benefits are to be
passed back to customers. In 2018 and 2019 adjusted base rates or surcredits were added to customer bills to reflect the
lower corporate income tax rate.
The regulatory asset for utility plant retirement costs, including cost of removal, represents costs already incurred that are
expected to be recovered in future rates over a five year recovery period. The regulatory liability for utility plant
retirement costs represents amounts recovered through rates during the life of the associated asset and before the costs are
incurred.
50
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The regulatory asset for accrued vacation represents costs that would otherwise be charged to operations and maintenance
expense for vacation that is earned by employees, which is recovered as a cost of service.
The regulatory asset for post-retirement benefits, which includes pension and other post-retirement benefits, primarily
reflects a regulatory asset that has been recorded for the costs that would otherwise be charged to stockholders’ equity for
the underfunded status of the Company’s pension and other post-retirement benefit plans. The Company also has a
regulatory asset related to post-retirement benefits costs that represent costs already incurred which are now being
recovered in rates over 10 years. The regulatory liability for post-retirement benefits represents costs recovered in rates in
excess of post-retirement benefits expense.
Expenses associated with water tank painting are deferred and amortized over a period of time as approved in the
regulatory process. Water tank painting costs are generally being amortized over a period ranging from 7 to 10 years.
The regulatory liability for water tank painting costs represents amounts recovered through rates and before the costs are
incurred.
The Company recorded a fair value adjustment for fixed rate, long-term debt assumed in acquisitions that matures in
various years ranging from 2022 to 2029. The regulatory asset or liability results from the rate setting process continuing
to recognize the historical interest cost of the assumed debt.
The regulatory asset for debt refinancing represents a portion of a make whole payment of $25,237 incurred in May 2019
for the Company’s redemption of $313,500 of the Company’s outstanding notes that had maturities ranging from 2019-
2037 and interest rates ranging from 3.57-5.83%. The Company deferred a portion of the make whole payment as it
represents an amount by which we expect to receive prospective rate recovery.
The regulatory asset related to rate case filing expenses and other represents the costs associated with filing for rate
increases that are deferred and amortized over periods that generally range from one year to five years, and costs incurred
by the Company for which it has received or expects to receive rate recovery.
The regulatory asset related to the costs incurred for information technology software projects and water main cleaning
and relining projects are described in Note 1 – Summary of Significant Accounting Policies – Property, Plant and
Equipment and Depreciation.
Note 7 – Income Taxes
Income tax (benefit) expense for the years ended December 31, is comprised of the following:
Current:
Federal
State
Deferred:
Federal
State
Total tax expense (benefit)
Years Ended December 31,
2019
2018
2017
(4,415)$
1,834
(2,581)
(3,906)
(6,530)
(10,436)
(13,017)$
-$
1,281
1,281
(8,721)
(6,229)
(14,950)
(13,669)$
1,297
1,837
3,134
21,376
(7,596)
13,780
16,914
$
$
51
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The statutory Federal tax rate is 21% for 2019 and 2018, and 35% for 2017. For states with a corporate net income tax,
the state corporate net income tax rates range from 2.5% to 9.99% for all years presented. The Company’s effective
income tax rate for 2019, 2018, and 2017 was (6.2)%, (7.7)%, and 6.6%, respectively. The Company remains subject to
examination by federal and state tax authorities for the 2016 through 2019 tax years.
The reasons for the differences between amounts computed by applying the statutory Federal corporate income tax rate to
income before income tax expense are as follows:
Computed Federal tax expense at statutory rate
Decrease in Federal tax expense related to an income tax accounting change for
qualifying utility asset improvement costs
State income taxes, net of Federal tax benefit
Increase in tax expense for depreciation expense to be recovered in future rates
Stock-based compensation
Deduction for Essential Utilities common dividends paid under employee benefit
plan
Amortization of deferred investment tax credits
Impact of Federal rate change and amortization of excess deferred income tax
Other, net
Actual income tax expense (benefit)
Years Ended December 31,
2018
2019
37,447 $
44,420 $
2017
89,828
$
(48,518)
(3,616)
347
(167)
(315)
(361)
(6,323)
1,516
(44,089)
(4,964)
328
(414)
(312)
(373)
(313)
(979)
$ (13,017) $ (13,669) $
(69,325)
(3,743)
199
(595)
(455)
(376)
3,141
(1,760)
16,914
In response to a June 2012 rate order issued by the Pennsylvania Public Utility Commission to Aqua Pennsylvania, the
Company changed its tax method of accounting for qualifying utility system repairs, which provides for the expensing of
qualifying utility asset improvement costs that were previously being capitalized and depreciated for book and tax
purposes. The rate order allows for a reduction in current income tax expense as a result of the flow-through recognition
of some income tax benefits due to the income tax accounting change. The Company recorded income tax benefits of
$66,816, $64,183, and $84,766 during 2019, 2018, and 2017, respectively. In May 2019 the Pennsylvania Public Utility
Commission issued a rate order to Aqua Pennsylvania and commencing in 2020 the base rates are designed to include
annual tax benefits for qualifying utility system improvement costs equal to $158,865, subject to $3,000 either above or
below this target amount. To the extent actual tax benefits are outside this range, tax benefits will either be deferred or
accrued, and settled in the next rate filing.
Aqua Pennsylvania had changed to this method of tax accounting in 2012, and for prior tax years, the qualifying utility
system asset improvement costs were previously capitalized and depreciated for book and tax purposes. The Company
recognized a tax deduction on its 2012 Federal tax return of $380,000 and based on a 2012 rate order, Aqua Pennsylvania
began to amortize this benefit over ten years beginning in 2013. The amortization of this benefit, which annually
amounted to $38,000, effectively reduced current income tax expense annually by $16,724. As a result of the May 2019
Aqua Pennsylvania rate order the amortization period was slightly shortened and now includes the tax benefits in
establishing utility rates.
52
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the changes in the Company’s unrecognized tax benefits:
Balance at January 1,
Additions based on tax position related to the current year
Balance at December 31,
2019
2018
17,792 $
879
18,671$
17,583
209
17,792
$
$
In accordance with the FASB’s accounting guidance for income taxes we recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position
are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
resolution. From time to time, the Company may be assessed interest and penalties by taxing authorities, which would be
recorded as income tax expense. There were no expenses for interest and penalties assessed by taxing authorities for the
years ended December 31, 2019, 2018, and 2017.
On its 2012 Federal tax return, filed in September 2013, Aqua Pennsylvania filed a change in accounting method to adopt
the IRS temporary tangible property regulations. This method change allowed the Company to take a current year
deduction for expenses that were previously capitalized for tax purposes. Since the filing of the 2012 tax return, the IRS
has issued final regulations. While the Company maintains the belief that the deduction taken on its tax return is
appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. Provisions
for uncertain tax positions were recorded to reflect the possible challenge of the Company’s methodology for determining
its repair deduction as required by the FASB’s accounting guidance for income taxes. Should the taxing authority
challenge the Company’s tax treatment, and ultimately disallow a portion of the repair deduction, the Company expects
Federal net operating loss carryforwards to offset any resulting liability, and state net operating loss carryforwards will
offset a portion of any resulting liability.
The unrecognized tax benefits relate to the income tax accounting change, and the tax position is attributable to a
temporary difference. The Company does not anticipate material changes to its unrecognized tax benefits within the next
year. As a result of the regulatory treatment afforded by the income tax accounting change in Pennsylvania and despite
this position being a temporary difference, as of December 31, 2019 and 2018, $31,015 and $26,990, respectively, of
these tax benefits would have an impact on the Company’s effective income tax rate in the event the Company does
sustain all, or a portion, of its tax position.
53
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the components of net deferred tax liability:
Deferred tax assets:
Customers' advances for construction
Costs expensed for book not deducted for tax, principally accrued expenses
Utility plant acquisition adjustment basis differences
Post-retirement benefits
Tax loss and credit carryforwards
Operating lease liabilities
Other
Less valuation allowance
Deferred tax liabilities:
Utility plant, principally due to depreciation and differences in the basis of fixed assets
due to variation in tax and book accounting
Deferred taxes associated with the gross-up of revenues necessary to recover, in rates,
the effect of temporary differences
Tax effect of regulatory asset for post-retirement benefits
Utility plant acquisition adjustment basis differences
Deferred investment tax credit
Operating lease right-of-use assets
$
December 31,
2019
2018
22,664 $
1,473
-
20,575
65,438
3,540
2,798
116,488
22,873
93,615
13,188
27,711
1,053
39,515
43,637
-
2,761
127,865
18,082
109,783
909,219
837,057
101,126
8,973
827
6,088
3,540
1,029,773
72,258
39,515
6,356
-
955,186
Net deferred tax liability
$
936,158 $
845,403
At December 31, 2019, the Company has a cumulative Federal NOL of $79,039. The Company believes the Federal
NOLs are more likely than not to be recovered and require no valuation allowance. The Company’s Federal NOLs do not
begin to expire until 2032.
At December 31, 2019, the Company has a cumulative state NOL of $817,323, a portion of which is offset by a valuation
allowance because the Company does not believe these NOLs are more likely than not to be realized. The state NOLs do
not begin to expire until 2023.
The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of
$73,352 and $85,645, respectively, which results from the Company’s adoption in 2013 of the FASB’s accounting
guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a
tax credit carryforward exists. The amounts of the Company’s Federal and state NOL carryforwards prior to being
reduced by the unrecognized tax positions are $152,391 and $902,968, respectively. The Company records its
unrecognized tax benefit as a component of its net deferred income tax liability.
On December 22, 2017, President Trump signed the TCJA into law. The TCJA includes significant changes to the Code
and the taxation of business entities, and includes specific provisions related to regulated public utilities. Significant
changes that impact the Company included in the TCJA are a reduction in the corporate federal income tax rate from 35%
to 21%, effective January 1, 2018, and a limitation of the utilization of NOLs arising after December 31, 2017 to 80% of
taxable income with an indefinite carryforward. The specific TCJA provisions related to our regulated entities generally
allow for the continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain
54
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
property acquired after September 27, 2017 and the continuation of certain rate normalization requirements for accelerated
depreciation benefits. Our market-based companies still qualify for 100% deductibility of qualifying property acquired
after September 27, 2017 and before January 1, 2023.
At the date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rate. For our regulated
entities, the change in deferred taxes was recorded as either an offset to a regulatory asset or liability. In instances where
the deferred tax balances are not in ratemaking, such as the Company’s market-based operations, the change in deferred
taxes was recorded as an adjustment to our deferred tax provision. To the extent the revalued deferred income tax assets
and liabilities were outside of our regulated operations and are not believed to be recoverable in utility customer rates, the
revalued amount of $3,141 was recognized as additional deferred income tax expense during the quarter ended
December 31, 2017.
The staff of the SEC has recognized the complexity of reflecting the impacts of the TCJA, and on December 22, 2017
issued guidance, which clarifies accounting for income taxes if information is not yet available or complete and provides
for up to a one year period in which to complete the required analyses and accounting (the measurement period). The
guidance describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform:
(1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a
reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is
not able to determine a reasonable estimate and therefore continues to apply the FASB’s accounting guidance, based on
the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The one year
measurement period concluded in the fourth quarter of 2018, and there were no material changes in the Company’s
accounting for the TCJA.
At the end of the measurement period, the Pennsylvania Public Utility Commission, had not issued an accounting or
procedural order addressing how the TCJA changes are to be reflected in our utility customer rates. As of December 31,
2017, the Company provisionally classified $175,108 of deferred income tax liabilities for our Pennsylvania subsidiary as
a regulatory liability. In May 2019 a final order was issued from the PA PUC affirming the Company’s regulatory
liability and authorizing the Company to implement an average rate assumption method to reduce the regulatory liability
as the temporary difference reverses. Beginning in June 2019 base rates reflect the fact that the benefit from the excess
accumulated deferred taxes is now reflected in base rates. Overall, the Company has applied a reasonable interpretation of
the impact of the TCJA and a reasonable estimate of the regulatory resolution. Further clarification of the TCJA and
regulatory resolution may change the amounts estimated of the deferred income tax provision and the accumulated
deferred income tax liability.
The Company’s regulated operations accounting for income taxes are impacted by the FASB’s accounting guidance for
regulated operations. Reductions in accumulated deferred income tax balances due to the reduction in the Federal
corporate income tax rates to 21% under the provisions of the TCJA will result in amounts previously collected from
utility customers for these deferred taxes to be refundable to such customers, generally through reductions in future rates.
The TCJA includes provisions that stipulate how these excess deferred taxes related to certain accelerated tax depreciation
deduction benefits are to be passed back to customers. Potential refunds of other deferred taxes will be determined by our
state regulators. The Company has reserved $3,907 for amounts expected to be refundable to utility customers. In 2018,
Illinois, Virginia, Texas, New Jersey, and two operating divisions in Ohio which operate under locally-negotiated
contractual rates with their respective counties, adjusted base rates or surcredits have been added to customer bills to
reflect the lower corporate income tax rate. In North Carolina, Indiana, and our regulated operations in Ohio, no
surcredits have been added to customer bills to reflect the lower corporate income tax rate in 2018. These adjustments
were reflected in customer bills beginning January 1, 2019. In Pennsylvania, a procedural order was received in May
2019, which adjusted the Company’s base rate to reflect the lower corporate income tax rate.
55
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 8 – Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes:
Property
Gross receipts, excise and franchise
Payroll
Regulatory assessments
Pumping fees
Other
Total taxes other than income taxes
Note 9 – Commitments and Contingencies
Commitments –
Years Ended December 31,
2019
2018
2017
27,735$
13,500
10,303
2,916
5,112
389
59,955$
27,469$
14,521
9,789
2,752
4,978
253
59,762$
25,810
13,458
9,477
2,552
5,057
274
56,628
$
$
The Company maintains agreements with other water purveyors for the purchase of water to supplement its water supply,
particularly during periods of peak demand. The agreements stipulate purchases of minimum quantities of water to the
year 2026. The estimated annual commitments related to such purchases through 2024 are expected to average $5,032
and the aggregate of the years remaining approximates $4,433.
The Company has entered into purchase obligations, in the ordinary course of business, that include agreements for water
treatment processes at some of its wells in a small number of its divisions. The 20 year term agreement provides for the
use of treatment equipment and media used in the treatment process and are subject to adjustment based on changes in the
Consumer Price Index. The future contractual cash obligations related to these agreements are as follows:
$
2020
1,002 $
2021
1,022 $
2022
1,043 $
2023
1,050 $
2024
1,068 $
Thereafter
4,291
The purchased water expense and water treatment expenses under these agreements were as follows:
Purchased water under long-term agreements
Water treatment expense under contractual agreement
$
6,577$
989
6,065$
970
8,558
945
Years Ended December 31,
2018
2017
2019
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
December 31, 2019, the aggregate amount of $19,591 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. During a portion of 2019, the Company initiated a do not consume
advisory for some of its customers in one division served by the Company’s Illinois subsidiary. Although the Company
56
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 no liability has been accrued for these future costs. In addition, a claim for the expenses incurred has
been submitted to the Company’s insurance carrier for potential recovery of a portion of these costs. The Company
continues to assess this matter and any potential loss. While the final outcome of this and other loss contingencies 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 are not expected to have a material adverse effect on the Company’s
financial position, results of operations or cash flows. Further, Essential Utilities has insurance coverage for a number of
these loss contingencies, and as of December 31, 2019, estimates that approximately $7,941 of the amount accrued for
these matters are probable of recovery through insurance, which amount is also reported in the Company’s consolidated
balance sheet as deferred charges and other assets, net.
Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of its properties is the subject that are material or
are expected to have a material effect on the Company’s financial position, results of operations or cash flows.
Additionally, 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 $1,852 and $1,515 at
December 31, 2019 and 2018 and represents a reserve for unpaid claim costs, including an estimate for the cost of
incurred but not reported claims.
Note 10 – Leases
The Company leases land, office facilities, office equipment, and vehicles for use in its operations, which are accounted
for as operating leases. Leases with a term of 12 months or less are not recorded on the balance sheet; rather, lease
expense is recognized over the lease term. Our leases have remaining lives of 1 year to 75 years.
Some of the Company’s leases can be extended on a month-to-month basis, which allow us to terminate the lease at any
given month without penalty while others include options to extend the leases for up to 50 years. The renewal of a month-
to-month lease is at our sole discretion.
The Company accounts for lease and non-lease components of lease arrangements separately. For calculating lease
liabilities, we may deem lease terms to include options to extend or terminate the lease when it’s reasonably certain that
we will exercise that option. The Company’s lease agreements do not contain significant residual value guarantees,
restrictions or covenants.
Lease liabilities and corresponding right-of-use assets are recorded based on the present value of the lease payments over
the expected lease term, including leases with variable payments that are based on a market rate or an index. All other
variable payments are expensed as incurred. Since the Company’s lease agreements do not provide an implicit interest
rate, we utilize our incremental borrowing rate to determine the discount rate used to present value the lease payments.
Components of lease expense were as follows:
Operating lease cost
Years Ended December 31,
2018
2017
2019
$
2,183 $
2,569 $
2,241
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
57
Year Ended December 31,
2019
$
1,992
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Supplemental balance sheet information related to leases was as follows:
Operating leases:
Operating lease right-of-use assets
Other accrued liabilities
Operating lease liabilities
Total operating lease liabilities
Weighted average remaining lease term:
Operating leases
Weighted average discount rate:
Operating leases
December 31, 2019
$
$
$
12,867
1,222
11,645
12,867
December 31, 2019
27 years
4.08%
Maturities of operating lease liabilities and a reconciliation of the operating lease liabilities reported on our Consolidated
Balance Sheets as of December 31, 2019 are as follows:
2020
2021
2022
2023
2024
Thereafter
Total operating lease payments
Total operating lease payments
Less operating lease liabilities
Present value adjustment
Operating Leases
1,699
1,462
1,219
771
609
15,836
21,596
21,596
12,867
8,729
$
$
$
$
Note 11 – Long-term Debt and Loans Payable
Long-term Debt – The consolidated statements of capitalization provide a summary of long-term debt as of December 31,
2019 and 2018. The supplemental indentures with respect to specific issues of the first mortgage bonds restrict the ability
of Aqua Pennsylvania and other operating subsidiaries of the Company to declare dividends, in cash or property, or
repurchase or otherwise acquire the stock of these companies. Loan agreements for Aqua Pennsylvania and other
operating subsidiaries of the Company have restrictions on minimum net assets. As of December 31, 2019, restrictions on
the net assets of the Company were $2,450,381 of the total $3,880,860 in net assets. Included in this amount were
restrictions on Aqua Pennsylvania’s net assets of $1,332,017 of their total net assets of $1,775,110. As of December 31,
2019, $1,591,800 of Aqua Pennsylvania’s retained earnings of $1,611,800 and $221,466 of the retained earnings of
$270,192 of other subsidiaries were free of these restrictions. Some supplemental indentures also prohibit Aqua
Pennsylvania and some other subsidiaries of the Company from making loans to, or purchasing the stock of, the
Company.
58
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Sinking fund payments are required by the terms of specific issues of long-term debt. Excluding amounts due under the
Company’s revolving credit agreement, the future sinking fund payments and debt maturities of the Company’s long-term
debt are as follows:
Interest Rate Range
0.00% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%
8.00% to 8.99%
9.00% to 9.99%
Total
2020
2021
2022
2023
2024
Thereafter
$
$
670$
1,016
1,863
91,524
292
6,191
-
574
521
2,400
105,051$
460$
978
1,913
41,287
168
6,215
-
666
1,665
4,900
58,252$
461$
957
1,964
24,622
94
787
-
374
721
-
29,980$
461$
835
2,017
2,065
99
10,811
-
-
784
-
17,072$
252$
764
1,619
1,767
103
10,611
-
-
852
-
15,968$
1,170
6,183
6,298
1,133,776
1,554,035
76,995
31,000
29,137
483
12,000
2,851,077
In December 2019, Aqua Pennsylvania issued $125,000 of first mortgage bonds, of which $75,000 is due in 2052 and
$50,000 is due in 2053 with interest rates of 3.39% and 3.41%, respectively. The proceeds from these bonds were used to
repay existing indebtedness and for general corporate purposes.
In May 2019, Aqua Pennsylvania issued $125,000 of first mortgage bonds, of which $75,000 is due in 2049, $25,000 is
due in 2054, and $25,000 is due in 2059 with interest rates of 4.02%, 4.07%, and 4.12%, respectively. The proceeds from
these bonds were used to repay existing indebtedness and for general corporate purposes. Additionally, in September
2019, Aqua Pennsylvania issued $175,000 of first mortgage bonds, of which $50,000 is due in 2054, $75,000 is due in
2058, and $50,000 is due in 2059 with interest rates of 4.09%, 4.13%, and 4.14%, respectively.
On May 18, 2019, the Company redeemed $313,500 of the Company’s outstanding notes (the “Company Debt
Refinancing”) that had maturities ranging from 2019-2037 and interest rates ranging from 3.57% - 5.83%. Additionally,
the Company Debt Refinancing was subject to a make whole payment of $25,237, and $18,528 of this payment was
expensed, and is presented in the consolidated statements of net income on the line item “loss on debt extinguishment.”
The balance of the payment, or $6,709, was deferred, as a regulatory asset, as it represents an amount by which the
Company expects to receive prospective rate recovery.
On April 26, 2019, the Company issued $900,000 of long-term debt (the “Senior Notes”), less expenses of $7,931, of
which $400,000 is due in 2029, and $500,000 is due in 2049 with interest rates of 3.566% and 4.276%, respectively. The
Company used the net proceeds from the issuance of Senior Notes to (1) secure $436,000 of funding for the Peoples Gas
Acquisition, (2) complete the redemption of $313,500 aggregate principal amount of certain of the Company’s
outstanding notes noted below, (3) pay related costs and expenses, and (4) for general corporate purposes.
In November 2018, Aqua Pennsylvania issued $125,000 of first mortgage bonds, of which $65,000 is due in 2047,
$30,000 is due in 2052, and $30,000 is due in 2053 with interest rates of 4.44%, 4.49%, and 4.51%, respectively. The
proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
In June 2018, Aqua Pennsylvania issued $100,000 of first mortgage bonds, of which $25,000 is due in 2042, $10,000 is due
in 2045, and $65,000 is due in 2048 with interest rates of 3.99%, 4.04%, and 4.09%, respectively. The proceeds from these
bonds were used to repay existing indebtedness and for general corporate purposes.
In July 2018, Aqua Pennsylvania redeemed $49,660 of tax-exempt bonds at 5.25% that were originally maturing in 2042
and 2043, respectively.
59
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
As of December 31, 2019 and 2018, the Company did not have any funds restricted for construction activity.
The weighted average cost of long-term debt at December 31, 2019 and 2018 was 4.09% and 4.23%, respectively. The
weighted average cost of fixed rate long-term debt at December 31, 2019 and 2018 was 4.09% and 4.31%, respectively.
In December 2018, the Company entered into a five year $550,000 unsecured revolving credit facility, which replaced the
Company’s prior five year $500,000 unsecured revolving credit facility. The Company’s new unsecured revolving credit
facility will be used to repay all indebtedness and fees under our prior unsecured revolving credit facility, and for other
general corporate purposes. Additionally, the facility expands by $150,000 of capacity, upon closing of the Peoples Gas
Acquisition, which amount will be available to repay certain outstanding indebtedness and fees to close an existing credit
facility of Peoples and for general corporate purposes. Further, at the Company’s request this facility expands by an
additional amount of up to $300,000, upon the closing of the Peoples Gas Acquisition. The facility includes a $25,000
sublimit for daily demand loans. Funds borrowed under this facility are classified as long-term debt and are used to
provide working capital as well as support for letters of credit for insurance policies and other financing arrangements. As
of December 31, 2019, the Company has the following sublimits and available capacity under the credit facility: $50,000
letter of credit sublimit, $32,876 of letters of credit available capacity, $0 borrowed under the swing-line commitment, and
$0 of funds borrowed under the agreement. Interest under this facility is based at the Company’s option, on the prime
rate, an adjusted Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. A facility fee is charged on the
total commitment amount of the agreement. Under these facilities the average cost of borrowings was 3.55% and 2.92%,
and the average borrowing was $102,973 and $207,277, during 2019 and 2018, respectively.
The Company is obligated to comply with covenants under some of its loan and debt agreements. These covenants
contain a number of restrictive financial covenants, which among other things limit, subject to specific exceptions, the
Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and require a minimum level of
earnings coverage over interest expense. During 2019, the Company was in compliance with its debt covenants under its
loan and debt agreements. Failure to comply with the Company’s debt covenants could result in an event of default,
which could result in the Company being required to repay or finance its borrowings before their due date, possibly
limiting the Company’s future borrowings, and increasing its borrowing costs.
Loans Payable – In November 2019, Aqua Pennsylvania renewed its $100,000 364-day unsecured revolving credit
facility with four banks. The funds borrowed under this agreement are classified as loans payable and used to provide
working capital. As of December 31, 2019 and 2018, funds borrowed under the agreement were $25,724 and $15,449,
respectively. Interest under this facility is based, at the borrower’s option, on the prime rate, an adjusted federal funds
rate, an adjusted London Interbank Offered Rate corresponding to the interest period selected, an adjusted Euro-Rate
corresponding to the interest period selected or at rates offered by the banks. This agreement restricts short-term
borrowings of Aqua Pennsylvania. A commitment fee of 0.05% is charged on the total commitment amount of Aqua
Pennsylvania’s revolving credit agreement. The average cost of borrowing under the facility was 3.12% and 2.68%, and
the average borrowing was $21,871 and $22,056, during 2019 and 2018, respectively. The maximum amount outstanding
at the end of any one month was $39,930 and $45,000 in 2019 and 2018, respectively.
At December 31, 2019 and 2018, the Company had other combined short-term lines of credit of $35,500. Funds
borrowed under these lines are classified as loans payable and are used to provide working capital. As of December 31,
2019 and 2018, funds borrowed under the short-term lines of credit were $0, respectively. The average borrowing under
the lines was $0 during 2019 and 2018, respectively. The maximum amount outstanding at the end of any one month was
$0 in 2019 and 2018, respectively. Interest under the lines is based at the Company’s option, depending on the line, on
the prime rate, an adjusted Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. The average cost of
borrowings under all lines during 2019 and 2018 was 3.12% and 2.68%, respectively.
Interest Income and Expense– Interest income of $25,406, $152, and $202 was recognized for the years ended
December 31, 2019, 2018, and 2017, respectively. Interest expense was $125,383, $99,054, and $88,543 in 2019, 2018,
and 2017, including amounts capitalized for borrowed funds of $4,231 $3,332, and $3,578, respectively.
60
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Unsecured Bridge Loan Commitment – On October 22, 2018, the Company obtained the Bridge Commitment from
certain banks to provide senior unsecured bridge loans in an aggregate amount of up to $5,100,000 to, among other things,
backstop the Peoples Gas Acquisition purchase price and the refinancing of certain debt of the Company and of Peoples.
As of December 31, 2019, the Company had terminated $4,350,000 of commitments under the Bridge Commitment in
connection with, among other things, the replacement of the Company’s unsecured revolving credit facility, and the
issuances of common stock, tangible equity units, and senior notes in April 2019.
Interest Rate Swap Agreements – In October 2018, the Company entered into interest rate swap agreements to mitigate
interest rate risk associated with an anticipated $850,000 of debt issuances to fund a portion of the Peoples Gas
Acquisition and refinance a portion of the Company’s borrowings. On April 24, 2019, the Company settled the interest
rate swap agreements upon issuance of $900,000 of long-term debt to be used to finance a portion of the purchase price of
the Peoples Gas Acquisition and redeem $313,500 of the Company’s existing debt. The settlement resulted in a payment
by the Company of $83,520.
The interest rate swaps did not qualify for hedge accounting and any changes in the fair value of the swaps was included
in our earnings. The interest rate swaps were classified as financial derivatives used for non-trading activities. Other than
the interest rate swaps, the Company has no other derivative instruments. The Company recorded the fair value of the
interest rate swaps by discounting the future net cash flows associated with the debt issuance and recognized either an
asset or liability at the balance sheet date.
The following table provides a summary of the amounts recognized in earnings for our interest rate swap agreements:
Amount of Gain (Loss) Recognized in
Income on Derivatives
Years Ended December 31,
Location of Gain (Loss)
Recognized
2019
2018
Derivatives not designated as hedging instrument:
Interest rate swaps
Other (expense) income
$
(23,742) $
(59,779)
Note 12 – Fair Value of Financial Instruments
Financial instruments are recorded at carrying value in the financial statements and approximate fair value, with the
exception of long-term debt, 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 December 31, 2019 and 2018, the carrying amount of the Company’s loans payable was $25,724 and $15,449,
which equates to their estimated fair value. The fair value of the interest rate swap agreements is determined by
discounting the future net cash flows utilizing level 2 methods and assumptions. As of December 31, 2018, the fair value
of the Company’s interest rate swap agreements, which were settled in April 2019, represented a liability of $59,779. The
fair value of cash and cash equivalents, which is comprised of uninvested cash and the proceeds from the April 2019
issuances of common stock, tangible equity units, and long-term debt for the Peoples Gas Acquisition, which are held in
an interest-bearing account, is determined based on level 1 methods and assumptions. As of December 31, 2019 and
2018, the carrying amounts of the Company's cash and cash equivalents were $1,868,922 and $3,627, which equates to
their fair value. The Company’s assets underlying the deferred compensation and non-qualified pension plans are
determined by the fair value of mutual funds, which are based on quoted market prices from active markets utilizing level
1 methods and assumptions. As of December 31, 2019 and 2018, the carrying amount of these securities was $23,419 and
61
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
$20,388, which equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other
assets.
Unrealized gains and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:
Years ended
December 31,
2019
2018
Net gain (loss) recognized during the period on equity securities
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
$
$
293
-
293
$
$
(95)
-
(95)
The net gain (loss) recognized on equity securities is presented on the consolidated statements of net income on the line
item “Other.” Additionally, the unrealized gain recognized during 2017 was reported on the consolidated statements of
comprehensive income.
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
Carrying amount
Estimated fair value
$
December 31,
2019
3,077,400$
3,324,377
2018
2,563,660
2,588,086
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 $95,556 and $93,343 at December 31, 2019 and 2018,
respectively. 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. Portions of these
non-interest bearing instruments are payable annually through 2029 and amounts not paid by the respective contract
expiration dates become non-refundable. The fair value of these amounts would, however, be less than their carrying
value due to the non-interest bearing feature.
Note 13 – Stockholders’ Equity
At December 31, 2019, the Company had 300,000,000 shares of common stock authorized; par value $0.50. Shares
outstanding and treasury shares held were as follows:
Shares outstanding
Treasury shares
Private Placement
2019
220,758,719
3,112,565
December 31,
2018
178,091,621
3,060,206
2017
177,713,943
2,986,308
On March 29, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with
Canada Pension Plan Investment Board (the “Investor”), pursuant to which the Company agreed to issue and sell to the
Investor in a private placement (the “Private Placement”) 21,661,095 newly issued shares of common stock, par value
$0.50 per share (the “Common Stock”). The gross proceeds of the Private Placement are expected to amount to
approximately $750,000 less estimated expenses of $21,560.
62
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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’ subsequent public offering of Common Stock to fund a portion of the Peoples Gas Acquisition. Based on the
common stock offering noted below, the Private Placement was priced at $34.62 per share.
The closing of the Private Placement is expected to occur concurrently with the closing of the Peoples Gas Acquisition,
subject to certain closing conditions, including the closing of the Peoples Gas Acquisition, and the execution and delivery
of a shareholder agreement between the Investor and the Company. The Investor has agreed to certain transfer restrictions
for a period of 15 months from the closing date 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. Upon closing of the Private Placement, the Company has agreed to reimburse the Investor
for reasonable out-of-pocket diligence expenses of up to $4,000, subject to certain exceptions.
Common Stock / Tangible Equity Unit Issuances
On April 23, 2019, the Company issued $1,293,750, less expenses of $30,651, of its common stock and $690,000, less
expenses of $16,358, of its tangible equity units (the “Units”), with a stated amount of $50 per unit. These issuances were
part of the financing of the Peoples Gas Acquisition. The common stock was issued at $34.62 per share and thus the
Private Placement noted above was priced at $34.62 per share.
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 2019, 4,109,292 stock purchase contracts were early settled by the
holders of the contracts, resulting in the issuance of 4,846,601 shares of the Company’s common stock. 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.
The issuance of the common stock and the Units (including the component stock purchase contracts and amortizing notes)
were separate public issuances made by means of separate prospectus supplements pursuant to the Company’s universal
“pay as you go” shelf registration statement, filed with the SEC in February 2018, which allows for the potential future
offer and sale by us, from time to time, in one or more public offerings, of an indeterminate amount of the Company’s
common stock, preferred stock, debt securities, and other securities specified therein at indeterminate prices.
The Company recorded the issuance of the purchase contract portion of the Units as additional paid-in-capital of
$570,919, less allocable issuance costs of $13,530, in our financial statements. The Company recorded the amortizing
notes portion of the Units of $119,081 as long-term debt and recorded allocable issuance costs of $2,828 as debt issuance
costs.
At December 31, 2019, the Company had 1,770,819 shares of authorized but unissued Series Preferred Stock, $1.00 par
value.
63
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In February 2018, the Company filed a universal shelf registration statement with the SEC to allow for the potential future
sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common
stock, preferred stock, debt securities and other securities specified therein at indeterminate prices.
The Company has an acquisition shelf registration statement on file with the SEC which permits the offering, from time to
time, of an aggregate of $500,000 in shares of common stock and shares of preferred stock in connection with
acquisitions. The balance remaining available for use under the acquisition shelf registration as of December 31, 2019 is
$487,155.
The form and terms of any securities issued under the universal shelf registration statement and the acquisition shelf
registration statement will be determined at the time of issuance.
The Company has a Dividend Reinvestment and Direct Stock Purchase Plan (“Plan”) that allows reinvested dividends to
be used to purchase shares of common stock at a five percent discount from the current market value. Under the direct
stock purchase program, shares are purchased by investors at a five percent discount from the market price. The shares
issued under the Plan are either shares purchased by the Company’s transfer agent in the open-market or original issue
shares. In 2019, 2018, and 2017, 183,731, 321,585, and 447,753 shares of the Company were purchased under the
dividend reinvestment portion of the Plan by the Company’s transfer agent in the open-market for $7,777, $11,343, and
$15,168, respectively. During 2019 and 2018, under the dividend reinvestment portion of the Plan, 236,666 and 158,205
original issue shares of common stock were sold, providing the Company with proceeds of $8,959 and $5,163,
respectively.
The Company’s accumulated other comprehensive income is reported in the stockholders’ equity section of the
consolidated balance sheets, the consolidated statements of equity, and the related components of other comprehensive
income are reported in the consolidated statements of comprehensive income. The Company recorded a regulatory asset
for its underfunded status of its pension and other post-retirement benefit plans that would otherwise be charged to other
comprehensive income, as it anticipates recovery of its costs through customer rates.
Note 14 – Net Income per Common Share and Equity per Common Share
Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income
per share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The
dilutive effect of employee stock-based compensation is included in the computation of diluted net income per share. The
dilutive effect of stock-based compensation is calculated by using the treasury stock method and expected proceeds upon
exercise or issuance of the stock-based compensation. The treasury stock method assumes that the proceeds from stock-
based compensation 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 share:
Average common shares outstanding during the period for basic computation
Effect of dilutive securities:
Tangible equity units
Employee stock-based compensation
Average common shares outstanding during the period for diluted computation
Years ended December 31,
2018
2019
215,550
-
381
215,931
177,904
-
495
178,399
2017
177,612
-
563
178,175
For the years ended December 31, 2019 and 2017, all of the Company’s employee stock options were included in the
calculation of diluted net income per share as the calculated cost to exercise the stock options was less than the average
market price of the Company’s common stock during these periods. For the year ended December 31, 2018, the
Company’s employee stock options to purchase 8,596 shares of common stock were excluded from the calculation of
diluted net income per share as the calculated cost to exercise the stock options was greater than the average market price
of the Company’s common stock during this period.
64
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
For the year ended December 31, 2019, the average common shares outstanding during the period for basic computation
includes the weighted-average impact of 10,533,133 shares, based on the minimum number of shares of 11,425,345 to be
issued in April 2022 upon settlement of the stock purchase contracts issued in April 2019 under the tangible equity units.
Equity per common share was $17.58 and $11.28 and at December 31, 2019 and 2018, respectively. These amounts were
computed by dividing Essential Utilities stockholders’ equity by the number of shares of common stock outstanding at the
end of each year.
Note 15 – Employee Stock and Incentive Plan
Under the Company’s Amended and Restated Equity Compensation Plan, (the “Plan”) approved by the Company’s
shareholders on May 2, 2019, to replace the 2004 Equity Compensation Plan, as amended and restated in 2009 (the “2009
Plan”), stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based
awards may be granted to employees, non-employee directors, and consultants and advisors. The Plan authorizes
6,250,000 shares for issuance under the plan. A maximum of 3,125,000 shares under the Plan may be issued pursuant to
stock award, stock units and other stock-based awards, subject to adjustment as provided in the Plan. During any calendar
year, no individual may be granted (i) stock options and stock appreciation rights under the Plan for more than 500,000
shares of common stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the Plan for
more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the Plan. Awards to
employees and consultants under the Plan are made by a committee of the Board of Directors, 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 December 31, 2019, 2,667,480 shares were still available for issuance under the Plan. No further grants may
be made under the Company’s 2009 Equity Compensation Plan.
Performance Share Units – During 2018 and 2017, the Company granted performance share units. A performance share
unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are
met over the three year performance period specified in the grant, subject to exceptions through the respective vesting
periods, 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 Company did not grant PSUs for the year ended December 31, 2019. The performance goals of the 2018 and 2017
PSU grants consisted of the following metrics:
Metric 1 – Company’s total shareholder return (“TSR”) compared to the TSR for a specific
peer group of investor-owned water companies (a market-based condition)
Metric 2 – Company’s TSR compared to the TSR for the companies listed in the Standard
and Poor’s Midcap Utilities Index (a market-based condition)
Metric 3 – Achievement of a targeted cumulative level of rate base growth as a result of
acquisitions (a performance-based condition)
Metric 4 – Achievement of targets for maintaining consolidated operations and maintenance
expenses over the three year measurement period (a performance-based condition)
Performance Grant of:
2018
25.0%
2017
26.47%
25.0%
26.47%
25.0%
23.53%
25.0%
23.53%
65
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the compensation expense and income tax benefit for PSUs:
Stock-based compensation within operations and maintenance expense
Income tax benefit
Years ended December 31,
2018
2019
2017
$
2,741$
767
4,817$
1,344
4,351
1,766
The following table summarizes nonvested PSU transactions for the year ended December 31, 2019:
Nonvested share units at beginning of period
Granted
Performance criteria adjustment
Forfeited
Share units issued
Nonvested share units at end of period
Number of
Share Units
Weighted
Average Fair
Value
443,410 $
-
(82,921)
(9,767)
(89,324)
261,398
27.20
-
33.56
33.21
52.39
16.35
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based
conditions associated with the PSUs using the Monte Carlo valuation method, which assesses the probabilities of various
outcomes of market conditions. The other portion of the fair value of the PSUs associated with performance-based
conditions was 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 fair value of each PSU grant is amortized into compensation expense on a straight-line
basis over their respective vesting periods, generally 36 months. The accrual of compensation costs is based on an
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. The following table provides the assumptions used in the pricing model for the
grant, the resulting grant date fair value of PSUs, and the intrinsic value and fair value of PSUs that vested during the
year:
Expected term (years)
Risk-free interest rate
Expected volatility
Weighted average fair value of PSUs granted
Intrinsic value of vested PSUs
Fair value of vested PSUs
Years ended December 31,
2019
2018
2017
-
-
-
-$
3,181 $
2,569 $
$
$
$
3.0
2.43%
17.2%
37.42$
4,704 $
3,613 $
3.0
1.49%
17.9%
30.79
3,926
3,207
As of December 31, 2019, $1,840 of unrecognized compensation costs related to PSUs is expected to be recognized over
a weighted average period of approximately 1.1 years. The aggregate intrinsic value of PSUs as of December 31, 2019
was $12,270. The aggregate intrinsic value of PSUs is based on the number of nonvested share units and the market value
of the Company’s common stock as of the period end date.
66
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common
stock and is valued based on the fair market value of the Company’s stock on the date of grant. RSUs are eligible to be
earned at the end of a specified restricted period, generally three years, beginning on the date of grant. In some cases, the
right to receive the shares is subject to specific performance goals established at the time the grant is made. The Company
assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in
compensation expense. As the payout of the RSUs includes dividend equivalents, no separate dividend yield assumption
is required in calculating the fair value of the RSUs. The following table provides the compensation expense and income
tax benefit for RSUs:
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
Years ended December 31,
2019
1,650 $
466
2018
1,605 $
456
2017
1,183
489
The following table summarizes nonvested RSU transactions for the year ended December 31, 2019:
Nonvested stock units at beginning of period
Granted
Stock units vested and issued
Forfeited
Nonvested stock units at end of period
The following table summarizes the value of RSUs:
Weighted average fair value of RSUs granted
Intrinsic value of vested RSUs
Fair value of vested RSUs
Number of
Stock Units
Weighted
Average Fair
Value
130,085 $
57,290
(40,971)
(4,520)
141,884
33.13
36.25
32.89
35.28
34.39
$
Years ended December 31,
2019
2018
2017
36.25$
1,456
1,341
35.15$
1,605
1,268
30.37
896
751
As of December 31, 2019, $2,187 of unrecognized compensation costs related to RSUs is expected to be recognized over
a weighted average period of approximately 1.4 years. The aggregate intrinsic value of RSUs as of December 31, 2019
was $6,660. The aggregate intrinsic value of RSUs is based on the number of nonvested stock units and the market value
of the Company’s common stock as of the period end date.
67
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 ten years from the grant date. The vesting of stock options granted in 2019, 2018, and
2017 are subject to the achievement of the following performance goal: the Company achieves at least an adjusted return
on equity equal to 150 basis points below the return on equity granted by the Pennsylvania Public Utility Commission
during the Company’s Pennsylvania subsidiary’s last rate proceeding. The adjusted return on equity equals net income,
excluding net income or loss from acquisitions which have not yet been incorporated into a rate application as of the last
year end, divided by equity which excludes equity applicable to acquisitions which are not yet incorporated in a rate
application during the award period.
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
compensation expense and income tax benefit for stock options:
Stock-based compensation within operations and maintenance expenses
Income tax benefit
$
Years ended December 31,
2019
2,280 $
643
546 $
184
2018
2017
245
208
Options under the plans were issued at the closing market price of the stock on the day of the grant. The fair value of
options was estimated at the grant date using the Black-Scholes option-pricing model, which relies on assumptions that
require management’s judgment. The following table provides the assumptions used in the pricing model for grants and
the resulting grant date fair value of stock options granted in the period reported:
Expected term (years)
Risk-free interest rate
Expected volatility
Dividend yield
Grant date fair value per option
2019
Years ended December 31,
2018
2017
5.47
2.53%
17.7%
2.44%
5.25$
5.46
2.72%
17.2%
2.37%
5.10$
5.45
2.01%
17.7%
2.51%
4.07
$
Historical information was the principal basis for the selection of the expected term and dividend yield. The expected
volatility is based on a weighted-average combination of historical and implied volatilities over a time period that
approximates the expected term of the option. The risk-free interest rate was selected based upon the U.S. Treasury yield
curve in effect at the time of grant for the expected term of the option. The Company assumes that forfeitures will be
minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.
68
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes stock option transactions for the year ended December 31, 2019:
Outstanding, beginning of year
Granted
Forfeited
Expired / Cancelled
Exercised
Outstanding at end of year
Exercisable at end of year
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (years)
Aggregate
Intrinsic Value
25.97
35.94
35.46
32.28
15.91
34.20
26.86
8.4 $
5.4 $
13,171
3,296
Shares
422,972 $
769,115
(36,479)
(2,532)
(119,306)
1,033,770 $
164,117 $
The intrinsic value of stock options is the amount by which the market price of the stock on a given date, such as at the
end of the period or on the day of exercise, exceeded the closing market price of stock on the date of grant. The following
table summarizes the intrinsic value of stock options exercised and the fair value of stock options which vested:
Intrinsic value of options exercised
Fair value of options vested
Years ended December 31,
2019
2018
2017
$
2,552$
422
1,806$
156
2,767
-
The following table summarizes information about the options outstanding and options exercisable as of December 31,
2019:
Range of prices:
$13.00 - 14.99
$15.00 - 33.99
$34.00 - 34.99
$35.00 - 35.99
Shares
47,388
99,661
138,113
748,608
1,033,770
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Life (years)
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
0.1$
7.2
8.2
9.2
8.4
13.72
30.47
34.51
35.93
34.20
47,388$
67,649
46,214
2,866
164,117
13.72
30.47
34.51
35.44
26.86
As of December 31, 2019, there was $2,018 of total unrecognized compensation costs related to nonvested stock options
granted under the plans. The cost is expected to be recognized over a weighted average period of approximately 1.5
years.
69
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. Stock awards
are granted to the Company’s non-employee directors. The issuance of stock awards results in compensation expense
which is equal to the fair market value of the stock on the grant date, and is expensed immediately upon grant. The
following table provides compensation cost and income tax benefit for stock-based compensation related to stock awards:
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
698$
202
600$
173
563
233
The following table summarizes the value of stock awards:
Years ended December 31,
2019
2018
2017
Years ended December 31,
2019
2018
2017
Intrinsic and fair value of stock awards vested
Weighted average fair value of stock awards granted
$
698$
41.75
600$
34.95
563
34.42
The following table summarizes stock award transactions for year ended December 31, 2019:
Nonvested stock awards at beginning of period
Granted
Vested
Nonvested stock awards at end of period
Number of
Stock Awards
Weighted
Average Fair
Value
-$
16,714
(16,714)
-
-
41.75
41.75
-
70
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 16 – Pension Plans and Other Post-retirement Benefits
The Company maintains a qualified, defined benefit pension plan that covers its full-time employees who were hired prior
to April 1, 2003. Retirement benefits under the plan are generally based on the employee’s total years of service and
compensation during the last five years of employment. The Company’s policy is to fund the plan annually at a level
which is deductible for income tax purposes and which provides assets sufficient to meet its pension obligations over
time. To offset some limitations imposed by the Internal Revenue Code with respect to payments under qualified plans,
the Company has a non-qualified Supplemental Pension Benefit Plan for Salaried Employees in order to prevent some
employees from being penalized by these limitations, and to provide certain retirement benefits based on employee’s
years of service and compensation. The net pension costs and obligations of the qualified and non-qualified plans are
included in the tables which follow. Employees hired after April 1, 2003 may participate in a defined contribution plan
that provides a Company matching contribution on amounts contributed by participants and an annual profit-sharing
contribution based upon a percentage of the eligible participants’ compensation.
Effective July 1, 2015, the Company added a permanent lump sum option to the form of benefit payments offered to
participants of the qualified defined benefit pension plan upon retirement or termination. The plan paid $10,197 and
$14,872 to participants who elected this option during 2019 and 2018.
In addition to providing pension benefits, the Company offers post-retirement benefits other than pensions to employees
hired before April 1, 2003 and retiring with a minimum level of service. These benefits include continuation of medical
and prescription drug benefits, or a cash contribution toward such benefits, for eligible retirees and life insurance benefits
for eligible retirees. The Company funds these benefits through various trust accounts. The benefits of retired officers
and other eligible retirees are paid by the Company and not from plan assets due to limitations imposed by the Internal
Revenue Code.
In 2018 the Company recognized a settlement loss of $5,931, which resulted from lump sum payments from the qualified
or non-qualified plans exceeding the threshold of service and interest cost for the period. A settlement loss is the
recognition of unrecognized pension benefit costs that would have been incurred in subsequent periods. The Company
recorded this settlement loss as a regulatory asset, as it is probable of recovery in future rates, which will be amortized
into pension benefit costs.
71
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years
indicated:
Years:
2020
2021
2022
2023
2024
2025-2029
Pension Benefits
Other Post-retirement Benefits
$
$
20,468
20,330
20,911
21,121
20,583
106,028
2,437
2,640
2,880
3,133
3,312
19,517
The changes in the benefit obligation and fair value of plan assets, the funded status of the plans and the assumptions used
in the measurement of the company’s benefit obligation are as follows:
Change in benefit obligation:
Benefit obligation at January 1,
Service cost
Interest cost
Actuarial (gain)/loss
Plan participants' contributions
Benefits paid
Benefit obligation at December 31,
Change in plan assets:
Fair value of plan assets at January 1,
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at December 31,
Funded status of plan:
Net liability recognized at December 31,
Pension Benefits
2019
2018
Other Post-retirement Benefits
2019
2018
$
281,964 $
2,718
11,817
36,885
-
(23,003)
310,381
239,007
41,955
8,502
(23,003)
266,461
$
320,979
3,249
11,495
(23,080)
-
(30,679)
281,964
270,353
(16,852)
16,185
(30,679)
239,007
69,443 $
819
2,999
7,238
145
(1,102)
79,542
45,422
9,436
-
(847)
54,011
75,960
1,049
2,831
(8,970)
127
(1,554)
69,443
47,750
(2,599)
1,636
(1,365)
45,422
$
43,920 $
42,957
$
25,531 $
24,021
The following table provides the net liability recognized on the consolidated balance sheets at December 31,:
Current liability
Noncurrent liability
Net liability recognized
Pension Benefits
2019
2018
Other Post-retirement Benefits
2019
2018
$
$
403$
43,517
43,920$
267
42,690
42,957
$
$
-$
25,531
25,531$
-
24,021
24,021
72
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
At December 31, 2019 and 2018, the Company’s pension plans had benefit obligations in excess of its plan assets. The
following tables provide the projected benefit obligation, the accumulated benefit obligation and fair market value of the
plan assets as of December 31,:
Projected benefit obligation
Fair value of plan assets
Accumulated benefit obligation
Fair value of plan assets
Projected Benefit Obligation Exceeds the Fair
Value of Plan Assets
2019
310,381 $
266,461
2018
281,964
239,007
Accumulated Benefit Obligation Exceeds the
Fair Value of Plan Assets
2019
2018
290,522 $
266,461
264,876
239,007
$
$
The following table provides the components of net periodic benefit costs for the years ended December 31,:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of actuarial loss
Settlement loss
Net periodic benefit cost
Pension Benefits
2019
2018
2017
Other Post-retirement Benefits
2018
2019
2017
$
$
2,718 $
11,817
(15,272)
620
7,927
-
3,249 $
3,174
$
819 $
1,049 $
11,495
(18,211)
527
7,291
5,931
12,434
(17,077)
579
8,003
-
2,999
(2,482)
(464)
664
-
2,831
(2,706)
(509)
1,182
-
7,810 $
10,282 $
7,113
$
1,536 $
1,847 $
1,020
2,947
(2,589)
(509)
1,165
-
2,034
The Company records the underfunded status of its pension and other post-retirement benefit plans on its consolidated
balance sheets and records a regulatory asset for these costs that would otherwise be charged to stockholders’ equity, as
the Company anticipates recoverability of the costs through customer rates to be probable. The Company’s pension and
other post-retirement benefit plans were underfunded at December 31, 2019 and 2018. Changes in the plans’ funded
status will affect the assets and liabilities recorded on the balance sheet. Due to the Company’s regulatory treatment, the
recognition of the funded status is recorded as a regulatory asset pursuant to the FASB’s accounting guidance for
regulated operations.
The following table provides the amounts recognized in regulatory assets that have not been recognized as components of
net periodic benefit cost as of December 31,:
Net actuarial loss
Prior service cost (credit)
Total recognized in regulatory assets
$
$
87,786$
2,115
89,901$
85,510 $
2,734
88,244 $
Pension Benefits
2019
2018
Other Post-retirement Benefits
2019
10,496
(896)
9,600
$
$
2018
10,876
(1,360)
9,516
73
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the estimated net actuarial loss and prior service cost for the Company’s pension plans that
will be amortized from regulatory asset into net periodic benefit cost for the year ending December 31, 2019:
Net actuarial loss
Prior service cost (credit)
$
Pension Benefits
8,021
591
Other Post-retirement Benefits
531
$
(464)
Accounting for pensions and other post-retirement benefits requires 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. Each assumption is reviewed annually with assistance from the Company’s
actuarial consultant who provides guidance in establishing the assumptions. The assumptions are selected to represent the
average expected experience over time and may differ in any one year from actual experience due to changes in capital
markets and the overall economy. These differences will impact the amount of pension and other post-retirement benefit
expense that the Company recognizes.
The significant assumptions related to the Company’s benefit obligations are as follows:
Weighted Average Assumptions Used to Determine Benefit Obligations as of December
31,
Discount rate
Rate of compensation increase
Assumed Health Care Cost Trend Rates Used to Determine Benefit Obligations as of
December 31,
Health care cost trend rate
Rate to which the cost trend is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
n/a – Assumption is not applicable.
Pension Benefits
2018
2019
Other Post-
retirement Benefits
2019
2018
3.35%
4.30%
3.0-4.0% 3.0-4.0%
3.42% 4.34%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
6.25%
5.0%
2024
6.6%
5.0%
2022
74
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The significant assumptions related to the Company’s net periodic benefit costs are as follows:
Pension Benefits
2018
2019
2017
Weighted Average Assumptions Used to Determine
Net Periodic Benefit Costs for Years Ended December
31,
Discount rate
Expected return on plan assets
Rate of compensation increase
4.30%
6.50%
4.13%
3.66%
7.00%
6.75%
3.0-4.0% 3.0-4.0% 3.0-4.0%
Other Post-retirement Benefits
2018
2019
2017
4.34%
4.25%
3.73%
4.1-6.5% 4.25-6.75% 4.67-7.00%
n/a
n/a
n/a
Assumed Health Care Cost Trend Rates Used to
Determine Net Periodic Benefit Costs for Years Ended
December 31,
Health care cost trend rate
Rate to which the cost trend is assumed to decline
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
n/a – Assumption is not applicable.
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
6.6%
5.0%
2023
7.0%
5.0%
2023
6.6%
5.0%
2021
Assumed health-care trend rates have a significant effect on the expense and liabilities for other post-retirement benefit
plans. The health care trend rate is based on historical rates and expected market conditions. A one-percentage point
change in the assumed health-care cost trend rates would have the following effects:
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Effect on the health-care component of the accrued other post-retirement benefit
obligation
Effect on aggregate service and interest cost components of net periodic post-
retirement health-care benefit cost
$
$
5,131
301
$
$
(4,548)
(227)
The Company’s discount rate assumption, which is utilized to calculate the present value of the projected benefit
payments of our post-retirement benefits, was determined by selecting a hypothetical portfolio of high quality corporate
bonds appropriate to match the projected benefit payments of the plans. The selected bond portfolio was derived from a
universe of Aa-graded corporate bonds. The discount rate was then developed as the rate that equates the market value of
the bonds purchased to the discounted value of the plan’s benefit payments. The Company’s pension expense and liability
(benefit obligations) increases as the discount rate is reduced.
The Company’s expected return on plan assets is determined by evaluating the asset class return expectations with its
advisors as well as actual, long-term, historical results of our asset returns. The Company’s market related value of plan
assets is equal to the fair value of the plan’s assets as of the last day of its fiscal year, and is a determinant for the expected
return on plan assets which is a component of post-retirement benefits expense. The Company’s pension expense
increases as the expected return on plan assets decreases. For 2019, the Company used a 6.50% expected return on plan
assets assumption which will decrease to 6.0% for 2020. The Company believes its actual long-term asset allocation on
average will approximate the targeted allocation. The Company’s investment strategy is to earn a reasonable rate of
return while maintaining risk at acceptable levels. Risk is managed through fixed income investments to manage interest
rate exposures that impact the valuation of liabilities and through the diversification of investments across and within
various asset categories. Investment returns are compared to a total plan benchmark constructed by applying the plan’s
asset allocation target weightings to passive index returns representative of the respective asset classes in which the plan
75
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
invests. The Retirement and Employee Benefits Committee meets quarterly to review plan investments and management
monitors investment performance quarterly through a performance report prepared by an external consulting firm.
The Company’s pension plan asset allocation and the target allocation by asset class are as follows:
Target Allocation
2019
2018
Percentage of Plan Assets at December 31,
Return seeking assets
Liability hedging assets
Total
50 to 70%
30 to 50%
100%
56%
44%
100%
The fair value of the Company’s pension plans’ assets at December 31, 2019 by asset class are as follows:
Common stock
Return seeking assets:
Global equities
Real estate securities
Hedge / diversifying strategies
Credit
Liability hedging assets
Cash and cash equivalents
Total pension assets
Level 1
Level 2
Level 3
$
17,166 $
-
-
-
-
-
4,194
21,360 $
$
- $
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
- $
Assets measured at
NAV (a)
-
$
51,408
13,970
38,099
27,847
113,777
-
245,101
$
58%
42%
100%
Total
17,166
51,408
13,970
38,099
27,847
113,777
4,194
266,461
(a) Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the
fair value hierarchy.
The fair value of the Company’s pension plans’ assets at December 31, 2018 by asset class are as follows:
Common stock
Return seeking assets:
Global equities
Real estate securities
Hedge / diversifying strategies
Credit
Liability hedging assets
Cash and cash equivalents
Total pension assets
Level 1
Level 2
Level 3
$
12,268 $
- $
-
-
-
-
-
1,814
14,082 $
$
-
-
-
-
-
- $
Assets
measured at
NAV (a)
-
$
48,040
15,766
37,591
25,772
97,756
-
224,925
$
- $
-
-
-
-
-
-
- $
Total
12,268
48,040
15,766
37,591
25,772
97,756
1,814
239,007
Equity securities include our common stock in the amounts of $17,166 or 6.4% and $12,393 or 5.1% of total pension
plans’ assets as of December 31, 2019 and 2018, respectively.
76
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset class are as
follows:
Target Allocation
2019
2018
Percentage of Plan Assets at December 31,
Return seeking assets
Liability hedging assets
Total
50 to 70%
30 to 50%
100%
64%
36%
100%
60%
40%
100%
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2019 by asset class are as
follows:
Return seeking assets:
Global equities
Real estate securities
Liability hedging assets
Cash and cash equivalents
Total other post-retirement assets
Level 1
Level 2
Level 3
Assets measured at
NAV (a)
$
$
10,795 $
2,449
5,685
3,566
22,495 $
- $
-
-
-
- $
- $
-
-
-
- $
17,781
3,751
9,984
-
31,516
$
$
Total
28,576
6,200
15,669
3,566
54,011
(a) Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the
fair value hierarchy.
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2018 by asset class are as
follows:
Return seeking assets:
Global equities
Real estate securities
Liability hedging assets
Cash and cash equivalents
Total other post-retirement assets
Level 1
Level 2
Level 3
Assets
measured at
NAV (a)
$
$
8,411 $
1,967
5,075
4,216
19,669 $
- $
-
-
-
- $
- $
-
-
-
- $
13,882
3,065
8,806
-
25,753
$
$
Total
22,293
5,032
13,881
4,216
45,422
Valuation Techniques Used to Determine Fair Value
Common Stocks - Investments in common stocks are valued using unadjusted quoted prices obtained from active
markets.
Return Seeking Assets – Investments in return seeking assets consists of the following:
o Global equities, which consist of common and preferred shares of stock, traded on U.S. or foreign
exchanges that are valued using unadjusted quoted prices obtained from active markets, or commingled
fund vehicles, consisting of such securities valued using NAV, which are not classified within the fair
value hierarchy.
o Real estate securities, which consist of securities, traded on U.S. or foreign exchanges that are valued
using unadjusted quoted prices obtained from active markets, or for real estate commingle fund vehicles
that are not publicly quoted, the fund administrators value the funds using the NAV per fund share,
77
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
derived from the quoted prices in active markets of the underlying securities and are not classified within
the fair value hierarchy.
o Hedge / diversifying strategies, which consist of a multi-manager fund vehicle having underlying
exposures that collectively seek to provide low correlation of return to equity and fixed income markets,
thereby offering diversification. As a multi-manager fund investment, NAV is derived from underlying
manager NAVs, which are derived from the quoted prices in active markets of the underlying securities
and are not classified within the fair value hierarchy.
o Credit, which consist of certain opportunistic, return-oriented credits which primarily include below
investment grade bonds (i.e. high yield bonds), bank loans, and securitized debt. Credits are valued using
the NAV per fund share, derived from either quoted prices in active markets of the underlying securities,
or less active markets, or quotes of similar assets, and are not classified within the fair value hierarchy.
Liability Hedging Assets – Investments in liability hedging assets consist of funds investing in high-quality fixed
income (i.e. U.S. Treasury securities and government bonds), and for funds for which market quotations are
readily available, are valued at the last reported closing price on the primary market or exchange on which they
are traded. Funds for which market quotations are not readily available, are valued using the NAV per fund share,
derived from the quoted prices in active markets of the underlying securities and are not classified within the fair
value hierarchy.
Cash and Cash Equivalents – Investments in cash and cash equivalents are comprised of both uninvested cash and
money market funds. The uninvested cash is valued based on its carrying value, and the money market funds are
valued utilizing the net asset value per unit obtained from published market prices.
Funding requirements for qualified defined benefit pension plans are determined by government regulations and not by
accounting pronouncements. In accordance with funding rules and the Company’s funding policy, during 2020 our
pension contribution is expected to be $13,542.
The Company has a 401(k) savings plan, which is a defined contribution plan and covers substantially all employees. The
Company makes matching contributions that are based on a percentage of an employee’s contribution, subject to specific
limitations, as well as, non-discretionary contributions based on eligible hourly wages for certain union employees,
discretionary year-end contributions based on an employee’s eligible compensation, and employer profit sharing
contributions. Participants may diversify their Company matching account balances into other investments offered under
the 401(k) savings plan. The Company’s contributions, which are recorded as compensation expense, were $ 6,259,
$6,096, and $5,374, for the years ended December 31, 2019, 2018, and 2017, respectively.
Note 17 – Water and Wastewater Rates
On June 7, 2012, Aqua Pennsylvania reached a settlement agreement in its rate filing with the Pennsylvania Public Utility
Commission, which in addition to a water rate increase, provided for a reduction in current income tax expense as a result
of the recognition of qualifying income tax benefits upon Aqua Pennsylvania changing its tax accounting method to
permit the expensing of qualifying utility asset improvement costs that historically have been capitalized and depreciated
for book and tax purposes. In December 2012, Aqua Pennsylvania implemented this change which provides for the flow-
through of income tax benefits that resulted in a substantial reduction in income tax expense and greater net income and
cash flow. This change allowed Aqua Pennsylvania to suspend its water Distribution System Improvement Charges in
2013 and lengthen the amount of time until the next Aqua Pennsylvania rate case. Beginning on October 1, 2017, Aqua
Pennsylvania initiated a water infrastructure rehabilitation surcharge for the capital invested since the last rate proceeding
and in August 2018 filed for a base rate increase in water and wastewater rates for its customers. In May 2019, the
Company received an order from the Pennsylvania Public Utility Commission, resulting in an increase of $47,000 in
annual revenue, and new rates went into effect on May 24, 2019. The rates in effect at the time of the filing also included
$29,493 in Distribution System Improvement Charges (“DSIC”), which was 7.5% above prior base rates. Consequently,
the aggregate base rates increased by $76,493 since the last base rate increase and the DSIC was reset to zero. Revenues
78
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
from this rate increase realized in the year of grant were approximately $28,396. Additionally, in the May 2019 Aqua
Pennsylvania rate order, base rates are designed with $158,865 of tax benefits assumed for qualifying utility asset
improvement costs, subject to $3,000 either above or below this target amount. To the extent actual tax benefits are
outside this range, tax benefits will either be deferred or accrued, and settled in the next rate filing.
In December 2018, the Company’s operating subsidiary in New Jersey filed for a base rate increase in water rates for its
customers. In May 2019, the Company received an order from the New Jersey Board of Public Utilities, resulting in an
increase of $5,000 in annual revenues, and new rates went into effect on June 1, 2019. Revenues from this rate increase
realized in the year of grant were approximately $2,917.
In addition to the Pennsylvania and New Jersey rate awards noted above, the Company’s operating subsidiaries were
allowed annualized rate increases of $974 in 2019, $11,558 in 2018, and $7,558 in 2017, represented by two, five, and
five rate decisions, respectively. Revenues from these rate increases realized in the year of grant were approximately
$974, $7,270, and $6,343 in 2019, 2018, and 2017, respectively.
Seven states in which the Company operates permit water utilities, and in six states wastewater utilities, to add a surcharge
to their water or wastewater bills to offset the additional depreciation and capital costs related to infrastructure system
replacement and rehabilitation projects completed and placed into service between base rate filings. Currently, New
Jersey allows for an infrastructure rehabilitation surcharge for water utilities, while Pennsylvania, Illinois, Ohio, Indiana,
Virginia, and North Carolina allow for the use of an infrastructure rehabilitation surcharge for both water and wastewater
utility systems. The surcharge for infrastructure system replacements and rehabilitations is typically adjusted periodically
based on additional qualified capital expenditures completed or anticipated in a future period, is capped as a percentage of
base rates, generally at 5% to 12.75%, and is reset to zero when new base rates that reflect the costs of those additions
become effective or when a utility’s earnings exceed a regulatory benchmark. The surcharge for infrastructure system
replacements and rehabilitations provided revenues in 2019, 2018, and 2017 of $16,007, $31,836, and $10,255,
respectively.
Note 18 – Segment Information
The Company has ten operating segments and one reportable segment. The Regulated water segment, the Company’s
single reportable segment, is comprised of eight operating segments representing our water and wastewater regulated
utility companies which are organized by the states where we provide water and wastewater services. These operating
segments are aggregated into one reportable segment since 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.
Two operating segments are included within the Other category below. These segments are not quantitatively significant
and are comprised of Aqua Infrastructure and Aqua Resources. In addition to these segments, Other is comprised of other
business activities not included in the reportable segment, including corporate costs that have not been allocated to the
Regulated water segment, because they would not be recoverable as a cost of utility service, and intersegment
eliminations. Corporate costs include general and administrative expenses, and interest expense.
79
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table presents information about the Company’s reportable segment:
Operating revenues
Operations and maintenance expense
Depreciation
Amortization
Operating income (loss)
Interest expense
Interest income
Allowance for funds used during construction
Equity earnings in joint venture
Provision for income taxes (benefit)
Net income (loss)
Capital expenditures
Total assets
Operating revenues
Operations and maintenance expense
Depreciation
Amortization
Operating income
Interest expense
Interest income
Allowance for funds used during construction
Equity earnings in joint venture
Provision for income taxes
Net income (loss)
Capital expenditures
Total assets
$
$
Regulated
Water
886,430 $
315,052
158,162
(2,264)
357,979
97,995
54
16,172
-
(1,267)
274,920
550,273
7,269,404
2019
Other and
Eliminations
3,262 $
18,050
17
561
(17,820)
27,388
25,352
-
2,210
(11,750)
(50,377)
-
2,092,581
Regulated
Water
2017
Other and
Eliminations
804,905 $
282,009
136,246
240
331,888
82,102
128
15,211
-
14,107
246,548
478,077
6,236,109
4,620 $
244
56
182
2,032
6,441
74
-
331
2,807
(6,810)
12
96,354
$
Consolidated
889,692
333,102
158,179
(1,703)
340,159
125,383
25,406
16,172
2,210
(13,017)
224,543
550,273
9,361,985
Regulated
Water
834,638 $
292,232
145,977
401
338,388
89,207
95
13,023
-
4,158
259,160
495,730
6,807,960
2018
Other and
Eliminations
3,453 $
16,246
55
240
(15,210)
9,847
57
-
2,081
(17,827)
(67,172)
7
156,536
Consolidated
838,091
308,478
146,032
641
323,178
99,054
152
13,023
2,081
(13,669)
191,988
495,737
6,964,496
Consolidated
809,525
282,253
136,302
422
333,920
88,543
202
15,211
331
16,914
239,738
478,089
6,332,463
80
Selected Quarterly Financial Data (Unaudited)
Essential Utilities, Inc. and Subsidiaries
(In thousands of dollars, except per share amounts)
2019
Operating revenues
Operations and maintenance expense
Operating income
Net income
Basic net income per common share
Diluted net income per common share
Dividend paid per common share
Dividend declared per common share
2018
Operating revenues
Operations and maintenance expense
Operating income
Net income (loss)
Basic net income (loss) per common share
Diluted net income (loss) per common share
Dividend paid per common share
Dividend declared per common share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$
$
201,132 $
79,314
67,439
16,924
0.09
0.09
0.2190
0.2190
194,347 $
73,946
69,337
50,839
0.29
0.29
0.2047
0.2047
218,892 $
86,445
80,949
54,903
0.25
0.25
0.2190
0.2190
211,860 $
73,515
86,754
66,590
0.37
0.37
0.2047
0.2047
243,626 $
82,022
106,470
88,489
0.38
0.38
0.2343
0.2343
226,137 $
68,624
104,293
78,216
0.44
0.44
0.2190
0.2190
226,042 $
85,321
85,301
64,227
0.28
0.28
0.2343
0.2343
205,747 $
92,393
62,794
(3,657)
(0.02)
(0.02)
0.2190
0.2190
889,692
333,102
340,159
224,543
1.04
1.04
0.9066
0.9066
838,091
308,478
323,178
191,988
1.08
1.08
0.8474
0.8474
81
Summary of Selected Financial Data (Unaudited)
Essential Utilities, Inc. and Subsidiaries
(In thousands of dollars, except per share amounts)
Years ended December 31,
PER COMMON SHARE:
Net income:
Basic
Diluted
Cash dividends declared and paid
Return on Essential Utilities stockholders' equity
Book value at year end
Market value at year end
INCOME STATEMENT HIGHLIGHTS:
Operating revenues
Depreciation and amortization
Interest expense
Income before income taxes (1) (2)
Provision for income taxes (benefit)
Net income (1) (2)
BALANCE SHEET HIGHLIGHTS:
Total assets
Property, plant and equipment, net
Essential Utilities stockholders' equity
Long-term debt, including current portion, excluding debt issuance costs (3)
Total debt, excluding debt issuance costs (3)
ADDITIONAL INFORMATION:
Net cash flows from operating activities
Capital expenditures
Net cash expended for acquisitions of utility systems and other
Dividends on common stock
Number of utility customers served
Number of shareholders of common stock
Common shares outstanding (000)
Employees (full-time)
2019
2018
2017
2016
2015
$
$
$
$
1.04
1.04
0.9066
5.8%
17.58
46.94
$
$
1.08
1.08
0.8474
9.6%
11.28
34.19
$
$
1.35
1.35
0.7920
12.2%
11.02
39.23
$
$
1.32
1.32
0.7386
12.7%
10.43
30.04
1.14
1.14
0.6860
11.7%
9.78
29.80
$
889,692
$
838,091
$
809,525
$
819,875
$
814,204
156,476
125,383
211,526
(13,017)
224,543
146,673
99,054
178,319
(13,669)
191,988
136,724
88,543
256,652
16,914
239,738
133,008
80,811
255,160
20,978
234,182
128,737
76,808
216,752
14,962
201,790
$
9,361,985
$
6,964,496
$
6,332,463
$
6,158,991
$
5,717,873
6,345,790
3,880,860
3,077,400
3,103,124
5,930,326
2,009,364
2,563,660
2,579,109
5,399,860
1,957,621
2,143,127
2,146,777
5,001,615
1,850,068
1,910,633
1,917,168
4,688,925
1,725,930
1,779,205
1,795,926
$
338,523
$
368,522
$
381,318
$
396,163
$
370,794
550,273
59,687
188,512
495,737
145,693
150,736
1,026,704
1,005,590
22,752
220,759
1,583
23,476
178,092
1,571
478,089
5,860
140,660
982,849
23,511
177,714
1,530
382,996
9,423
130,923
972,265
24,750
177,394
1,551
364,689
28,989
121,248
957,866
25,269
176,544
1,617
(1) 2019 and 2018 results include mark-to-market fair value adjustment expense of $18,756 ($23,742 pre-tax) and
$47,225 ($59,779 pre-tax) associated with our interest rate swap agreements that were entered into to mitigate interest
rate risk associated with our debt issuances to fund a portion of the Peoples Gas Acquisition
(2) 2015 results include Essential Utilities’ share of a joint venture impairment charge of $21,433 ($32,975 pre-tax)
(3) Debt issuance costs for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 were $29,022, $20,651,
$21,605, $22,357, and $23,165, respectively
82
The graph below matches the cumulative 5-Year total return of holders of Essential Utilities, Inc.’s common
stock with the cumulative total returns of the S&P 500 index and the S&P MidCap 400 Utilities index. The graph
assumes that the value of the investment in our common stock, in each index, and in the peer group (including
reinvestment of dividends) was $100 on 12/31/2014 and tracks it through 12/31/2019.
Comparison of five year cumulative total return*
Among Essential Utilties, Inc., the S&P 500 Index, and S&P MidCap 400 Utilities Index
*$100 invested on 12/31/14 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2020 Standard & Poor’s, a division of S&P Global. All rights reserved.
Years as of December 31
Essential Utilities, Inc.
100.00
114.49
S&P 500 Index
100.00
101.38
2014
2015
2016
118.18
113.51
2017
2018
2019
158.08
141.19
198.25
138.29
132.23
173.86
S&P MidCap 400 Utilities Index
100.00
92.90
118.22
130.52
137.42
157.48
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
83
Financial Reports and Investor Relations
Copies of the company’s public financial reports,
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
including annual reports and Forms 10–K and 10–Q,
Two Commerce Square
are available online and can be downloaded from the
Suite 1800
investor relations section of our website at Essential.co.
2001 Market Street
You may also obtain these reports by writing to us at:
Philadelphia, PA 19103-7042
Stock Exchange
The Common Stock of the company is listed on the
New York Stock Exchange and under the ticker symbol
WTRG.
Dividend Reinvestment and Direct Stock
Purchase Plan
The company’s Dividend Reinvestment and Direct
Stock Purchase Plan (“Plan”) enables shareholders
to reinvest all, or a designated portion of, dividends
paid on up to 100,000 shares of Common Stock in
additional shares of Common Stock at a discretionary
discount from a price based on the market value of
the stock. The discount between 0 and 5.0 percent on
the shares purchased or issued to meet the dividend
reinvestment requirement will be designated by us in
our sole discretion prior to the purchase or issuance
of such shares. We reserve the right to change, reduce
or discontinue any discount at any time without notice.
In addition, shareholders may purchase additional
shares of Essential Utilities Common Stock at any time
with a minimum investment of $50, up to a maximum
of $250,000 annually. Individuals may become
shareholders by making an initial investment of at
least $500. A Plan prospectus may be obtained by
calling Computershare at 800.205.8314 or by visiting
www.computershare.com/investor. Please read the
prospectus carefully before you invest.
Investor Relations Department
Essential Utilities Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Corporate Governance
We are committed to maintaining high standards of
corporate governance and are in compliance with
the corporate governance rules of the Securities and
Exchange Commission (SEC) and the New York Stock
Exchange. Copies of our key corporate governance
documents, including our Corporate Governance
Guidelines, Code of Ethical Business Conduct,
and the charters of each committee of our Board
of Directors can be obtained from the corporate
governance portion of the investor relations section
of our website, Essential.co. Amendments to the Code
of Ethical Business, and in the event of any grant
of waiver from a provision of the Code of Conduct
requiring disclosure under applicable SEC rules will be
disclosed on our website.
Annual Meeting
8 a.m. Eastern Daylight Time
Wednesday, May 6, 2020
Peoples Natural Gas Co.
375 N. Shore Dr.
Pittsburgh, PA 15212
Transfer Agent and Registrar
Computershare
P.O. Box 505000
Louisville, KY 40233
800.205.8314 or
www.computershare.com/investor
84
IRA, Roth IRA, Education IRA
An IRA, Roth IRA or Coverdell Education Savings
How to obtain a separate set of voting materials
If you are a registered shareholder who shares an
Account may be opened through the Plan to hold
address with another registered shareholder and have
shares of Common Stock of the company and to
received only one Notice of Internet Availability of
make contributions to the IRA to purchase shares of
Proxy Materials or set of proxy material and wish to
Common Stock. Participants in the Plan may roll over
receive a separate copy for each shareholder in your
an existing IRA or other qualified plan distribution
household for the 2020 annual meeting, you may write
in cash into an IRA under the Plan to purchase the
or call us to request a separate copy of this material at
company’s Common Stock. Participants may also
no cost to you at 610.645.1040 or write us at:
transfer the company’s Common Stock from an
existing IRA into an IRA under the Plan. A prospectus,
IRA forms and a disclosure statement may be obtained
by calling Computershare at 800.597.7736. Please
read the prospectus carefully before you invest.
Attn: Investor Relations
Essential Utilities Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA, 19010
For future annual meetings, you may request separate
voting material by calling Broadridge at 866.540.9095,
or by writing to Broadridge Financial Solutions,
Inc., Householding Department, 51 Mercedes Way,
Edgewood, New York 11717.
Account Access
Essential Utilities shareholders may access their
account by visiting www.computershare.com/investor.
Shareholders may view their account, purchase
additional shares, and make changes to their account.
To learn more, visit www.computershare.com/investor
or call 800.205.8314.
Direct Deposit
With direct deposit, Essential Utilities cash dividends
are deposited automatically on the dividend payment
date of each quarter. Shareholders will receive
confirmation of their deposit in the mail. Shareholders
interested in direct deposit should call the company’s
transfer agent at 800.205.8314.
Delivery of voting materials to shareholders sharing
an address
The SEC’s rules permit the Company to deliver a
Notice of Internet Availability of Proxy Materials or a
single set of proxy materials to one address shared
by two or more of the Company’s shareholders.
This is intended to reduce the printing and postage
expense of delivering duplicate voting materials to
our shareholders who have more than one Essential
Utilities stock account. A separate Notice of Internet
Availability or proxy card is included for each of these
shareholders. If you received a Notice of Internet
Availability you will not receive a printed copy of the
proxy materials unless you request it by following the
instructions in the notice for requesting printed proxy
material.
85
Dividends
Essential Utilities has paid dividends for 75 consecutive years. The normal Common Stock dividend dates for
2020 and the first six months of 2021 are:
Declaration Date
Ex-Dividend Date
Record Date
Payment Date
February 3, 2020
February 12, 2020
February 14, 2020
March 1, 2020
May 4, 2020
May 13, 2020
May 15, 2020
June 1, 2020
August 3, 2020
August 12, 2020
August 14, 2020
September 1, 2020
November 2, 2020
November 11, 2020
November 13, 2020
December 1, 2020
February 1, 2021
February 10, 2021
February 12, 2021
March 1, 2021
May 3, 2021
May 12, 2021
May 14, 2021
June 1, 2021
To be an owner of record, and therefore eligible to
Escheatment is the act of reporting and transferring
receive the quarterly dividend, shares must have been
property to a state when the rightful owner has an
purchased before the ex-dividend date. Owners of
invalid address or has not made contact or initiated a
any share(s) on or after the ex-dividend date will not
transaction during the state’s designated dormancy
receive the dividend for that quarter. The previous
period. Escheated assets are transferred to the state
owner — the owner of record — will receive the
for safekeeping (and often liquidated) until the rightful
dividend.
Only the Board of Directors may declare dividends and
set record dates. Therefore, the payment of dividends
and these dates may change at the discretion of the
Board.
Dividends paid on the company’s Common Stock are
subject to Federal and State income tax.
Lost Dividend Checks, Stock Certificates and
Escheatment
Dividend checks lost by shareholders, or those
that might be lost in the mail, will be replaced
upon notification of the lost or missing check. All
inquiries concerning lost or missing dividend checks
should be made to the company’s transfer agent at
800.205.8314. Shareholders should call or write the
company’s transfer agent to report a lost certificate.
Appropriate documentation will be prepared and sent
to the shareholder with instructions.
owner makes a claim on the asset. To keep your
shares of stock and uncashed dividends from being
escheated, you must maintain contact (recommended
at least once a year) with the company’s transfer
agent, especially if you recently changed your address,
changed your marital status or are managing an estate
following a death. Unclaimed property laws vary
widely from state to state.
Safekeeping of Stock Certificates
Under the Direct Stock Purchase Plan, shareholders
may have their stock certificates deposited with
the transfer agent for safekeeping free of charge.
Stock certificates and written instructions should be
forwarded to:
Computershare, N.A.
P.O. BOX 505000
Louisville, KY 40233
86
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Corporate
Information
Board of Directors
Christopher Franklin
Chairman, Chief Executive Officer
and President
Essential Utilities Inc.
Director since 2015
Nicholas DeBenedictis
Chairman Emeritus
Essential Utilities Inc.
Director since 1992
Francis Idehen
Chief Operating Officer
GCM Grosvenor
Director since 2019
Lee C. Stewart
Private Financial
Consultant
Director since 2018
Elizabeth B. Amato
Sr. Vice President and Chief Human
Resources Officer
United Technologies Corporation
Director since 2018
Daniel J. Hilferty
President and Chief Executive Officer
Independence Health Group
Director since 2017
Ellen T. Ruff
Former President
Duke Energy
Director since 2006
Christopher C. Womack
President of External Affairs
Southern Company
Director since 2019
Officers
Christopher Franklin
Chairman, Chief Executive Officer and President
Richard S. Fox
Executive Vice President
Chief Operating Officer
Christopher P. Luning
Executive Vice President
General Counsel and Secretary
Robert A. Rubin
Senior Vice President
Chief Accounting Officer
Matthew Rhodes
Executive Vice President
Strategy and Corporate Development
Daniel J. Schuller
Executive Vice President
Chief Financial Officer
Forward-Looking Statements
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which generally include words
such as “believes,” “expects,” “intends,” “anticipates,” “estimates” and similar expressions. The Company can give no assurance that any actual or future results
or events discussed in these statements will be achieved. Any forward-looking statements represent its views only as of today and should not be relied upon as
representing its views as of any subsequent date. Readers are cautioned that such forward-looking statements are subject to a variety of risks and uncertainties
that could cause the company’s actual results to differ materially from the statements contained in this release. There are important factors that could cause actual
results to differ materially from those expressed or implied by such forward-looking statements including the factors discussed in our Annual Report on Form 10-K
and our Quarterly Reports on Form 10-Q, which are filed with the Securities and Exchange Commission. For more information regarding risks and uncertainties
associated with the Company’s business, please refer to the Company’s annual, quarterly and other SEC filings. The Company is not under any obligation - and
expressly disclaims any such obligation - to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.
Integrity
Respect
Excellence
Essential Utilities Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010
NYSE: WTRG
877.987.2782
www.Essential.co
2019
Annual Report
Essential Utilities Inc.
Providing
Natural
Resources
for Life
NYSE: WTRG