RELIABLE FOR LIFE
Essential Utilities, Inc
2021 Annual Report
NYSE: WTRG
2021 YEAR IN REVIEW
135 YEARS
as a company
1 YEAR
as Essential
Utilities
50 YEARS
on the NYSE
10
states
ESTIMATED
5.4 MILLION
people served
3,200
employees
MORE THAN
$1 BILLION
invested in infrastructure
470 MILES
of pipeline retired
or replaced
2
water and
wastewater acquisitions
6
water and
wastewater systems
25,800+
total customer
equivalents
$141.5M
total purchase
price
1 | 2021 Annual Report
OUR IMPACTOUR INVESTMENTSIGNED ACQUISITION AGREEMENTSOUR MILESTONES A WORD FROM OUR CHAIRMAN & CEO
Dear Shareholder,
On the heels of a pandemic that has transformed
our country and amid the changes we continue to
navigate as a result, our purpose remains steadfast.
We recognize that Essential Utilities provides some
of the most basic comforts to human beings, which
is why we remain so committed to our important
mission of safely and reliably delivering Earth’s most
essential resources to our customers and communities.
While the pandemic sharpened the world’s image of
“essential workers”, we have always known that the
dedicated and passionate team who ensure that water,
wastewater and natural gas services are provided
to our customers are Essential workers. Despite the
challenges COVID presented, we continued to deliver
for our customers. We kept our customers comfortable
and productive in their homes and businesses, our
employees safe, our financial performance on track
and our commitment to our communities strong.
At no point did any customer lose service due to
the impact of the pandemic, and I compliment our
incredible team for their role in making this happen.
When you think of water, wastewater and natural
gas, you think essential. These words are intrinsically
suited to each other because they underscore the
fact that our infrastructure is critical to sustaining
everyday life. We invested a record of more than $1
billion last year to strengthen our water, wastewater
and natural gas infrastructure, and enhance
customer experience across our operations.
While 2021 marked our first full year under the
name Essential Utilities, our water and natural gas
companies have long histories that span more than
135 years each. In 2021, we celebrated 50 years as
a listed company on the New York Stock Exchange,
and we provided our shareholders with more than
77 years of consecutive quarterly cash dividends.
In addition to our strong financial performance, we
continue to think broadly about the environmental
and social impact of our company. Environmental,
Social and Governance (ESG) are more than just
recent corporate buzz words. Our ESG work has
always been part of the fabric of our company and
plays an important role in our corporate strategy.
Our ESG work includes the protection of the health of
our customers. We’ve committed to treat any of our
finished water that exceeds 13 parts per trillion of PFAS,
PFOA or PFNA despite the lack of a formal federal health
standard. We also completed and opened our 14,700
square-foot state-of-the-art environmental laboratory
in July, and we remain committed and on track to
achieve our goal to reduce Scope 1 and 2 greenhouse
gas emissions by 60% by 2035 from our 2019 baseline.
We made the important decision to reflect the
demographic of our customer base within our employee
population and actively pursue diversity among
our vendor and supplier base, as we believe these
fundamental changes are core to the long-term success
of our company and its strategy. To accomplish this, we
developed a multiyear plan to ensure at least 17% of
our employees will be diverse and at least 15% of our
controllable spending will be with diverse suppliers.
At year end, 15% of Essential’s employees were people
of color and nearly 11% of our controllable spending
was with diverse suppliers. Further, we have been
named a Champion of Board Diversity by the Forum
of Executive Women in recognition that one-third
of our board of directors is comprised of women.
We are also proud to be a reliable and committed
corporate partner, focusing on reforesting stream
corridors with a goal to plant more than 170,000 trees
and shrubs over the next 15 years, and empowering our
employees to make a difference in their own communities
by cultivating a corporate culture of volunteerism
and philanthropy. In 2021, the Essential Foundation
contributed more than $4.6 million to organizations
that support our customers and communities.
2021 was a challenging year, but we persevered and lived
up to the legacy that has been created over our long
history. In 2022, we look forward to continuing to deliver
our Essential Value Proposition: operational excellence for
customers, strong financial performance for shareholders
and important ESG advances for our communities.
Our promise is to deliver natural
resources for life. On behalf of
the Essential leadership team,
board of directors and our
employees, thank you for
your unwavering support of
our mission. We are Essential
Utilities - Reliable for Life.
Christopher H. Franklin
Chairman and CEO,
Essential Utilities Inc.
2021 Annual Report | 1
RELIABLE GROWTH
STRATEGY
FINANCIAL HIGHLIGHTS
In thousands, except per-share amounts
2021
2020
% Change
Operating Revenues (b)
Regulated Segments:
$1,878,144
$1,462,698
28.4%
Regulated Water Segment Revenues
$980,203
$938,540
4.4%
Regulated Natural Gas Segment Revenues (b)
$859,902
$506,564
69.8%
Operations and Maintenance Expense (b)
$550,580
$528,611
4.2%
Net income (b)
Capital Expenditures (b)
$431,612
$284,849
51.5%
$1,020,519
$835,642
Diluted net income per common share (b)
$1.67
$1.12
Exclude:
Transaction-related rate credits issued to utility customers
Transaction expenses for acquisition of Peoples
Income tax effect of Non-GAAP adjustments
-
-
-
$23,004
$25,573
($11,295)
22.1%
49.1%
-
-
-
Adjusted income (a) (b) (Non-GAAP financial measure)
$431,612
$322,131
34.0%
Adjusted income per common share (a) (b)
(Non-GAAP financial measure)
$1.67
$1.27
31.5%
Annualized dividend rate per common share (12/31)
$1.0728
$1.0028
7.0%
Total Assets
$14,658,278 $13,705,277
Number of utility customers served (12/31)
1,820,049
1,798,803
7.0%
1.2%
(a) The GAAP financial measures are net income and net income per share.
(b) Includes Peoples’ operating results as of the closing date of the Peoples acquisition on
March 16, 2020.
Please see the investor relations page of Essential.co for a reconciliation of GAAP to non-
GAAP financial measures.
SPOTLIGHT ON TEXAS
In August 2021, Aqua Texas acquired the water treatment and distribution system
in The Commons of Lake Houston community, which serves approximately 1,000
customers, in a milestone transaction for Essential. This was the first transaction
under the new Texas fair market value legislation, which allows regulated water
companies to pay a fair market value for the purchase of water and wastewater
systems and include this fair value in rate base. Prior to the new legislation enacted
in 2019, a system’s value previously was determined by its depreciated original
cost, which generally did not reflect a reasonable market value for those assets.
2 | 2021 Annual Report
2021
TWO ACQUISITIONS
7,700
Total Customers
$36.3M
Total Rate Base
1
Bourbonnais, IL
Aug. 31, 2021
Wastewater
6,700
Customers
$32.3M
Rate Base
2
Commons
Water, TX
Aug. 2, 2021
Water
1,000
1,000
Customers
Customers
$4.0M
$4.0M
Rate Base
Rate Base
Diluted Adjusted Income per Common Share
Diluted Adjusted Income per Common Share
Dividends per Share (annualized)
$1.67
$1.073
$1.003
$0.937
$1.41
$1.47
$1.35
$1.27
$0.876
$0.818
7. 0 % G r o w t h
2017
2018 (1)
2019 (2)
2020 (3)(4)
2021
2017
2018
2019
2020
2021
Capital Investment (in millions of dollars)
Utility Customer Connections
751,502
753,244
$1,020.5
$889.1
Water
Natural Gas
982,849
1,005,590 1,026,704
1,047,301
1,066,805
$478.1
$495.7
$550.3
2017
2018
2019
2020 (5)
2021
2017
2018
2019
2020
2021
(1) 2018 Net income per share was $1.08 (GAAP). 2018 adjusted for transaction costs and other items related to the Peoples transaction (Non-GAAP).
(2) 2019 Net income per share was $1.04 (GAAP). 2019 adjusted for transaction costs and other items related to the Peoples transaction (Non-GAAP).
(3) 2020 Net income per share was $1.12 (GAAP). 2020 adjusted for transaction costs and other items related to the Peoples transaction (Non-GAAP).
(4) Includes Peoples’ operating results as of the closing date of the Peoples acquisition on March 16, 2020.
(5) 2020 Capital investment includes $53.5 million of capital invested by Peoples prior to closing.
Please see the investor relations page of Essential.co for a reconciliation of GAAP to non-GAAP financial measures.
2021 Annual Report | 3
RELIABLE ESG
MOMENTUM
INDUSTRY LEADER IN ENVIRONMENTAL, SOCIAL AND
GOVERNANCE PROGRESS
Essential continues to be an industry leader setting
and achieving ambitious environmental, social and
governance (ESG) targets. Our dependable track record
and ambitious goals ensure we are positioned to play
a critical role in solving our nation’s infrastructure
challenges and protecting our environment.
In January 2021, Essential announced an enterprise-
wide commitment to substantially reduce its Scope 1
and 2 greenhouse gas (GHG) emissions. By 2035, we will
reduce our emissions by 60% from our 2019 baseline.
Our regulated water and gas segments will each be
achieving roughly 60% reduced emissions in support
of the enterprise-wide 60% reduction target. This
science-based commitment is consistent with the rate
of reduction necessary, through 2035, to keep on track
with the Paris Agreement, which aims to limit the global
temperature increase to well below two degrees Celsius.
We have already achieved an estimated 7% reduction
from baseline, based mainly on pipeline replacement.
In 2021, Essential published a redesigned ESG microsite that
featured more extensive and expanded reporting inclusive
of our gas operations. Our ESG reporting was regarded
by the League of American Communications Professionals
to be among the top 30 in the world and top 15 in the
United States. We were also named among 3BL Media’s
Top 100 Best Corporate Citizens. We are proud that ESG
rating agencies such as ISS, MSCI, and Sustainalytics
have each recognized the progress we have made by
upgrading our scores, and we are eager to continue this
momentum and expand upon our impressive ESG program.
Visit esg.essential.co to learn more about
our extensive commitment to ESG.
MEASURING PROGRESS TOWARD OUR TARGETS
Scope 1 and 2 Greenhouse Gas Emissions
2019 Baseline
7
Estimated Reduction
Achieved
53%
Reduction Remaining
60%
Reduction Goal by 2035
Diversity, Equity and Inclusion
Employees of Color
15%
17%
Target
Controllable Spend with Diverse Suppliers
11%
15%
Target
4 | 2021 Annual Report
SUSTAINABILITY IN SOLAR
In 2020, Essential announced it would be sourcing nearly 100% of its electric power
from renewables by 2022 for its water and wastewater operations in Illinois, New
Jersey, Ohio and Pennsylvania. We also entered into a purchase power agreement to
source 25% of our electricity from solar power for our Texas operations. One project
at a time, we continue to work toward our goal of reducing our carbon footprint.
In Danville, Illinois, we completed construction and brought our brand-
new 8,000-panel solar farm online in July 2021. The electricity generated
from the solar panels goes straight to our Illinois water company’s
water treatment plant and is estimated to save approximately $4 million
over the next 25 years, directly leading to ratepayer savings.
We are also committed to using solar power to better the environment and
overcome operational challenges in our gas business. Solar technology is used to
power remote telemetry equipment in the field to feed critical information to
data systems. Solar powered equipment is utilized on remote automated valve
actuators, allowing for remote operations of valves in the field. These solar solutions
are low maintenance and cost less than other alternative sources of power.
New
8,000-panel
solar farm
Saves
$4 million
over 25 years
which directly
benefits our
customers’
utility rates
COMMITMENT TO DIVERSITY, EQUITY & INCLUSION
Essential reaffirms our dedication to diversity, equity and inclusion
by setting ambitious targets to transition toward a more diverse
and inclusive company, as we recognize that diverse perspectives
and experiences strengthen the fabric of Essential.
As of year-end 2021, we reached 15% employees of color towards our
multi-year 17% target, established to more accurately reflect the composition
of the communities we serve. In addition, nearly 11% of our controllable
spending was with diverse suppliers, towards our multi-year target of 15%.
n Do not make assumptions about how someone identifies or force them to share.
n Use language that is inclusive for all genders and sexual orientations,
n Learn more about the LGBTQ+ community and how to be an ally at
n Share your pronouns during introductions or in your email signature.
such as “all” or “everyone” and “spouse” or “partner.”
or the Employee Ethics Helpline (800.461.9330).
hrc.org/resources/being-an-lgbtq-ally.
n Speak up for LGBTQ+ equality and report discrimination to Human Resources
Essential is proud to support our employee resource groups to foster a diverse
and inclusive workplace, and we continue to explore the ways in which we can
recruit diverse talent and ensure that our commitment to diversity hiring is carried
out at every level, up through our management team and board of directors.
people, and who advocates for equal rights and fair treatment.
An ally is a person who actively supports and accepts LGBTQ+
What is an LGBTQ+ Ally?
n Respect, listen to, and support LGBTQ+ colleagues.
Be an Ally at Essential:
ESSENTIAL PRIDE
E M P L O Y E E R E S O U R C E G R O U P
ALLY
In October 2021,
Essential was proud
to be recognized as
a Champion of Board
Diversity by The Forum
of Executive Women
for having one-third of
our board comprised
of women. This is
a testament to our
commitment and a
great steppingstone
toward our overarching
ESG goals.
2021 Annual Report | 5
Scan tolearn more! RELIABLE
INFRASTRUCTURE
INVESTMENT
RECORD INFRASTRUCTURE INVESTMENT
Essential is committed to renewing and improving our nation’s water,
wastewater and natural gas infrastructure through thoughtful and
continuous capital investment, enabling us to deliver on our mission
of safely and reliably providing Earth’s most essential resources.
In 2021, we invested a record of more than $1 billion to improve water
and natural gas infrastructure systems and replaced or retired 470
miles of aging gas and water mains. We remain committed to ongoing
record levels of infrastructure replacement and anticipate investing
approximately $3 billion through 2024 towards this commitment.
We are proud to play a leading role in providing solutions that enable us to
enhance customer service and environmental impact across our operations.
More than
$1 billion
invested in
infrastructure
470 MILES
of pipeline retired
or replaced
INVESTING IN THE
COMMUNITIES WE SERVE
GOODWIN AND TOMBAUGH SYSTEM
In 2020, Peoples Gas began a 7-year effort in southwestern
Pennsylvania to replace more than 300 miles of antiquated
bare steel pipelines, known as the Goodwin and Tombaugh
System. This system had originally been created to serve
a remote, rural population of nearly 1,700 customers.
Rural populations are among the most underserved in our nation.
Rural topography makes ongoing repairs to infrastructure difficult.
Our decision was made to replace the aging bare steel with
modern plastic pipe, rather than continue to make temporary
repairs. This transformation protects the environment by reducing
methane emissions and provides a new level of customer service
that this population this population never previously experienced.
It further promotes economic development by attracting new
businesses to the area and supports future job creation.
We’re not just in the business of replacing pipes, we’re in the
business of serving our customers. What we’re doing in this entire
corner of Southwestern Pennsylvania will serve these customers
and promote the entire region for decades.
Paul Becker, Peoples Vice President of Construction & Engineering
6 | 2021 Annual Report
Damage sustained at Pickering West Water Treatment Plant during Hurricane Ida.
RESILIENCY DURING HURRICANE IDA
Essential’s mission is protecting and providing Earth’s most essential resources.
While we are not immune to natural disasters, our planning and operational
excellence ensure that service remains dependable and accessible for all.
Just before Labor Day 2021, our disaster response plan was put to the
test when Hurricane Ida rolled through southeastern Pennsylvania,
bringing record rainfall and severely damaging the Pickering West Water
Treatment Plant, Aqua Pennsylvania’s largest suburban Philadelphia
water treatment facility. For perspective, 20% of the normal annual
rain fell in a six-hour period. This historic and catastrophic flooding
disabled operations for nine days and affected service to approximately
1 million customers’ homes and businesses in four counties.
Immediately after floodwaters receded, a team of employees and
contractors worked around the clock to optimize production at our
other plants and ensure that service continued without disruption.
Aqua Pennsylvania’s robust distribution infrastructure improved over
recent years, coupled with system redundancy, enabled us to reroute
drinking water to compensate for the loss at Pickering West.
As we experienced first-hand with this storm, it is imperative to maintain,
improve and protect the safety of our nation’s infrastructure and have
actionable natural disaster plans in place to provide reliable service to
our customers. It is with this in mind that we plan for the future and
remain steadfast in our mission to provide essential resources for life.
The operational excellence
our team exhibited, in
addition to our proactive
disaster preparedness,
facilitated this swift
response and ensured we
restored and continued to
deliver reliable service for
our customers.
Marc Lucca, Aqua Pennsylvania
President
COMMUNITY RECOGNITION
Several preschool, elementary and middle school students
from the Atwater community in Malvern, PA. were part
of a group that expressed their appreciation for Aqua
Pennsylvania employees in Schuylkill Township, Chester
County. Students collected donations from neighbors to
purchase Wawa gift cards and made handmade thank-
you cards to show their appreciation for the Pickering
Water Treatment Plant employees who maintained
water service during the remnants of Hurricane Ida.
On the far right of this photo are members of the Atwater community
with Todd Duerr, Aqua Pennsylvania vice president, production; Jeff
Bickel, director, production; and Dave Marozzi, plant superintendent.
2021 Annual Report | 7
RELIABLE CUSTOMER
COMMITMENT
EXCELLENCE IN WATER QUALITY
Our commitment to protecting public health and ensuring
safe water remains at the center of all we do, which is
why we are proud of our brand new, state-of-the-art
environmental laboratory at our headquarters in Bryn Mawr.
The new lab, which began operations in March of 2021, is more
than double the size of our previous lab that served our company
for more than 60 years. It is one of only two utility laboratories
accredited, and the only utility lab certified to test for Per- and
polyfluoroalkyl substances (PFAS) contaminants in Pennsylvania.
As part of our ongoing promise to ensure safe water for our
customers, we committed to testing every one of our 1,500
water sources to understand where PFAS exists. We are proud
that our new lab is equipped to continue this capability.
EXCEEDING INDUSTRY
WATER QUALITY
REQUIREMENTS
In 2020, we took the first step in
necessary capital investment to
install mitigation technology at water
treatment facilities where source water
exceeds 13 parts per trillion (ppt)
for PFOA, PFAS and PFNA chemicals,
which is significantly lower than the
EPA health advisory level of 70 ppt.
Our new 14,700 square-foot lab guarantees our ability to deliver
safe water to our customers and return clean water to our streams.
Aqua is at the forefront of water quality testing as part of our
ongoing safety and reliability commitment to our communities.
Christine Brisbin, Water Quality Director
8 | 2021 Annual Report
COMMITMENT TO
AFFORDABILITY & ACCESS
Essential passionately believes that every customer, regardless of income,
deserves access to reliable water and gas services at an affordable rate.
Through various customer support programs, we provide financial assistance
to those who may need a helping hand, and we strive to ensure that this
messaging is widely distributed to reach as many customers as possible.
The Low-Income Home Energy Assistance Program (LIHEAP) is a federally
funded assistance program designed to financially support customers with
their home heating needs. Similarly, the Customer Assistance Program (CAP)
aims to provide affordable, monthly, long-term bill payment plans, based on
income, to help Peoples’ customers best manage their gas service.
We have similar programs in place for water and wastewater to ensure no
customer is without water service in times of financial hardship. In October,
we began promoting the rollout of the 2021 Low Income Household Water
Assistance Program (LIHWAP), a national program established through the
American Rescue Plan Act to help families experiencing financial challenges
due to the ongoing COVID-19 pandemic. As the program launched in each
state, Essential worked to publicize the availability of funding to water
customers in Pennsylvania, Ohio, Illinois, Indiana and North Carolina.
We are wholeheartedly committed to keeping rates as low as possible
and working with our customers who are experiencing financial
hardship, as we strive to ensure safe and reliable water, wastewater
and natural gas service is both accessible and affordable.
Rita Black, Director of Community Assistance Programs
CUSTOMER EDUCATION & OUTREACH
Part of our ongoing commitment to provide safe, reliable service is
dependent on our public outreach to our customers. Year after year,
Essential shares educational tools on conserving water and natural
gas and avoiding service issues through customer mailers, social media
and our website blog.
We provide proactive tips on how to avoid clogged pipes, best
practices to prevent frozen pipes in cold weather, who to call before
starting an excavation project and more. We also provide automatic
notifications through Aqua’s WaterSmart alerts and Peoples’
outage map and alert system, designed to relay information quickly
and reliably in times of emergencies or service disruption.
We continue to demonstrate our commitment to our communities to
educate and equip our customers to join us as responsible stewards of
these precious resources.
2021 Annual Report | 9
RELIABLE COMMUNITY
PARTNER
CARING ABOUT COMMUNITY
As a utility provider, Essential is committed to ensuring reliable
and safe access to natural resources. As a mission-based
organization, we are also driven to improve the quality of
life and livelihood of our customers and communities within
our company footprint. That is why we started the Essential
Foundation, which provides grants to nonprofits working to
improve the communities where we live and work. In 2021,
Essential provided more than $4.6 million in charitable giving.
The company also encourages its employees to engage in
philanthropy through its United Way campaign and matching gift
program. Each year, we embark on a company-wide initiative with
the United Way to fulfill a variety of needs across our 10-state
footprint. Our 2021 campaign raised more than $800,000 in total
contributions. In addition, the Essential Foundation matches
employee donations to 501(c)3 charitable organizations.
We also work to cultivate a culture of volunteerism, recognizing
that donating our time can be as meaningful to our employees as
it is to our communities. We speak often of the ripple effect our
volunteerism has by fostering an environment where everyone
feels inspired to play an integral part.
While COVID-19 inhibited our public volunteer programs, our
employees remained committed to our mission, supporting the
United Way campaign and participating in volunteer efforts
such as stream clean-ups, food banks and disaster relief.
The Essential Foundation provided $75,000 to the West Chester University Resource
Pantry to help minimize food and basic need insecurities among college students.
2021 CHARITABLE DONATIONS: $4,619,050
$1,601,264
Direct Human Services
$549,486
Environment
$262,406
Diversity & Inclusion
$1,547,370
Community Support
& Economic Growth
$435,150
Education
$210,820
Emergency Services
1,800+
Hours
$12,554
Matching
Employee Gifts
Through our community volunteer program, Essential team
members serve their communities in meaningful ways,
enriching their lives and making a positive impact on others.
Krista Scheirer, Lead Corporate Giving and Community Affairs
10 | 2021 Annual Report
THE DONATIONBREAKDOWN THE RIPPLE EFFECT OF A CULTURE OF VOLUNTEERISM
Essential operates in 10 states across the country, but our presence is felt locally throughout our service
territory. We thrive when our communities thrive, and we proudly contribute time and resources to
strengthen our communities. We aim to be a good corporate partner and model the gift of volunteerism
across our company, but occasionally it’s our employees who provide that gift to us.
Shawn Boyer Thanksgiving Drive
Shawn Boyer is the Security Lead at Aqua
Pennsylvania and perfectly embodies our
commitment to giving back. In November 2009,
Shawn began an annual yearly tradition of
delivering care packages to people experiencing
homelessness throughout Philadelphia. He spends
each Thanksgiving driving the city streets in a
U-Haul, providing curated care packages containing
basic necessities. In 2021, Shawn completed his
12th round of Thanksgiving deliveries, giving away
nearly 400 bags. For many years, Shawn kept his
tradition private. Word began to spread, however,
and in recent years Shawn has been joined by
Essential leadership, including Chris Franklin, Chris
Luning and Chris Kelly, all of whom have helped to
distribute care packages throughout the holiday.
Travis Leonard Sleep in Heavenly Peace
Travis Leonard is an Aqua Ohio employee who
works in the Struthers, Ohio division and inspired
his entire team to come together in a meaningful
way. Travis is a volunteer with Sleep in Heavenly
Peace, an organization dedicated to building,
assembling and delivering fully outfitted beds to
children and families in need. When he shared
his involvement with the organization with his
coworkers, they learned their local city council was
fundraising for the cause but was short the funding
needed to complete the project. Together with his
area manager, they committed to help with the
project. Aqua Ohio donated the remaining money
needed to purchase all materials, and seven of his
coworkers came together on a cold Saturday
morning to help build the remaining beds needed
for the project.
Shawn and Travis are just two examples of the generous, dedicated people we have behind the scenes,
enabling us to provide essential resources while making a positive impact in our communities. These
selfless acts are a humbling reminder of our commitment to strengthening our communities and making
investments in the areas we serve. We are proud of the work we do as a company, and even more proud
to employ people like Shawn and Travis who inspire us all to be better every day. When employees are
passionate about giving back to their communities, Essential is thrilled to support them.
2021 Annual Report | 11
Shawn 2021 FINANCIAL DATA
12 | 2021 Annual Report
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,” “estimates”, “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:
impacts from the global outbreak of COVID-19, including on consumption, usage and collections.
the success in the closing of, and the profitability of future acquisitions;
changes in general economic, business, credit and financial market conditions;
our ability to manage the expansion of our business, including our ability to manage our expanded operations
resulting from the Peoples Gas Acquisition;
changes in environmental conditions, including the effects of climate change;
our ability to integrate and otherwise realize all of the anticipated benefits of businesses, technologies or
services which we may acquire;
the decisions of governmental and regulatory bodies, including decisions on regulatory filings, including rate
increase requests and decisions regarding potential acquisitions;
the impact of inflation on our business and on our customers;
abnormal weather conditions, including those that result in water use restrictions;
the seasonality of our business;
our ability to file rate cases on a timely basis to minimize regulatory lag;
our ability to treat and supply water or collect and treat wastewater;
our ability to source sufficient natural gas to meet customer demand in a timely manner;
the continuous and reliable operation of our information technology systems, including the impact of cyber
security attacks or other cyber-related events;
changes in governmental laws, regulations and policies, including those dealing with taxation, the
environment, health and water quality, and public utility regulation;
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;
inflation in the costs of goods and services;
the effect of natural gas price volatility;
civil disturbance or terroristic threats or acts;
changes to the rules or our assumptions underlying our determination of what qualifies for an income tax
deduction for qualifying utility asset improvements;
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;
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
litigation and claims; and
restrictions on our subsidiaries’ ability to make dividends and other distributions.
COVID-19 Pandemic
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 in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2021.
OVERVIEW
The following discussion and analysis of our financial condition and results of operations for 2021 compared to 2020
should be read together with our Consolidated Financial Statements and accompanying Notes included in this Annual
Report. For discussion of our results of operations and cash flows for 2020 compared with 2019, 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, 2020, filed with the SEC on March 1, 2021. 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., (Essential Utilities, the Company, we, us, or our), a Pennsylvania corporation, is the holding
company for regulated utilities providing water, wastewater, or natural gas services to an estimated five million people in
Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Kentucky under
the Aqua and Peoples brands. One of our largest operating subsidiaries, Aqua Pennsylvania, Inc. (Aqua Pennsylvania),
provides water or wastewater services to approximately one-half of the total number of water or wastewater customers we
serve. These customers are located in the suburban areas in counties north and west of the City of Philadelphia and in 27
other counties in Pennsylvania. Our other regulated water or wastewater utility subsidiaries provide similar services in
seven additional states. Additionally, pursuant to the Company’s growth strategy, commencing on March 16, 2020, with
the completion of the Peoples Gas Acquisition, the Company began to provide natural gas distribution services to
customers in western Pennsylvania, Kentucky, and West Virginia. Approximately 93% of the total number of natural gas
utility customers we serve are in western Pennsylvania. Lastly, the Company’s market-based activities are conducted
through Aqua Infrastructure, LLC and Aqua Resources, Inc. and certain other non-regulated subsidiaries of Peoples. Prior
to our October 30, 2020 sale of our investment in a joint venture, Aqua Infrastructure provided non-utility raw water
supply services for firms in the natural gas drilling industry. Following the October 30, 2020 closing, Aqua Infrastructure
does not provide any services to the natural gas drilling industry. Aqua Resources offers, through a third-party, water and
sewer service line protection solutions and repair services to households. Other non-regulated subsidiaries of Peoples
provide utility service line protection services to households and operate gas marketing and production businesses.
We provide a critical service to our customers, which means that it is paramount that we keep our employees who operate
the business safe and informed while supporting our customers and assuring the continuity of our operations. We continue
to monitor the COVID-19 pandemic and continue to take steps to mitigate the potential risks to our employees. We
continue to implement strong physical and cyber security measures in an effort to ensure that our systems remain
functional in order to both serve our operational needs with a hybrid workforce and maintain uninterrupted service to our
customers. We continue to monitor developments affecting our business, workforce, and suppliers and take additional
precautions as we believe are warranted. We are continuing with our capital investment program and continue to work
with our suppliers to monitor and address the risks present in our supply chain. While we have experienced some delays in
certain materials, we have been able to adjust our purchasing procedures to secure and stock the necessary materials
without materially impacting our operations or capital investment program. We are actively monitoring our utility billings
for changes in residential, commercial and industrial usage. In addition, we are monitoring collections of customer utility
accounts as to potential impacts on cash flows, and increased expenses for costs associated with workforce-related
expenses, security and cleaning of company offices and operating facilities, as well as other one-time expenses above the
expense amounts included in general rates.
While the pandemic presents risks to the Company's business, as further described in Part I, Item 1A — Risk Factors in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, the Company has not experienced any
material financial or operational impacts related to COVID-19. Despite our efforts, the potential for a material negative
impact on the Company exists as the COVID-19 pandemic also depends on factors beyond our knowledge, control, or
ability to predict, including the duration and severity of this pandemic, the emergence of new variants of the virus, the
development and availability of effective treatments and vaccines, as well as third party actions taken to contain its spread
and mitigate its public health effects.
Economic Regulation
Most of our 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. 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 on 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 – The mission of the regulated utility industry is to provide quality and reliable utility
service at reasonable rates to customers, while earning a fair return for shareholders. 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. 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 utility rates are established to provide full recovery of utility
2
3
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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
restrictions on our subsidiaries’ ability to make dividends and other distributions.
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 in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2021.
OVERVIEW
The following discussion and analysis of our financial condition and results of operations for 2021 compared to 2020
should be read together with our Consolidated Financial Statements and accompanying Notes included in this Annual
Report. For discussion of our results of operations and cash flows for 2020 compared with 2019, 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, 2020, filed with the SEC on March 1, 2021. 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., (Essential Utilities, the Company, we, us, or our), a Pennsylvania corporation, is the holding
company for regulated utilities providing water, wastewater, or natural gas services to an estimated five million people in
Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Kentucky under
the Aqua and Peoples brands. One of our largest operating subsidiaries, Aqua Pennsylvania, Inc. (Aqua Pennsylvania),
provides water or wastewater services to approximately one-half of the total number of water or wastewater customers we
serve. These customers are located in the suburban areas in counties north and west of the City of Philadelphia and in 27
other counties in Pennsylvania. Our other regulated water or wastewater utility subsidiaries provide similar services in
seven additional states. Additionally, pursuant to the Company’s growth strategy, commencing on March 16, 2020, with
the completion of the Peoples Gas Acquisition, the Company began to provide natural gas distribution services to
customers in western Pennsylvania, Kentucky, and West Virginia. Approximately 93% of the total number of natural gas
utility customers we serve are in western Pennsylvania. Lastly, the Company’s market-based activities are conducted
through Aqua Infrastructure, LLC and Aqua Resources, Inc. and certain other non-regulated subsidiaries of Peoples. Prior
to our October 30, 2020 sale of our investment in a joint venture, Aqua Infrastructure provided non-utility raw water
supply services for firms in the natural gas drilling industry. Following the October 30, 2020 closing, Aqua Infrastructure
does not provide any services to the natural gas drilling industry. Aqua Resources offers, through a third-party, water and
sewer service line protection solutions and repair services to households. Other non-regulated subsidiaries of Peoples
provide utility service line protection services to households and operate gas marketing and production businesses.
COVID-19 Pandemic
We provide a critical service to our customers, which means that it is paramount that we keep our employees who operate
the business safe and informed while supporting our customers and assuring the continuity of our operations. We continue
to monitor the COVID-19 pandemic and continue to take steps to mitigate the potential risks to our employees. We
continue to implement strong physical and cyber security measures in an effort to ensure that our systems remain
functional in order to both serve our operational needs with a hybrid workforce and maintain uninterrupted service to our
customers. We continue to monitor developments affecting our business, workforce, and suppliers and take additional
precautions as we believe are warranted. We are continuing with our capital investment program and continue to work
with our suppliers to monitor and address the risks present in our supply chain. While we have experienced some delays in
certain materials, we have been able to adjust our purchasing procedures to secure and stock the necessary materials
without materially impacting our operations or capital investment program. We are actively monitoring our utility billings
for changes in residential, commercial and industrial usage. In addition, we are monitoring collections of customer utility
accounts as to potential impacts on cash flows, and increased expenses for costs associated with workforce-related
expenses, security and cleaning of company offices and operating facilities, as well as other one-time expenses above the
expense amounts included in general rates.
While the pandemic presents risks to the Company's business, as further described in Part I, Item 1A — Risk Factors in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, the Company has not experienced any
material financial or operational impacts related to COVID-19. Despite our efforts, the potential for a material negative
impact on the Company exists as the COVID-19 pandemic also depends on factors beyond our knowledge, control, or
ability to predict, including the duration and severity of this pandemic, the emergence of new variants of the virus, the
development and availability of effective treatments and vaccines, as well as third party actions taken to contain its spread
and mitigate its public health effects.
Economic Regulation
Most of our 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. 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 on 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 – The mission of the regulated utility industry is to provide quality and reliable utility
service at reasonable rates to customers, while earning a fair return for shareholders. 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. 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 utility rates are established to provide full recovery of utility
2
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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.
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 be reflected in rates, and may not yet be requested, 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
As of December 31, 2021, the Company’s rate base is estimated to be $8,600,000, which is comprised of:
$5,900,000 in the Regulated Water segment; and
$2,700,000 in the Regulated Natural Gas segment.
As of December 31, 2021, the regulatory status of the Company’s rate base is estimated to be as follows:
$7,200,000 filed with respective state utility commissions or local regulatory authorities; and
$1,400,000 not yet filed with respective state utility commissions or local regulatory authorities.
Our water and wastewater operations are composed of 45 rate divisions, and our natural gas operations are comprised of 4
rate divisions. Each of our utility rate divisions require 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 water and wastewater utilities 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.
Our operating subsidiaries received rate increases representing estimated annualized revenues of $3,390 in 2021 resulting
from six base rate decisions, $4,480 in 2020 resulting from five base rate decisions, and $52,974 in 2019 resulting from
four base rate decisions. Revenues from these increases realized in the year of grant were $2,995 in 2021, $1,594 in 2020,
and $32,287 in 2019.
Revenue Surcharges – Eight states in which we operate water and wastewater utilities, and three states in which we
operate natural gas 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, 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 substantially
reduce regulatory lag, which could act as a disincentive for 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. Additional information regarding revenue surcharges is provided in Note 17 – Rate Activity in this Annual
Report.
Inflation and Operating Costs – 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 or gas consumption, weather
conditions, and the degree of water treatment required due to variations in the quality of the raw water. The principal
elements of operating costs are purchased gas, 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 or gas consumption, raw water quality, wastewater volumes, and price
changes. Maintenance expenses are sensitive to extremely cold weather, which can cause utility mains to rupture and
natural gas service lines to freeze, resulting in additional costs to repair the affected mains.
Materials and supplies, freight, and labor inflation resulted in increased costs in fiscal 2021, and we expect this trend will
continue in fiscal 2022. Recovery of the effects of inflation through higher customer 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
inflation, the effects of inflation can have a negative impact on our operating results.
Our natural gas distribution operations are also affected by the cost of natural gas. We are able to generally pass the cost
of gas to our customers without markup under purchase gas cost adjustment mechanisms; therefore, increases in the cost
of gas are offset by a corresponding increase in revenues. However, higher gas costs may adversely impact our accounts
receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us
to collect from our customers a portion of our bad debt expense. Additionally, higher gas costs may require us to increase
borrowings under our credit facilities, resulting in higher interest expense. A typical residential natural gas bill includes
charges for the cost of gas, delivery, and other charges. As of January 1, 2022, the annual portion of a typical Peoples
Natural Gas residential bill related to gas costs is approximately 49%. In periods when we experience market increases in
natural gas costs, such as in 2021, customer affordability and usage may be reduced. Customer conservation measures
may occur that can reduce natural gas revenues, either temporarily or over time.
Income Tax Accounting Change - On March 31, 2020, the Company changed the method of tax accounting for certain
qualifying infrastructure investments at its Peoples Natural Gas subsidiary, its largest natural gas subsidiary in
Pennsylvania. This change allows a tax deduction for qualifying utility asset improvement costs that were formerly
capitalized for tax purposes. Consistent with the Company’s accounting for differences between book and tax
expenditures for its Aqua Pennsylvania subsidiary, the Company is utilizing the flow-through method to account for this
timing difference. In addition, the Company calculated the income tax benefits for qualifying capital expenditures made
prior to March 16, 2020 (catch-up adjustment) and has recorded a regulatory liability for $160,655 for these income tax
benefits. In August 2020, the Company filed a petition with the Pennsylvania Public Utility Commission proposing
treatment of the catch-up adjustment. On March 11, 2021, the Company and the statutory advocates filed a Joint Petition
of Settlement (Settlement) representing a settlement of the parties, and, on May 6, 2021, it was approved by the
Pennsylvania Public Utility Commission. The Settlement stipulates, among other points, that the catch-up adjustment be
provided to utility customers over a five-year period, and the Company can continue to use flow-through accounting for
the current tax repair benefit until its next base rate case. The five-year customer surcredit for the catch-up adjustment was
initiated in August 2021. In addition, consistent with the Settlement, the Company contributed $500 to a customer-bill
payment assistance program in July 2021 and in December 2021, provided $5,000 in customer rate credit relief for past-
due accounts of natural gas customers impacted by the COVID-19 pandemic.
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, 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 utility 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.
4
5
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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)
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, 2021, the Company’s rate base is estimated to be $8,600,000, which is comprised of:
$5,900,000 in the Regulated Water segment; and
$2,700,000 in the Regulated Natural Gas segment.
As of December 31, 2021, the regulatory status of the Company’s rate base is estimated to be as follows:
$7,200,000 filed with respective state utility commissions or local regulatory authorities; and
$1,400,000 not yet filed with respective state utility commissions or local regulatory authorities.
Our water and wastewater operations are composed of 45 rate divisions, and our natural gas operations are comprised of 4
rate divisions. Each of our utility rate divisions require 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 water and wastewater utilities 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.
Our operating subsidiaries received rate increases representing estimated annualized revenues of $3,390 in 2021 resulting
from six base rate decisions, $4,480 in 2020 resulting from five base rate decisions, and $52,974 in 2019 resulting from
four base rate decisions. Revenues from these increases realized in the year of grant were $2,995 in 2021, $1,594 in 2020,
and $32,287 in 2019.
Revenue Surcharges – Eight states in which we operate water and wastewater utilities, and three states in which we
operate natural gas 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, 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 substantially
reduce regulatory lag, which could act as a disincentive for 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. Additional information regarding revenue surcharges is provided in Note 17 – Rate Activity in this Annual
Report.
Inflation and Operating Costs – 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 or gas consumption, weather
conditions, and the degree of water treatment required due to variations in the quality of the raw water. The principal
elements of operating costs are purchased gas, 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 or gas consumption, raw water quality, wastewater volumes, and price
changes. Maintenance expenses are sensitive to extremely cold weather, which can cause utility mains to rupture and
natural gas service lines to freeze, resulting in additional costs to repair the affected mains.
Materials and supplies, freight, and labor inflation resulted in increased costs in fiscal 2021, and we expect this trend will
continue in fiscal 2022. Recovery of the effects of inflation through higher customer 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 be reflected in rates, and may not yet be requested, 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.
Our natural gas distribution operations are also affected by the cost of natural gas. We are able to generally pass the cost
of gas to our customers without markup under purchase gas cost adjustment mechanisms; therefore, increases in the cost
of gas are offset by a corresponding increase in revenues. However, higher gas costs may adversely impact our accounts
receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us
to collect from our customers a portion of our bad debt expense. Additionally, higher gas costs may require us to increase
borrowings under our credit facilities, resulting in higher interest expense. A typical residential natural gas bill includes
charges for the cost of gas, delivery, and other charges. As of January 1, 2022, the annual portion of a typical Peoples
Natural Gas residential bill related to gas costs is approximately 49%. In periods when we experience market increases in
natural gas costs, such as in 2021, customer affordability and usage may be reduced. Customer conservation measures
may occur that can reduce natural gas revenues, either temporarily or over time.
Income Tax Accounting Change - On March 31, 2020, the Company changed the method of tax accounting for certain
qualifying infrastructure investments at its Peoples Natural Gas subsidiary, its largest natural gas subsidiary in
Pennsylvania. This change allows a tax deduction for qualifying utility asset improvement costs that were formerly
capitalized for tax purposes. Consistent with the Company’s accounting for differences between book and tax
expenditures for its Aqua Pennsylvania subsidiary, the Company is utilizing the flow-through method to account for this
timing difference. In addition, the Company calculated the income tax benefits for qualifying capital expenditures made
prior to March 16, 2020 (catch-up adjustment) and has recorded a regulatory liability for $160,655 for these income tax
benefits. In August 2020, the Company filed a petition with the Pennsylvania Public Utility Commission proposing
treatment of the catch-up adjustment. On March 11, 2021, the Company and the statutory advocates filed a Joint Petition
of Settlement (Settlement) representing a settlement of the parties, and, on May 6, 2021, it was approved by the
Pennsylvania Public Utility Commission. The Settlement stipulates, among other points, that the catch-up adjustment be
provided to utility customers over a five-year period, and the Company can continue to use flow-through accounting for
the current tax repair benefit until its next base rate case. The five-year customer surcredit for the catch-up adjustment was
initiated in August 2021. In addition, consistent with the Settlement, the Company contributed $500 to a customer-bill
payment assistance program in July 2021 and in December 2021, provided $5,000 in customer rate credit relief for past-
due accounts of natural gas customers impacted by the COVID-19 pandemic.
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, 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 utility 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.
4
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
On March 16, 2020, we completed the acquisition of Peoples Natural Gas (the Peoples Gas Acquisition), which expanded
the Company’s regulated utility business to include natural gas distribution, serving approximately 750,000 natural gas
utility customers in western Pennsylvania, West Virginia, and Kentucky.
During 2021, we completed two acquisitions of water and wastewater systems, which along with the organic growth in
our existing systems, represents 21,364 new customers. During 2020, in addition to the Peoples Gas Acquisition, we
completed six acquisitions of water and wastewater systems, which along with the organic growth in our existing systems,
represents 24,169 new customers. During 2019, we completed eight acquisitions, which along with the organic growth in
our existing systems, represents 21,613 new customers.
The Company currently has eight signed purchase agreements for additional water and wastewater systems that are
expected to serve approximately 235,000 equivalent retail customers or equivalent dwelling units and total
approximately $471,000 in purchase price in three of our existing states. This includes the Company’s agreement to
acquire the Delaware County Regional Water Quality Control Authority (DELCORA) for $276,500. DELCORA,
a Pennsylvania sewer authority, serves approximately 198,000 equivalent dwelling units in the Philadelphia suburbs.
Refer to Note 2 – Acquisitions in this Annual Report for further discussion.
As of December 31, 2021, the pipeline of potential water and wastewater municipal acquisitions the company is actively
pursuing represents approximately 400,000 total customers or equivalent dwelling units. The Company remains on track
to, on average, annually increase customers between 2 and 3% through acquisitions and organic customer growth.
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;
• gross margin;
•
•
•
• net income; and
•
the dividend rate on common stock.
earnings before interest, taxes, and depreciation (EBITD);
income adjusted to remove transaction-related expenses associated with the Peoples Gas Acquisition;
earnings before income taxes;
In addition, we consider other key measures in evaluating our utility business performance within our Regulated Water
and Natural Gas segments:
• 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 and gross margin, 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 meaningful way to compare the Company’s
operating performance against its historical financial results. We believe EBITD is a relevant and useful indicator of
6
7
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 businesses. Furthermore,
we review the measure of earnings before unusual items that are not directly related to our core businesses, 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. Refer to Note 11 – Long-term Debt
and Loans Payable in this Annual Report for information regarding the interest rate swap agreements.
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 utilities. Additionally, our Regulated Natural Gas segment is affected
by the cost of natural gas, which is passed through to customers using a purchased gas adjustment mechanism and
includes commodity price, transportation and storage costs. These costs are reflected in the consolidated statement of
operations and comprehensive income as purchased gas expenses. Therefore, fluctuations in the cost of purchased gas
impact operating revenues on dollar-for-dollar basis, but does not impact gross margin. Management uses gross margin, a
non-GAAP financial measure, defined as operating revenues less purchased gas expense, to analyze the financial
performance of our Regulated Natural Gas segment, as management believes gross margin provides a meaningful basis
for evaluating our natural gas utility operations since purchased gas expenses are included in operating revenues and
passed through to customers.
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 usage as impacted by
adverse weather conditions, or conservation trends. 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 consisting of our non-regulated natural gas operations, 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 or Regulated Natural Gas segments.
We continue to evaluate initiatives to help control operating costs and improve efficiencies.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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 March 16, 2020, we completed the acquisition of Peoples Natural Gas (the Peoples Gas Acquisition), which expanded
the Company’s regulated utility business to include natural gas distribution, serving approximately 750,000 natural gas
utility customers in western Pennsylvania, West Virginia, and Kentucky.
During 2021, we completed two acquisitions of water and wastewater systems, which along with the organic growth in
our existing systems, represents 21,364 new customers. During 2020, in addition to the Peoples Gas Acquisition, we
completed six acquisitions of water and wastewater systems, which along with the organic growth in our existing systems,
represents 24,169 new customers. During 2019, we completed eight acquisitions, which along with the organic growth in
our existing systems, represents 21,613 new customers.
The Company currently has eight signed purchase agreements for additional water and wastewater systems that are
expected to serve approximately 235,000 equivalent retail customers or equivalent dwelling units and total
approximately $471,000 in purchase price in three of our existing states. This includes the Company’s agreement to
acquire the Delaware County Regional Water Quality Control Authority (DELCORA) for $276,500. DELCORA,
a Pennsylvania sewer authority, serves approximately 198,000 equivalent dwelling units in the Philadelphia suburbs.
Refer to Note 2 – Acquisitions in this Annual Report for further discussion.
As of December 31, 2021, the pipeline of potential water and wastewater municipal acquisitions the company is actively
pursuing represents approximately 400,000 total customers or equivalent dwelling units. The Company remains on track
to, on average, annually increase customers between 2 and 3% through acquisitions and organic customer growth.
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 before interest, taxes, and depreciation (EBITD);
income adjusted to remove transaction-related expenses associated with the Peoples Gas Acquisition;
earnings per share;
• operating revenues;
• gross margin;
earnings before income taxes;
• net income; and
the dividend rate on common stock.
and Natural Gas segments:
• our number of utility customers;
“operating expense ratio”);
•
•
•
•
•
•
•
•
•
•
In addition, we consider other key measures in evaluating our utility business performance within our Regulated Water
the ratio of operations and maintenance expense compared to operating revenues (this percentage is termed
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 and gross margin, 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 meaningful way to compare the Company’s
operating performance against its historical financial results. We believe EBITD 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 businesses. Furthermore,
we review the measure of earnings before unusual items that are not directly related to our core businesses, 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. Refer to Note 11 – Long-term Debt
and Loans Payable in this Annual Report for information regarding the interest rate swap agreements.
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 utilities. Additionally, our Regulated Natural Gas segment is affected
by the cost of natural gas, which is passed through to customers using a purchased gas adjustment mechanism and
includes commodity price, transportation and storage costs. These costs are reflected in the consolidated statement of
operations and comprehensive income as purchased gas expenses. Therefore, fluctuations in the cost of purchased gas
impact operating revenues on dollar-for-dollar basis, but does not impact gross margin. Management uses gross margin, a
non-GAAP financial measure, defined as operating revenues less purchased gas expense, to analyze the financial
performance of our Regulated Natural Gas segment, as management believes gross margin provides a meaningful basis
for evaluating our natural gas utility operations since purchased gas expenses are included in operating revenues and
passed through to customers.
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 usage as impacted by
adverse weather conditions, or conservation trends. 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 consisting of our non-regulated natural gas operations, 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 or Regulated Natural Gas segments.
We continue to evaluate initiatives to help control operating costs and improve efficiencies.
6
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
Other Operational Measures Considered by Management
RESULTS OF OPERATIONS
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 Regulated Water segment 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.
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, 2021, our operating revenues for our
Regulated Water segment were derived principally from the following states: approximately 55% in Pennsylvania, 12%
in Ohio, 9% in Illinois, 8% in Texas, and 7% in North Carolina.
Heating Degree Days – The regulated natural gas utility business is subject to seasonal fluctuations with the peak usage
period occurring in the heating season which generally runs from October to March. A heating degree day (HDD) is each
degree that the average of the high and the low temperatures for a day is below 65 degrees Fahrenheit in a specific
geographic location. Particularly during the heating season, this measure is used to reflect the demand for natural gas
needed for heating based on the extent to which the average temperature falls below a reference temperature for which no
heating is required (65 degrees Fahrenheit). HDDs are used in the natural gas industry to measure the relative coldness of
weather and to estimate the demand for natural gas. Normal temperatures are based on a historical twenty-year average
heating degree days, as calculated from data provided by the National Weather Service for the same geographic location.
During the year ended December 31, 2021, we experienced actual HDDs of 5,139 days, which was warmer by 6% than
the average or normal HDDs for Pittsburgh, Pennsylvania, which we use as a proxy for our western Pennsylvania service
territory.
Consolidated financial and operational highlights for the years ended December 31, 2021, 2020 and 2019 are presented
below. Our Regulated Natural Gas segment results, which represent Peoples Gas’ operating results, are included since its
acquisition on March 16, 2020. The variance of the operating results in the first quarter of 2021 as compared to 2020 in
the Regulated Natural Gas segment for the timing of the Peoples Gas Acquisition closing, resulted in an increase in the
following income statement amounts for 2021: $304,571 of operating revenues, $42,503 of operations and maintenance
expense, $110,117 of purchased gas expense, $23,022 of depreciation and amortization, $125,149 of operating income,
and $105,853 of net income.
Years ended December 31,
Operating revenues:
Regulated water segment
Regulated gas segment
Other and eliminations
Consolidated operating revenues
Operations and maintenance expense
Net income (1)
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 of interest income
Net income (1)
Return on Essential Utilities stockholders' equity (1)
Ratio of capital expenditures to depreciation expense
Effective tax rate
2021
2020
2019
2021 vs. 2020 2020 vs. 2019
$
980,203 $ 938,540 $ 886,430 $
41,663 $
859,902
38,039
506,564
17,594
-
3,262
353,338
20,445
$ 1,878,144 $ 1,462,698 $ 889,692 $
415,446 $
$
$
550,580 $ 528,611 $ 333,102 $
21,969 $
431,612 $ 284,849 $ 224,543 $
146,763 $
52,110
506,564
14,332
573,006
195,509
60,306
$ 1,020,519 $ 835,642 $ 550,273 $
184,877 $
285,369
29.3%
15.9%
4.6%
10.9%
23.0%
8.3%
3.5
(2.3%)
36.1%
17.6%
5.2%
12.9%
19.5%
6.1%
3.3
(7.5%)
37.4%
17.6%
6.7%
14.1%
25.2%
5.8%
3.5
(6.2%)
-6.8%
-1.7%
-0.6%
-2.0%
3.5%
2.2%
0.2
5.2%
-1.3%
0.0%
-1.5%
-1.2%
-5.7%
0.3%
-0.2
(1.3%)
(1) Reflects Peoples Gas Acquisition transaction-related expenses of $20,925 ($25,573 pre-tax) in 2020 and $18,246 ($22,891 pre-tax) in 2019;
utility customer rate credits issued in 2020 of $23,004 (or $16,357 net of tax); a mark-to-market fair value adjustment expense for 2019 of
$18,756 ($23,742 pre-tax) associated with interest rate swap agreements entered into to mitigate interest rate risk associated with issuance of
long-term debt to fund a portion of the Peoples Gas Acquisition; and in 2019 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.
Consolidated Results of Operations Comparison for 2021 and 2020
Operating revenues - Operating revenues increased by $415,446 or 28.4% for the year ended December 31, 2021
compared to the year ended December 31, 2020. Revenues from our Regulated Water segment increased by $41,663,
Regulated Natural Gas segment by $353,338 and other revenues by $20,445. The growth in our Regulated Water
segment’s revenues is primarily a result of increases in our water and wastewater rates and our customer base. The
increase in our Regulated Natural Gas Revenues is primarily due to a full year of People’s revenue in 2021 compared to
nine months and sixteen days of results in 2020 and higher natural gas cost pass-through to customers. The variance in
operating revenues in the first quarter of 2021 as compared to 2020, as a result of the timing of the Peoples’ acquisition,
was $304,571. Refer below for further details on the changes on Regulated Water and Regulated Natural Gas segment
revenues.
Our other revenues consist of market-based revenues at Aqua Resources, Aqua Infrastructure, and our non-regulated
natural gas operations (post-closing) amounting to $38,435 in 2021, $17,776 in 2020, and $3,395 in 2019. The increase
in other revenues in 2021 as compared to 2020 is largely due to higher purchased gas revenues from our non-regulated
natural gas operations of $15,230 resulting from the timing of Peoples’ acquisition in 2020 and higher gas costs in 2021.
8
9
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 Regulated Water segment 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.
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, 2021, our operating revenues for our
Regulated Water segment were derived principally from the following states: approximately 55% in Pennsylvania, 12%
in Ohio, 9% in Illinois, 8% in Texas, and 7% in North Carolina.
Heating Degree Days – The regulated natural gas utility business is subject to seasonal fluctuations with the peak usage
period occurring in the heating season which generally runs from October to March. A heating degree day (HDD) is each
degree that the average of the high and the low temperatures for a day is below 65 degrees Fahrenheit in a specific
geographic location. Particularly during the heating season, this measure is used to reflect the demand for natural gas
needed for heating based on the extent to which the average temperature falls below a reference temperature for which no
heating is required (65 degrees Fahrenheit). HDDs are used in the natural gas industry to measure the relative coldness of
weather and to estimate the demand for natural gas. Normal temperatures are based on a historical twenty-year average
heating degree days, as calculated from data provided by the National Weather Service for the same geographic location.
During the year ended December 31, 2021, we experienced actual HDDs of 5,139 days, which was warmer by 6% than
the average or normal HDDs for Pittsburgh, Pennsylvania, which we use as a proxy for our western Pennsylvania service
territory.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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 Operational Measures Considered by Management
RESULTS OF OPERATIONS
Consolidated financial and operational highlights for the years ended December 31, 2021, 2020 and 2019 are presented
below. Our Regulated Natural Gas segment results, which represent Peoples Gas’ operating results, are included since its
acquisition on March 16, 2020. The variance of the operating results in the first quarter of 2021 as compared to 2020 in
the Regulated Natural Gas segment for the timing of the Peoples Gas Acquisition closing, resulted in an increase in the
following income statement amounts for 2021: $304,571 of operating revenues, $42,503 of operations and maintenance
expense, $110,117 of purchased gas expense, $23,022 of depreciation and amortization, $125,149 of operating income,
and $105,853 of net income.
Years ended December 31,
Operating revenues:
Regulated water segment
Regulated gas segment
Other and eliminations
Consolidated operating revenues
Operations and maintenance expense
Net income (1)
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 of interest income
Net income (1)
Return on Essential Utilities stockholders' equity (1)
Ratio of capital expenditures to depreciation expense
Effective tax rate
2021
2020
2019
2021 vs. 2020 2020 vs. 2019
$
980,203 $ 938,540 $ 886,430 $
859,902
38,039
506,564
17,594
$ 1,878,144 $ 1,462,698 $ 889,692 $
550,580 $ 528,611 $ 333,102 $
$
$
431,612 $ 284,849 $ 224,543 $
$ 1,020,519 $ 835,642 $ 550,273 $
-
3,262
41,663 $
353,338
20,445
415,446 $
21,969 $
146,763 $
184,877 $
52,110
506,564
14,332
573,006
195,509
60,306
285,369
29.3%
15.9%
4.6%
10.9%
23.0%
8.3%
3.5
(2.3%)
36.1%
17.6%
5.2%
12.9%
19.5%
6.1%
3.3
(7.5%)
37.4%
17.6%
6.7%
14.1%
25.2%
5.8%
3.5
(6.2%)
-6.8%
-1.7%
-0.6%
-2.0%
3.5%
2.2%
0.2
5.2%
-1.3%
0.0%
-1.5%
-1.2%
-5.7%
0.3%
-0.2
(1.3%)
(1) Reflects Peoples Gas Acquisition transaction-related expenses of $20,925 ($25,573 pre-tax) in 2020 and $18,246 ($22,891 pre-tax) in 2019;
utility customer rate credits issued in 2020 of $23,004 (or $16,357 net of tax); a mark-to-market fair value adjustment expense for 2019 of
$18,756 ($23,742 pre-tax) associated with interest rate swap agreements entered into to mitigate interest rate risk associated with issuance of
long-term debt to fund a portion of the Peoples Gas Acquisition; and in 2019 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.
Consolidated Results of Operations Comparison for 2021 and 2020
Operating revenues - Operating revenues increased by $415,446 or 28.4% for the year ended December 31, 2021
compared to the year ended December 31, 2020. Revenues from our Regulated Water segment increased by $41,663,
Regulated Natural Gas segment by $353,338 and other revenues by $20,445. The growth in our Regulated Water
segment’s revenues is primarily a result of increases in our water and wastewater rates and our customer base. The
increase in our Regulated Natural Gas Revenues is primarily due to a full year of People’s revenue in 2021 compared to
nine months and sixteen days of results in 2020 and higher natural gas cost pass-through to customers. The variance in
operating revenues in the first quarter of 2021 as compared to 2020, as a result of the timing of the Peoples’ acquisition,
was $304,571. Refer below for further details on the changes on Regulated Water and Regulated Natural Gas segment
revenues.
Our other revenues consist of market-based revenues at Aqua Resources, Aqua Infrastructure, and our non-regulated
natural gas operations (post-closing) amounting to $38,435 in 2021, $17,776 in 2020, and $3,395 in 2019. The increase
in other revenues in 2021 as compared to 2020 is largely due to higher purchased gas revenues from our non-regulated
natural gas operations of $15,230 resulting from the timing of Peoples’ acquisition in 2020 and higher gas costs in 2021.
8
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
Operating expenses - Operations and maintenance expenses increased in 2021, as compared to 2020, by $21,969 or 4.2%,
primarily due to:
increase in operations and maintenance expenses for our Regulated Natural Gas business of $42,503 representing
the variance in the first quarter of 2021 versus first quarter of 2020 as a result of the timing of the Peoples Gas
Acquisition in 2020;
costs related to the restoration and repair of facilities in southeastern Pennsylvania damaged by Hurricane Ida of
$2,820;
increase in employee related costs of $8,624 related to pension and post-retirement benefits, medical and labor;
increase in insurance expense of $6,397 due to higher insurance claims;
an asset impairment charge of $4,695 to write down a portion of the right of use asset of our Regulated Natural
Gas Segment’s office space to fair value;
increase in outside services of $9,586;
the prior year effect of net insurance proceeds of $2,874 and a reduction in expenses in 2021 of $690 associated
with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect
the expenses associated with remediating the advisory to continue into 2022; offset by
decrease in COVID-19 pandemic related expenses of $18,044 and decrease in charitable donations expense of
$14,014; and,
the prior year effect of transaction expenses of $25,397 in the first quarter of 2020 for the Peoples Gas
Acquisition, primarily representing expenses associated with investment banking fees, employee related expenses,
obtaining regulatory approvals, legal expenses, and integration planning.
Purchased gas increased by $174,517 or 105.3% in 2021 compared to 2020. Purchased gas represents the cost of gas sold
by Peoples for the regulated and non-regulated gas business and has a corresponding offset in revenue. This expense
increased for the regulated natural gas business and non-regulated business by $159,287 and $15,230, respectively, as a
result of the increase in natural gas prices and the timing of People’s acquisition.
Depreciation and amortization expense increased by $40,748 or 16.2% and $145 or 2.6%, respectively, in 2021 over 2020,
principally due to the timing of the Peoples Gas Acquisition, continued capital expenditures to expand and improve our
utility facilities, our acquisitions of new utility systems, and additional rate case filings. Expenses associated with filing
rate cases are deferred and amortized over periods that generally range from one to three years.
Taxes other than income taxes totaled $86,641 in 2021, $76,597 in 2020, and $59,955 in 2019, and has increased by
$10,044 or 13.1% in 2021 as compared to 2020 principally due to the timing of the Peoples Gas Acquisition, increase in
payroll taxes of $2,736 and reclassification of regulatory fees and assessments previously recorded in Operations and
maintenance expense of $3,210.
Other expense, net - Interest expense was $207,709 in 2021, $188,435 in 2020, and 125,383 in 2019. Interest expense
increased in 2021 primarily due to an increase in average borrowings, and interest on debt assumed in the Peoples Gas
Acquisition, offset by a decrease in average interest rates. The weighted average cost of fixed rate long-term debt was
3.61% at December 31, 2021, 3.73% at December 31, 2020, and 4.09% at December 31, 2019. The weighted average
cost of fixed and variable rate long-term debt was 3.49% at December 31, 2021, 3.56% at December 31, 2020, and 4.09%
at December 31, 2019.
Interest income was $2,384 in 2021, $5,363 in 2020, and $25,406 in 2019. The decrease in 2021 is primarily due to the
utilization of the proceeds held from our 2019 equity and debt offerings to close the Peoples Gas Acquisition on March
16, 2020.
Allowance for funds used during construction (AFUDC) was $20,792 in 2021, $12,687 in 2020, and $16,172 in 2019, 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 2021 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 $16,282 in 2021, $8,253 in 2020, and $11,941 in 2019.
Gain on sale of other assets totaled $976 in 2021, $661 in 2020, and $923 in 2019, and consists of the sales of property,
plant and equipment.
sold in October 2020.
Equity loss (earnings) in joint venture was $3,374 in 2020, and $(2,210) in 2019. Our investment in the joint venture was
Other totaled $(2,848) in 2021, $(3,383) in 2020, and $5,691 in 2019, and largely consists of the non-service cost
component of our net benefit cost for pension benefits. In 2021, there was a higher return on assets than costs recognized
which resulted to a net benefit for the year. The net benefit in 2020 is primarily due to a recovery of a previously
incurred cost that resulted in the recognition of a regulatory asset based on the Company’s recovery in a rate case.
Provision for income tax (benefit) - Our effective income tax rate was (2.3)% in 2021, (7.5)% in 2020, and (6.2)% in
2019. The Company’s provision for income taxes represents an income tax benefit due to the effects of tax deductions
recognized for certain qualifying infrastructure improvements for Aqua Pennsylvania and Peoples Natural Gas. The
effective income tax rate increased in 2021 due to the increase in our income before income taxes of $157,029, offset
partially by the income tax benefit recognized as a result of tax deductions for qualifying infrastructure investments of
Peoples Natural Gas. On March 31, 2020, we changed the method of tax accounting for certain qualifying infrastructure
investments at Peoples Natural Gas, our largest natural gas subsidiary in Pennsylvania, which provided for a reduction to
income tax expense of $27,822 in 2020 and $55,132 in 2021 due to the flow-through treatment of the current tax repair
benefits.
Net income -
Operating income
Net income
Diluted net income per share
Years ended December 31,
2021
2020
2019
$
602,709 $
431,612
1.67
434,686 $
284,849
1.12
340,159
224,543
1.04
The changes in diluted net income per share in 2021 over the previous year 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.
Segment Results of Operations Comparison for 2021 and 2020
We have identified twelve operating segments, and we have two reportable segments 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, Regulated Water,
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.
10
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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)
Allowance for funds used during construction (AFUDC) was $20,792 in 2021, $12,687 in 2020, and $16,172 in 2019, 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 2021 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 $16,282 in 2021, $8,253 in 2020, and $11,941 in 2019.
Gain on sale of other assets totaled $976 in 2021, $661 in 2020, and $923 in 2019, and consists of the sales of property,
plant and equipment.
Equity loss (earnings) in joint venture was $3,374 in 2020, and $(2,210) in 2019. Our investment in the joint venture was
sold in October 2020.
Other totaled $(2,848) in 2021, $(3,383) in 2020, and $5,691 in 2019, and largely consists of the non-service cost
component of our net benefit cost for pension benefits. In 2021, there was a higher return on assets than costs recognized
which resulted to a net benefit for the year. The net benefit in 2020 is primarily due to a recovery of a previously
incurred cost that resulted in the recognition of a regulatory asset based on the Company’s recovery in a rate case.
Provision for income tax (benefit) - Our effective income tax rate was (2.3)% in 2021, (7.5)% in 2020, and (6.2)% in
2019. The Company’s provision for income taxes represents an income tax benefit due to the effects of tax deductions
recognized for certain qualifying infrastructure improvements for Aqua Pennsylvania and Peoples Natural Gas. The
effective income tax rate increased in 2021 due to the increase in our income before income taxes of $157,029, offset
partially by the income tax benefit recognized as a result of tax deductions for qualifying infrastructure investments of
Peoples Natural Gas. On March 31, 2020, we changed the method of tax accounting for certain qualifying infrastructure
investments at Peoples Natural Gas, our largest natural gas subsidiary in Pennsylvania, which provided for a reduction to
income tax expense of $27,822 in 2020 and $55,132 in 2021 due to the flow-through treatment of the current tax repair
benefits.
Depreciation and amortization expense increased by $40,748 or 16.2% and $145 or 2.6%, respectively, in 2021 over 2020,
Net income -
Operating expenses - Operations and maintenance expenses increased in 2021, as compared to 2020, by $21,969 or 4.2%,
primarily due to:
increase in operations and maintenance expenses for our Regulated Natural Gas business of $42,503 representing
the variance in the first quarter of 2021 versus first quarter of 2020 as a result of the timing of the Peoples Gas
Acquisition in 2020;
$2,820;
costs related to the restoration and repair of facilities in southeastern Pennsylvania damaged by Hurricane Ida of
increase in employee related costs of $8,624 related to pension and post-retirement benefits, medical and labor;
increase in insurance expense of $6,397 due to higher insurance claims;
an asset impairment charge of $4,695 to write down a portion of the right of use asset of our Regulated Natural
Gas Segment’s office space to fair value;
increase in outside services of $9,586;
the prior year effect of net insurance proceeds of $2,874 and a reduction in expenses in 2021 of $690 associated
with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect
the expenses associated with remediating the advisory to continue into 2022; offset by
decrease in COVID-19 pandemic related expenses of $18,044 and decrease in charitable donations expense of
the prior year effect of transaction expenses of $25,397 in the first quarter of 2020 for the Peoples Gas
Acquisition, primarily representing expenses associated with investment banking fees, employee related expenses,
obtaining regulatory approvals, legal expenses, and integration planning.
$14,014; and,
Purchased gas increased by $174,517 or 105.3% in 2021 compared to 2020. Purchased gas represents the cost of gas sold
by Peoples for the regulated and non-regulated gas business and has a corresponding offset in revenue. This expense
increased for the regulated natural gas business and non-regulated business by $159,287 and $15,230, respectively, as a
result of the increase in natural gas prices and the timing of People’s acquisition.
principally due to the timing of the Peoples Gas Acquisition, continued capital expenditures to expand and improve our
utility facilities, our acquisitions of new utility systems, and additional rate case filings. Expenses associated with filing
rate cases are deferred and amortized over periods that generally range from one to three years.
Taxes other than income taxes totaled $86,641 in 2021, $76,597 in 2020, and $59,955 in 2019, and has increased by
$10,044 or 13.1% in 2021 as compared to 2020 principally due to the timing of the Peoples Gas Acquisition, increase in
payroll taxes of $2,736 and reclassification of regulatory fees and assessments previously recorded in Operations and
maintenance expense of $3,210.
Other expense, net - Interest expense was $207,709 in 2021, $188,435 in 2020, and 125,383 in 2019. Interest expense
increased in 2021 primarily due to an increase in average borrowings, and interest on debt assumed in the Peoples Gas
Acquisition, offset by a decrease in average interest rates. The weighted average cost of fixed rate long-term debt was
3.61% at December 31, 2021, 3.73% at December 31, 2020, and 4.09% at December 31, 2019. The weighted average
cost of fixed and variable rate long-term debt was 3.49% at December 31, 2021, 3.56% at December 31, 2020, and 4.09%
at December 31, 2019.
16, 2020.
Interest income was $2,384 in 2021, $5,363 in 2020, and $25,406 in 2019. The decrease in 2021 is primarily due to the
utilization of the proceeds held from our 2019 equity and debt offerings to close the Peoples Gas Acquisition on March
Operating income
Net income
Diluted net income per share
$
602,709 $
431,612
1.67
434,686 $
284,849
1.12
340,159
224,543
1.04
The changes in diluted net income per share in 2021 over the previous year 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.
Segment Results of Operations Comparison for 2021 and 2020
We have identified twelve operating segments, and we have two reportable segments 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, Regulated Water,
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.
10
11
Years ended December 31,
2020
2021
2019
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
Our Regulated Natural Gas segment is composed of natural gas utility companies in three states acquired in the
Peoples Gas Acquisition. These utilities provide natural gas distribution services, and their operating results
subsequent to the March 16, 2020 acquisition date are reported in the Regulated Natural Gas segment.
Three segments are not quantitatively significant to be reportable and are composed of our non-regulated natural
gas operations, 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 and Regulated Natural Gas
segments, 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.
Regulated Water Segment
The following tables present the operating results and customers served for our Regulated Water segment, for and as of
the year ended December 31,:
2021
2020
2019
2021 vs. 2020
2020 vs. 2019
Our Regulated Water segment also includes operating revenues of $13,358 in 2021 and $8,781 in 2020, and $13,835 in
Sendout (in millions of gallons)
Pennsylvania
Ohio
Illinois
Texas
North Carolina
Other states
Subtotal
Elimination
Total sendout by state
Utility customers:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Total water and wastewater utility customers
Operating revenues:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Customer rate credits
Other utility
Total operating revenues
Operating expenses:
Operations and maintenance expense
Depreciation and amortization
Taxes other than income taxes
Operating income
Other expense, net
Income before income taxes
Provision for income taxes (benefit)
Net income
42,198
13,971
8,764
7,212
5,984
6,191
84,320
(154)
84,166
41,683
14,020
8,651
7,393
5,780
6,299
83,826
(65)
83,761
42,074
13,346
8,712
6,937
5,727
6,113
82,909
(65)
82,844
842,200
42,864
1,331
17,932
162,478
1,066,805
832,902
42,535
1,338
18,561
151,965
1,047,301
822,817
41,892
1,339
18,984
141,672
1,026,704
567,485 $
143,479
29,764
67,712
121,117
(4,080)
13,063
938,540
309,608
171,152
60,505
397,275
91,001
306,274
22,481
283,793 $
518,192 $
145,599
30,667
72,942
105,204
-
13,826
886,430
315,052
155,898
59,955
355,525
81,872
273,653
(1,267)
274,920 $
$
$
561,996 $
151,071
30,230
89,472
132,316
-
15,118
980,203
332,598
182,074
63,264
402,267
81,931
320,336
26,633
293,703 $
12
515
(49)
113
(181)
204
(108)
494
(89)
405
9,298
329
(7)
(629)
10,513
19,504
(5,489) $
7,592
466
21,760
11,199
4,080
2,055
41,663
22,990
10,922
2,759
4,992
(9,070)
14,062
4,152
9,910 $
(391)
674
(61)
456
53
186
917
-
917
10,085
643
(1)
(423)
10,293
20,597
49,293
(2,120)
(903)
(5,230)
15,913
(4,080)
(763)
52,110
(5,444)
15,254
550
41,750
9,129
32,621
23,748
8,873
Operating revenues - The growth in our Regulated Water segment’s revenues over the past three years is primarily a
result of increases in our water and wastewater rates and our customer base. Water and wastewater rate increases,
including infrastructure rehabilitation surcharges, implemented during the past three years have provided additional
operating revenues of $27,421 in 2021, $32,660 in 2020, $55,658 in 2019. The number of customers increased at an
annual compound rate of 2.0% 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 $6,750 in 2021, $10,951 in 2020, and $8,393 in 2019.
In 2021 and 2020, we experienced a decrease in water and wastewater revenues of $1,146 and $1,402, respectively, as a
result of an advisory for some of our water utility customers served by our Illinois subsidiary, and do not expect the
revenue impact to continue into 2022.
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the
Company granted $4,080 of customer rate credits to its water and wastewater customers in 2020. There were no water and
wastewater customer rate credits issued in 2021.
2019, 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.
Operating expenses - Operations and maintenance expense for the year ended December 31, 2021 was $332,598
compared to $309,608 in the prior period. The increase of $22,990 or 7.4% was primarily due to the following:
costs related to the restoration and repair of facilities damaged by Hurricane Ida of $2,820;
increase in employee related costs of $10,495 related to pension and post-retirement benefits, medical and labor
increase in outside services of $5,986; and,
the prior year effect of net insurance proceeds of $2,874 and a reduction in expenses in 2021 of $690 associated
with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect
the expenses associated with remediating the advisory to continue into 2022; offset by
the decrease in COVID-19 pandemic related expenses of $2,366.
Depreciation and amortization increased by $10,922 or 6.4% primarily due to continued capital spend.
Taxes other than income taxes increased by $2,759 or 4.6%.
Other expense, net - Interest expense, net, increased by $6,546 or 6.4% primarily due to the increase in average
borrowings.
AFUDC increased by $8,027 or 71.5% due to the increase in the average balance of utility plant construction work in
progress, to which AFUDC is applied.
Other expense decreased by $7,589, primarily due to the decrease in the non-service cost component of net pension and
postretirement benefit cost in our Regulated Water segment. This is driven by improved investment returns as a result of
favorable market experience from the prior period.
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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 Natural Gas segment is composed of natural gas utility companies in three states acquired in the
Peoples Gas Acquisition. These utilities provide natural gas distribution services, and their operating results
subsequent to the March 16, 2020 acquisition date are reported in the Regulated Natural Gas segment.
Three segments are not quantitatively significant to be reportable and are composed of our non-regulated natural
gas operations, 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 and Regulated Natural Gas
segments, 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.
The following tables present the operating results and customers served for our Regulated Water segment, for and as of
2021
2020
2019
2021 vs. 2020
2020 vs. 2019
Regulated Water Segment
the year ended December 31,:
Sendout (in millions of gallons)
Pennsylvania
Ohio
Illinois
Texas
North Carolina
Other states
Subtotal
Elimination
Total sendout by state
Utility customers:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Total water and wastewater utility customers
Operating revenues:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Customer rate credits
Other utility
Total operating revenues
Operating expenses:
Operations and maintenance expense
Depreciation and amortization
Taxes other than income taxes
Operating income
Other expense, net
Income before income taxes
Provision for income taxes (benefit)
Net income
515
(49)
113
(181)
204
(108)
494
(89)
405
9,298
329
(7)
(629)
10,513
19,504
(5,489) $
7,592
466
21,760
11,199
4,080
2,055
41,663
22,990
10,922
2,759
4,992
(9,070)
14,062
4,152
(391)
674
(61)
456
53
186
917
-
917
10,085
643
(1)
(423)
10,293
20,597
49,293
(2,120)
(903)
(5,230)
15,913
(4,080)
(763)
52,110
(5,444)
15,254
550
41,750
9,129
32,621
23,748
8,873
42,198
13,971
8,764
7,212
5,984
6,191
84,320
(154)
84,166
41,683
14,020
8,651
7,393
5,780
6,299
83,826
(65)
83,761
42,074
13,346
8,712
6,937
5,727
6,113
82,909
(65)
82,844
842,200
42,864
1,331
17,932
162,478
1,066,805
832,902
42,535
1,338
18,561
151,965
1,047,301
822,817
41,892
1,339
18,984
141,672
1,026,704
567,485 $
143,479
29,764
67,712
121,117
(4,080)
13,063
938,540
309,608
171,152
60,505
397,275
91,001
306,274
22,481
518,192 $
145,599
30,667
72,942
105,204
-
13,826
886,430
315,052
155,898
59,955
355,525
81,872
273,653
(1,267)
151,071
30,230
89,472
132,316
-
15,118
980,203
332,598
182,074
63,264
402,267
81,931
320,336
26,633
12
$
293,703 $
283,793 $
274,920 $
9,910 $
Operating revenues - The growth in our Regulated Water segment’s revenues over the past three years is primarily a
result of increases in our water and wastewater rates and our customer base. Water and wastewater rate increases,
including infrastructure rehabilitation surcharges, implemented during the past three years have provided additional
operating revenues of $27,421 in 2021, $32,660 in 2020, $55,658 in 2019. The number of customers increased at an
annual compound rate of 2.0% 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 $6,750 in 2021, $10,951 in 2020, and $8,393 in 2019.
In 2021 and 2020, we experienced a decrease in water and wastewater revenues of $1,146 and $1,402, respectively, as a
result of an advisory for some of our water utility customers served by our Illinois subsidiary, and do not expect the
revenue impact to continue into 2022.
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the
Company granted $4,080 of customer rate credits to its water and wastewater customers in 2020. There were no water and
wastewater customer rate credits issued in 2021.
Our Regulated Water segment also includes operating revenues of $13,358 in 2021 and $8,781 in 2020, and $13,835 in
2019, 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.
Operating expenses - Operations and maintenance expense for the year ended December 31, 2021 was $332,598
compared to $309,608 in the prior period. The increase of $22,990 or 7.4% was primarily due to the following:
costs related to the restoration and repair of facilities damaged by Hurricane Ida of $2,820;
increase in employee related costs of $10,495 related to pension and post-retirement benefits, medical and labor
increase in outside services of $5,986; and,
the prior year effect of net insurance proceeds of $2,874 and a reduction in expenses in 2021 of $690 associated
with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect
the expenses associated with remediating the advisory to continue into 2022; offset by
the decrease in COVID-19 pandemic related expenses of $2,366.
Depreciation and amortization increased by $10,922 or 6.4% primarily due to continued capital spend.
$
561,996 $
Taxes other than income taxes increased by $2,759 or 4.6%.
Other expense, net - Interest expense, net, increased by $6,546 or 6.4% primarily due to the increase in average
borrowings.
AFUDC increased by $8,027 or 71.5% due to the increase in the average balance of utility plant construction work in
progress, to which AFUDC is applied.
Other expense decreased by $7,589, primarily due to the decrease in the non-service cost component of net pension and
postretirement benefit cost in our Regulated Water segment. This is driven by improved investment returns as a result of
favorable market experience from the prior period.
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
Regulated Natural Gas Segment
The following tables present the operating results and customers served for our Regulated Natural Gas segment, for the
period since the acquisition date of March 16, 2020, for and as of the year ended December 31,:
offset by lower usage of $13,664 due to warmer weather in 2021 as compared to 2020; $11,124 credit to
customers for tax repair catch-up; $5,000 rate credit to customers with past-due accounts receivable; and an
increased refund of the tax benefit associated with the Tax Cuts and Jobs Act of $1,456.
2021
2020 (a)
2021 vs. 2020
Operating expenses - Operations and maintenance expense for the year ended December 31, 2021 increased by $27,811
Gas utility customers:
Residential gas
Commercial gas
Industrial gas
Total gas utility customers
Delivered volumes (thousand cubic feet)
Residential gas
Commercial gas
Industrial gas
Total delivered volumes
Heating Degree Days (b)
Average Heating Degree Days (c)
Operating revenues:
Residential gas
Commercial gas
Industrial gas
Gas transportation
Customer rate credits
Other utility
Total operating revenues
Operating expenses:
Operations and maintenance expense
Purchased gas
Depreciation and amortization
Taxes other than income taxes
Operating income
Other expense, net
Income before income taxes
Income tax benefit
Net income
692,174
59,595
1,475
753,244
56,542,038
33,403,899
49,726,237
139,672,174
5,139
5,466
690,642
59,424
1,436
751,502
33,675,963
20,082,555
37,936,661
91,695,179
3,013
2,973
1,532
171
39
1,742
22,866,075
13,321,344
11,789,576
47,976,995
2,126
2,493
2021
2020 (a)
2021 vs. 2020
530,338 $
99,596
3,427
198,195
(5,000)
33,346
859,902
226,194
313,390
113,238
20,801
186,279
78,099
108,180
(40,013)
148,193 $
314,274 $
50,239
6,923
133,685
(18,924)
20,367
506,564
198,383
154,103
84,201
13,307
56,570
25,252
31,318
(25,133)
56,451 $
216,064
49,357
(3,496)
64,510
13,924
12,979
353,338
27,811
159,287
29,037
7,494
129,709
52,847
76,862
(14,880)
91,742
$
$
or 14.0% primarily due to the following:
increase of $42,503 representing variance in the first quarter of 2021 versus first quarter of 2020 as a result of the
timing of the Peoples’ acquisition in 2020;
increases in employee related costs of $1,918 and outside services expense of $3,600;
and an asset impairment charge of $4,695 to write down a portion of the right of use asset of our Regulated
Natural Gas Segment’s office space to fair value;
offset by decreases in COVID-19 pandemic related expenses of $8,371 and a decrease of $14,514 in charitable
donations expense.
Our Regulated Natural Gas segment is affected by the cost of natural gas, which is passed through to customers using a
purchased gas adjustment clause and includes commodity price, transportation and storage costs. These costs are
reflected in the consolidated statement of operations and comprehensive income as purchased gas expenses. Therefore,
fluctuations in the cost of purchased gas impact operating revenues on dollar-for-dollar basis but does not impact gross
margin. Purchased gas increased by $159,287 or 103.4% due to an increase in the price of natural gas in 2021 as
compared to the prior year. Management uses gross margin, a non-GAAP financial measure, defined as operating
revenues less purchased gas expense, to analyze the financial performance of our Regulated Natural Gas segment, as
management believes gross margin provides a meaningful basis for evaluating our natural gas utility operations since
purchased gas expenses are included in operating revenues and passed through to customers. The following table includes
the reconciliation of gross margin (non-GAAP) to operating revenues (GAAP) for our Regulated Natural Gas segment for
the period since the acquisition date of March 16, 2020:
Years ended December 31,
2021
859,902 $
313,390
546,512 $
2020
506,564
154,103
352,461
$
$
(a) Includes operating results since the completion of the Peoples Gas Acquisition on March 16, 2020.
(b) Unit of measure reflecting temperature-sensitive natural gas consumption, calculated by subtracting the average of a day’s high
and low temperatures from 65 degrees Fahrenheit.
(c) Based on historical twenty-year average heating degree days, as calculated from data provided by the National Weather Service
for the same geographic location.
The term gross margin is not intended to represent operating revenues, the most comparable GAAP financial measure, as
an indicator of operating performance. In addition, our measurement of gross margin is not necessarily comparable to
similarly titled measures reported by other companies.
Depreciation and amortization increased by $29,037 or 34.5% primarily due to the timing of the Peoples Gas Acquisition
Operating revenues - Operating revenues from the Regulated Natural Gas segment increased by $353,338 or 69.8% due
to:
Taxes other than income taxes increased by $7,494 or 56.3% mainly due to the timing of the Peoples Gas Acquisition and
Operating revenues (GAAP)
Purchased gas
Gross margin (non-GAAP)
and continued capital spend.
higher property tax expense.
borrowings pushed down by Parent.
to which AFUDC is applied.
Other expense, net - Interest expense, net, increased by $46,612 or 160.6% for 2021 compared to 2020 due to additional
AFUDC increased by $78 or 5.4% due to the increase in the average balance of utility plant construction work in progress,
higher average delivery and rider rates of $5,272;
prior year effect of customer rate credits of $18,924 granted to our natural gas customers associated with the
increase of $304,571 representing variance in the first quarter of 2021 versus first quarter of 2020 as a result of
the timing of the Peoples Gas Acquisition in 2020;
impact of higher gas cost of $47,548 in 2021 as compared to 2020;
approval of the Peoples Gas Acquisition;
and rate variance of $3,346;
14
15
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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)
Regulated Natural Gas Segment
The following tables present the operating results and customers served for our Regulated Natural Gas segment, for the
period since the acquisition date of March 16, 2020, for and as of the year ended December 31,:
offset by lower usage of $13,664 due to warmer weather in 2021 as compared to 2020; $11,124 credit to
customers for tax repair catch-up; $5,000 rate credit to customers with past-due accounts receivable; and an
increased refund of the tax benefit associated with the Tax Cuts and Jobs Act of $1,456.
2021
2020 (a)
2021 vs. 2020
Operating expenses - Operations and maintenance expense for the year ended December 31, 2021 increased by $27,811
or 14.0% primarily due to the following:
increase of $42,503 representing variance in the first quarter of 2021 versus first quarter of 2020 as a result of the
timing of the Peoples’ acquisition in 2020;
increases in employee related costs of $1,918 and outside services expense of $3,600;
and an asset impairment charge of $4,695 to write down a portion of the right of use asset of our Regulated
Natural Gas Segment’s office space to fair value;
offset by decreases in COVID-19 pandemic related expenses of $8,371 and a decrease of $14,514 in charitable
donations expense.
Our Regulated Natural Gas segment is affected by the cost of natural gas, which is passed through to customers using a
purchased gas adjustment clause and includes commodity price, transportation and storage costs. These costs are
reflected in the consolidated statement of operations and comprehensive income as purchased gas expenses. Therefore,
fluctuations in the cost of purchased gas impact operating revenues on dollar-for-dollar basis but does not impact gross
margin. Purchased gas increased by $159,287 or 103.4% due to an increase in the price of natural gas in 2021 as
compared to the prior year. Management uses gross margin, a non-GAAP financial measure, defined as operating
revenues less purchased gas expense, to analyze the financial performance of our Regulated Natural Gas segment, as
management believes gross margin provides a meaningful basis for evaluating our natural gas utility operations since
purchased gas expenses are included in operating revenues and passed through to customers. The following table includes
the reconciliation of gross margin (non-GAAP) to operating revenues (GAAP) for our Regulated Natural Gas segment for
the period since the acquisition date of March 16, 2020:
$
148,193 $
(25,133)
56,451 $
Operating revenues (GAAP)
Purchased gas
Gross margin (non-GAAP)
$
$
859,902 $
313,390
546,512 $
Years ended December 31,
2021
2020
506,564
154,103
352,461
The term gross margin is not intended to represent operating revenues, the most comparable GAAP financial measure, as
an indicator of operating performance. In addition, our measurement of gross margin is not necessarily comparable to
similarly titled measures reported by other companies.
Depreciation and amortization increased by $29,037 or 34.5% primarily due to the timing of the Peoples Gas Acquisition
and continued capital spend.
Taxes other than income taxes increased by $7,494 or 56.3% mainly due to the timing of the Peoples Gas Acquisition and
higher property tax expense.
Other expense, net - Interest expense, net, increased by $46,612 or 160.6% for 2021 compared to 2020 due to additional
borrowings pushed down by Parent.
prior year effect of customer rate credits of $18,924 granted to our natural gas customers associated with the
AFUDC increased by $78 or 5.4% due to the increase in the average balance of utility plant construction work in progress,
to which AFUDC is applied.
15
Gas utility customers:
Residential gas
Commercial gas
Industrial gas
Total gas utility customers
Delivered volumes (thousand cubic feet)
Residential gas
Commercial gas
Industrial gas
Total delivered volumes
Heating Degree Days (b)
Average Heating Degree Days (c)
Operating revenues:
Residential gas
Commercial gas
Industrial gas
Gas transportation
Customer rate credits
Other utility
Total operating revenues
Operating expenses:
Operations and maintenance expense
Purchased gas
Depreciation and amortization
Taxes other than income taxes
Operating income
Other expense, net
Income before income taxes
Income tax benefit
Net income
2021
2020 (a)
2021 vs. 2020
$
530,338 $
314,274 $
692,174
59,595
1,475
753,244
56,542,038
33,403,899
49,726,237
139,672,174
5,139
5,466
99,596
3,427
198,195
(5,000)
33,346
859,902
226,194
313,390
113,238
20,801
186,279
78,099
108,180
(40,013)
690,642
59,424
1,436
751,502
33,675,963
20,082,555
37,936,661
91,695,179
3,013
2,973
50,239
6,923
133,685
(18,924)
20,367
506,564
198,383
154,103
84,201
13,307
56,570
25,252
31,318
1,532
171
39
1,742
22,866,075
13,321,344
11,789,576
47,976,995
2,126
2,493
216,064
49,357
(3,496)
64,510
13,924
12,979
353,338
27,811
159,287
29,037
7,494
129,709
52,847
76,862
(14,880)
91,742
(a) Includes operating results since the completion of the Peoples Gas Acquisition on March 16, 2020.
(b) Unit of measure reflecting temperature-sensitive natural gas consumption, calculated by subtracting the average of a day’s high
and low temperatures from 65 degrees Fahrenheit.
(c) Based on historical twenty-year average heating degree days, as calculated from data provided by the National Weather Service
for the same geographic location.
Operating revenues - Operating revenues from the Regulated Natural Gas segment increased by $353,338 or 69.8% due
increase of $304,571 representing variance in the first quarter of 2021 versus first quarter of 2020 as a result of
to:
the timing of the Peoples Gas Acquisition in 2020;
impact of higher gas cost of $47,548 in 2021 as compared to 2020;
higher average delivery and rider rates of $5,272;
approval of the Peoples Gas Acquisition;
and rate variance of $3,346;
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
Other expense increased by $6,313 due to the non-service cost component of our net benefit cost for pension and post-
retirement benefits.
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 utility systems for the three years ended December 31, 2021, 2020 and
2019 were as follows:
Net Operating Cash
Flows
Dividends
Capital Expenditures
Acquisitions
2019
2020
2021
$
338,523
508,024
644,679
1,491,226
$
188,512
232,571
258,650
679,733
$
550,273
835,642
1,020,519
2,406,434
$
59,687
3,501,835
36,326
3,597,848
Net cash flows from operating activities increased primarily due to higher net income resulting from full year of Peoples'
operating results in 2021 compared to nine and a half months in 2020. Net cash flows from operating activities increased
from 2019 to 2020 primarily due to the prior year effect of the 2019 payment for the settlement of the interest rate swap
agreements of $83,520, and an increase in net income.
Included in capital expenditures for the three year period are: expenditures for the rehabilitation of existing utility
systems, the expansion of our utility systems, modernization and replacement of existing treatment facilities, meters,
office facilities, information technology, vehicles, and equipment. During this three year period, we received $33,941 of
customer advances and contributions in aid of construction to finance new utility 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 $2,571,586 and have refunded $22,887 of customers’ advances for construction. Dividends increased during
the past three years as a result of annual increases in the dividends declared and paid and increases in the number of shares
outstanding.
Our planned 2022 capital program, excluding the costs of new mains financed by advances and contributions in aid of
construction is estimated to be approximately $1,000,000 in infrastructure improvements for the communities we serve.
The 2022 capital program is expected to include $618,200 for infrastructure rehabilitation surcharge qualified projects.
Our planned 2022 capital program in Pennsylvania for our water and natural gas utilities is estimated to be approximately
$709,600, a portion of which is expected to be eligible as a deduction for qualifying utility asset improvements for Federal
income tax purposes. Our overall 2022 capital program along with $132,146 of debt repayments and $428,319 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 2023 through 2024, including recurring programs, such as the ongoing
replacement or rehabilitation of utility meters and mains, water treatment plant upgrades, storage facility renovations,
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 $1,940,000. We anticipate that approximately less than one-half of these expenditures will require external
financing. We expect to refinance $576,580 of long-term debt during this period as it becomes 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 utility systems or the financing necessary to support them.
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, utility operating revenues, and changes in Federal tax laws, 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. In 2020, 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 debt and equity
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
As part of the Company’s growth-through-acquisition strategy, as of December 31, 2021, the Company has entered into
purchase agreements to acquire the water or wastewater utility system assets of seven municipalities and a private
company for a total combined purchase price in cash of $471,000. 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 these acquisitions are expected to occur
through 2023, which is subject to the timing of the various regulatory approval processes. These acquisitions are expected
to add approximately 235,000 equivalent retail customers in three of the states in which the Company operates.
In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves
992 customers in Harris County, Texas, and the wastewater utility system assets of the Village of Bourbonnais, which
serves approximately 6,500 customers in Kankakee County, Illinois. The total cash purchase prices for these utility
systems were $4,000 and $32,100, respectively.
On March 16, 2020, the Company completed the Peoples Gas Acquisition, which expanded the Company’s regulated
utility business to include natural gas distribution, serving approximately 750,000 natural gas utility customers in western
Pennsylvania, West Virginia and Kentucky. The Company paid cash consideration of $3,465,344, which was subject to
adjustment based upon the terms of the purchase agreement. The Company financed this acquisition through the April
2019 issuances of $1,293,750 of common stock, $900,000 of senior notes (of which $436,000 was for this acquisition),
$690,000 of tangible equity units, and the issuance of $750,000 of common stock through a private placement, and
borrowings on our revolving credit facility. Additionally, during 2020, we completed six acquisitions of water and
wastewater utility systems for $63,279 in cash in three of the states in which we operate, adding 10,585 customers.
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. Refer to Note 2 – Acquisitions in this Annual
Report for additional information.
Excluding the Peoples Gas Acquisition, during the past three years, we have expended cash of $159,292 related to the
acquisition of both water and wastewater utility systems. 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.
16
17
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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 expense increased by $6,313 due to the non-service cost component of our net benefit cost for pension and post-
retirement benefits.
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 utility systems for the three years ended December 31, 2021, 2020 and
2019 were as follows:
Net Operating Cash
2019
2020
2021
338,523
508,024
644,679
Flows
Dividends
Capital Expenditures
Acquisitions
$
1,491,226
$
$
$
188,512
232,571
258,650
679,733
550,273
835,642
1,020,519
2,406,434
59,687
3,501,835
36,326
3,597,848
Net cash flows from operating activities increased primarily due to higher net income resulting from full year of Peoples'
operating results in 2021 compared to nine and a half months in 2020. Net cash flows from operating activities increased
from 2019 to 2020 primarily due to the prior year effect of the 2019 payment for the settlement of the interest rate swap
agreements of $83,520, and an increase in net income.
Included in capital expenditures for the three year period are: expenditures for the rehabilitation of existing utility
systems, the expansion of our utility systems, modernization and replacement of existing treatment facilities, meters,
office facilities, information technology, vehicles, and equipment. During this three year period, we received $33,941 of
customer advances and contributions in aid of construction to finance new utility 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 $2,571,586 and have refunded $22,887 of customers’ advances for construction. Dividends increased during
the past three years as a result of annual increases in the dividends declared and paid and increases in the number of shares
outstanding.
Our planned 2022 capital program, excluding the costs of new mains financed by advances and contributions in aid of
construction is estimated to be approximately $1,000,000 in infrastructure improvements for the communities we serve.
The 2022 capital program is expected to include $618,200 for infrastructure rehabilitation surcharge qualified projects.
Our planned 2022 capital program in Pennsylvania for our water and natural gas utilities is estimated to be approximately
$709,600, a portion of which is expected to be eligible as a deduction for qualifying utility asset improvements for Federal
income tax purposes. Our overall 2022 capital program along with $132,146 of debt repayments and $428,319 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 2023 through 2024, including recurring programs, such as the ongoing
replacement or rehabilitation of utility meters and mains, water treatment plant upgrades, storage facility renovations,
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 $1,940,000. We anticipate that approximately less than one-half of these expenditures will require external
financing. We expect to refinance $576,580 of long-term debt during this period as it becomes 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 utility systems or the financing necessary to support them.
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, utility operating revenues, and changes in Federal tax laws, 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. In 2020, 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 debt and equity
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
As part of the Company’s growth-through-acquisition strategy, as of December 31, 2021, the Company has entered into
purchase agreements to acquire the water or wastewater utility system assets of seven municipalities and a private
company for a total combined purchase price in cash of $471,000. 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 these acquisitions are expected to occur
through 2023, which is subject to the timing of the various regulatory approval processes. These acquisitions are expected
to add approximately 235,000 equivalent retail customers in three of the states in which the Company operates.
In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves
992 customers in Harris County, Texas, and the wastewater utility system assets of the Village of Bourbonnais, which
serves approximately 6,500 customers in Kankakee County, Illinois. The total cash purchase prices for these utility
systems were $4,000 and $32,100, respectively.
On March 16, 2020, the Company completed the Peoples Gas Acquisition, which expanded the Company’s regulated
utility business to include natural gas distribution, serving approximately 750,000 natural gas utility customers in western
Pennsylvania, West Virginia and Kentucky. The Company paid cash consideration of $3,465,344, which was subject to
adjustment based upon the terms of the purchase agreement. The Company financed this acquisition through the April
2019 issuances of $1,293,750 of common stock, $900,000 of senior notes (of which $436,000 was for this acquisition),
$690,000 of tangible equity units, and the issuance of $750,000 of common stock through a private placement, and
borrowings on our revolving credit facility. Additionally, during 2020, we completed six acquisitions of water and
wastewater utility systems for $63,279 in cash in three of the states in which we operate, adding 10,585 customers.
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. Refer to Note 2 – Acquisitions in this Annual
Report for additional information.
Excluding the Peoples Gas Acquisition, during the past three years, we have expended cash of $159,292 related to the
acquisition of both water and wastewater utility systems. 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.
16
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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.
Our consolidated balance sheet historically has had a negative working capital position, whereby routinely our current
liabilities exceed our current assets. Management believes that internally-generated funds along with existing credit
facilities and the proceeds from the issuance of long-term debt and common equity will be adequate to provide sufficient
working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.
In October 2020, the Company also sold its investment in a joint venture. Its investment represented its 49% investment
in a joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the
Marcellus Shale of north central Pennsylvania, and recorded a charge of $3,700 associated with the sale. Refer to Note 3
– Dispositions in this Annual Report for additional information.
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 included
financings for a portion of the Peoples Gas Acquisition, we issued $5,979,914 of long-term debt, and obtained other short-
term borrowings during the past three years. At December 31, 2021, we have a $1,000,000 long-term revolving credit
facility that expires in December 2023, of which $20,922 was designated for letter of credit usage, $679,078 was available
for borrowing, and $300,000 of borrowings were outstanding at December 31, 2021. In addition, we have short-term lines
of credit of $235,500 of which $170,500 was available as of December 31, 2021. Included in the short-term lines of credit
is an Aqua Pennsylvania $100,000 364 day unsecured revolving credit facility and a Peoples Natural Gas $100,000 364
day unsecured revolving credit facility. 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.
On April 15, 2021, our operating subsidiary, Aqua Ohio, Inc., issued $100,000 of first mortgage bonds, of which $50,000
is due in 2031 and $50,000 is due in 2051, with interest rates of 2.37% and 3.35%, respectively. The proceeds from these
bonds were used for general corporate purposes and to repay existing indebtedness. Further, on April 19, 2021, the
Company issued $400,000 of long-term debt, with expenses of $4,010, which is due in 2031 with an interest rate of
2.40%. The Company used the proceeds from this issuance to repay $50,000 of borrowings under the Aqua Pennsylvania
revolving credit facility, and the balance was used to repay in full the borrowings under its existing five-year unsecured
revolving credit agreement.
In August 2020, we entered into a forward equity sale agreement for 6,700,000 shares of common stock with a third party
(the “forward purchaser”). In connection with the forward equity sale agreement, the forward purchaser borrowed an
equal number of shares of our common stock from stock lenders and sold the borrowed shares to the public. We did not
receive any proceeds from the sale of our common stock by the forward purchaser until settlement of the forward equity
sale agreement. On August 9, 2021, the Company settled the forward equity sale agreement in full by physical share
settlement. The Company issued 6,700,000 shares and received cash proceeds of $299,739 at a forward price of $44.74
per share. Pursuant to the agreement, the forward price was computed based upon the initial forward price of $46.00 per
share, adjusted for a floating interest rate factor equal to a specified daily rate less a spread and scheduled dividends
during the term of the agreement. The Company used the proceeds received upon settlement of the forward equity sale
agreement to fund general corporate purposes, including for water and wastewater acquisitions, working capital and
capital expenditures. The forward equity sale agreement has now been completely settled, and there are no additional
shares subject to the forward equity sale agreement.
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). On March 16, 2020, in connection with the closing of the Peoples Gas Acquisition, the Company
closed on the Private Placement and received gross proceeds of $749,907, less expenses of $20,606. In June 2021, the
Company filed a registration statement on Form S-3 ASR registering the Private Placement shares for resale. Refer to
Note 13 – Stockholders’ Equity in this Annual Report for further information.
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 2021, 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.
In April 2021, the Company filed a universal shelf registration statement through a filing with the SEC to allow for the
potential future offer and 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. In April 2019, March 2020 and August 2020, we issued common stock, including common stock in connection
with a forward equity sale agreement, long-term debt and tangible equity units in several offerings under this shelf
registration statement. Refer to Note 11 – Long-term Debt and Loans Payable and Note 13 – Stockholders’ Equity in this
Annual Report 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, 2021 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 2021 dividend payment, holders of 5.8% 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 three
years, we have sold 1,000,468 original issue shares of common stock for net proceeds of $42,280 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 2021, 2020 and 2019, we sold 374,824, 388,978 and 236,666 original issues
shares of common stock for net proceeds of $16,799, $16,522 and $8,959, respectively, through the dividend reinvestment
portion of the plan. In 2019, 183,731 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.
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 has used interest rate swap agreements. Refer to Note 11 – Long-term Debt and
Loans Payable in this Annual Report for further information regarding these agreements.
18
19
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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)
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.
Our consolidated balance sheet historically has had a negative working capital position, whereby routinely our current
liabilities exceed our current assets. Management believes that internally-generated funds along with existing credit
facilities and the proceeds from the issuance of long-term debt and common equity will be adequate to provide sufficient
working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.
In October 2020, the Company also sold its investment in a joint venture. Its investment represented its 49% investment
in a joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the
Marcellus Shale of north central Pennsylvania, and recorded a charge of $3,700 associated with the sale. Refer to Note 3
– Dispositions in this Annual Report for additional information.
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 included
financings for a portion of the Peoples Gas Acquisition, we issued $5,979,914 of long-term debt, and obtained other short-
term borrowings during the past three years. At December 31, 2021, we have a $1,000,000 long-term revolving credit
facility that expires in December 2023, of which $20,922 was designated for letter of credit usage, $679,078 was available
for borrowing, and $300,000 of borrowings were outstanding at December 31, 2021. In addition, we have short-term lines
of credit of $235,500 of which $170,500 was available as of December 31, 2021. Included in the short-term lines of credit
is an Aqua Pennsylvania $100,000 364 day unsecured revolving credit facility and a Peoples Natural Gas $100,000 364
day unsecured revolving credit facility. 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.
On April 15, 2021, our operating subsidiary, Aqua Ohio, Inc., issued $100,000 of first mortgage bonds, of which $50,000
is due in 2031 and $50,000 is due in 2051, with interest rates of 2.37% and 3.35%, respectively. The proceeds from these
bonds were used for general corporate purposes and to repay existing indebtedness. Further, on April 19, 2021, the
Company issued $400,000 of long-term debt, with expenses of $4,010, which is due in 2031 with an interest rate of
2.40%. The Company used the proceeds from this issuance to repay $50,000 of borrowings under the Aqua Pennsylvania
revolving credit facility, and the balance was used to repay in full the borrowings under its existing five-year unsecured
revolving credit agreement.
In August 2020, we entered into a forward equity sale agreement for 6,700,000 shares of common stock with a third party
(the “forward purchaser”). In connection with the forward equity sale agreement, the forward purchaser borrowed an
equal number of shares of our common stock from stock lenders and sold the borrowed shares to the public. We did not
receive any proceeds from the sale of our common stock by the forward purchaser until settlement of the forward equity
sale agreement. On August 9, 2021, the Company settled the forward equity sale agreement in full by physical share
settlement. The Company issued 6,700,000 shares and received cash proceeds of $299,739 at a forward price of $44.74
per share. Pursuant to the agreement, the forward price was computed based upon the initial forward price of $46.00 per
share, adjusted for a floating interest rate factor equal to a specified daily rate less a spread and scheduled dividends
during the term of the agreement. The Company used the proceeds received upon settlement of the forward equity sale
agreement to fund general corporate purposes, including for water and wastewater acquisitions, working capital and
capital expenditures. The forward equity sale agreement has now been completely settled, and there are no additional
shares subject to the forward equity sale agreement.
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). On March 16, 2020, in connection with the closing of the Peoples Gas Acquisition, the Company
closed on the Private Placement and received gross proceeds of $749,907, less expenses of $20,606. In June 2021, the
Company filed a registration statement on Form S-3 ASR registering the Private Placement shares for resale. Refer to
Note 13 – Stockholders’ Equity in this Annual Report for further information.
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 2021, 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.
In April 2021, the Company filed a universal shelf registration statement through a filing with the SEC to allow for the
potential future offer and 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. In April 2019, March 2020 and August 2020, we issued common stock, including common stock in connection
with a forward equity sale agreement, long-term debt and tangible equity units in several offerings under this shelf
registration statement. Refer to Note 11 – Long-term Debt and Loans Payable and Note 13 – Stockholders’ Equity in this
Annual Report 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, 2021 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 2021 dividend payment, holders of 5.8% 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 three
years, we have sold 1,000,468 original issue shares of common stock for net proceeds of $42,280 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 2021, 2020 and 2019, we sold 374,824, 388,978 and 236,666 original issues
shares of common stock for net proceeds of $16,799, $16,522 and $8,959, respectively, through the dividend reinvestment
portion of the plan. In 2019, 183,731 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.
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 has used interest rate swap agreements. Refer to Note 11 – Long-term Debt and
Loans Payable in this Annual Report for further information regarding these agreements.
18
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2021:
Long-term debt
Interest on fixed-rate, long-term debt (1)
Operating leases (2)
Unconditional purchase obligations (3)
Gas purchase obligations (4)
Other purchase obligations (5)
Pension plan obligations (6)
Other obligations (7)
Total
$
$
Payments Due By Period
Less than 1
year
1 - 3 years
3 - 5 years
Total
5,947,357 $ 132,146 $
194,374
71,243
16,914
3,045,125
113,299
20,390
19,837
576,580 $ 173,328 $ 5,065,303
166,224
8,302
15,968
27,520
15,692
18,301
4,551
7,497
331
1,759,841
505,417
508,699
-
-
-
-
-
-
3,586
4,550
6,384
9,428,539 $ 560,465 $ 1,133,429 $ 711,840 $ 7,022,805
3,880
9,730
4,535
271,168
113,299
20,390
5,317
More than 5
years
Uncertain tax positions - We have uncertain tax positions of $20,201. 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.
(1) Represents interest payable on fixed rate, long-term debt. Amounts reported may differ from actual due to future
refinancing of debt.
(2) Represents minimum lease payments for long-term operating leases of land, office facilities, office equipment, and
vehicles.
(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 our commitment to purchase minimum quantities of natural gas stipulated in agreements with various
producers of natural gas to meet regulated customers’ natural gas requirements.
(5) Represents an approximation of the open purchase orders for goods and services purchased in the ordinary course of
business.
(6) Represents contributions to be made to the Company’s retirement plans.
(7) Represents expenditures estimated to be required under legal and binding contractual obligations.
In addition to the contractual obligations table above, we have the following obligations:
Refunds of customer’s advances for construction - We pay refunds on customers’ advances for construction over
a specific period of time based on operating revenues related to developer-installed utility 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 2030 and amounts not paid by the contract
expiration dates become non-refundable.
Asset Retirement Obligations – We recognize asset retirement obligations associated with retirements of
production, storage wells and other pipeline components at fair value, as incurred, or when sufficient information
becomes available to determine a reasonable estimate of the fair value of the retirement activities to be performed.
Expected obligations are not included in the above table because the amounts and timing are dependent upon
several variables, which cannot be accurately estimated.
20
21
We will fund these contractual obligations with cash flows from operations and liquidity sources held by or available to
us.
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 as of December 31, 2021 and 2020:
December 31,
Long-term debt (1)
Essential Utilities stockholders' equity
2021
2020
53.4%
46.6%
100.0%
54.6%
45.4%
100.0%
(1) Includes current portion, as well as our borrowings under a variable rate revolving credit agreement of
$300,000 at December 31, 2021, $385,000 at December 31, 2020.
Over the past two 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.
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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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, 2021:
Payments Due By Period
Less than 1
More than 5
Total
year
1 - 3 years
3 - 5 years
years
$
5,947,357 $ 132,146 $
576,580 $ 173,328 $ 5,065,303
194,374
71,243
16,914
3,045,125
113,299
20,390
19,837
3,880
9,730
4,535
271,168
113,299
20,390
5,317
15,968
18,301
7,497
8,302
15,692
4,551
166,224
27,520
331
508,699
505,417
1,759,841
-
-
-
-
-
-
6,384
4,550
3,586
$
9,428,539 $ 560,465 $ 1,133,429 $ 711,840 $ 7,022,805
Long-term debt
Interest on fixed-rate, long-term debt (1)
Operating leases (2)
Unconditional purchase obligations (3)
Gas purchase obligations (4)
Other purchase obligations (5)
Pension plan obligations (6)
Other obligations (7)
Total
refinancing of debt.
vehicles.
(1) Represents interest payable on fixed rate, long-term debt. Amounts reported may differ from actual due to future
(2) Represents minimum lease payments for long-term operating leases of land, office facilities, office equipment, and
(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 our commitment to purchase minimum quantities of natural gas stipulated in agreements with various
producers of natural gas to meet regulated customers’ natural gas requirements.
(5) Represents an approximation of the open purchase orders for goods and services purchased in the ordinary course of
business.
(6) Represents contributions to be made to the Company’s retirement plans.
(7) Represents expenditures estimated to be required under legal and binding contractual obligations.
In addition to the contractual obligations table above, we have the following obligations:
Refunds of customer’s advances for construction - We pay refunds on customers’ advances for construction over
a specific period of time based on operating revenues related to developer-installed utility 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 2030 and amounts not paid by the contract
expiration dates become non-refundable.
Asset Retirement Obligations – We recognize asset retirement obligations associated with retirements of
production, storage wells and other pipeline components at fair value, as incurred, or when sufficient information
becomes available to determine a reasonable estimate of the fair value of the retirement activities to be performed.
Expected obligations are not included in the above table because the amounts and timing are dependent upon
several variables, which cannot be accurately estimated.
Uncertain tax positions - We have uncertain tax positions of $20,201. 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.
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 as of December 31, 2021 and 2020:
December 31,
Long-term debt (1)
Essential Utilities stockholders' equity
2021
2020
53.4%
46.6%
100.0%
54.6%
45.4%
100.0%
(1) Includes current portion, as well as our borrowings under a variable rate revolving credit agreement of
$300,000 at December 31, 2021, $385,000 at December 31, 2020.
Over the past two 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.
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.
20
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)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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
consolidated statement of operations in the same period that they are reflected in our rates charged for utility 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, North Carolina, and Kentucky, we may bill our utility customers, in certain circumstances, in accordance with
a rate filing that is pending before the respective regulatory commission, which would allow interim rates 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.
Our long-lived assets, which consist primarily of utility plant in service, operating lease right-of-use assets and intangible
assets, 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 s 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. During the year ended December 31, 2021, the Company recorded an
impairment loss to write down a portion of the operating lease right-of-use asset for office space not used in operations.
Refer to Note 1 – Summary of Significant Accounting Policies – Impairment of Long-Lived Assets 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, or at our discretion, we may perform a quantitative goodwill
impairment test by determining the fair value of a reporting unit by weighting the results from the income approach and
the market approach. These valuation approaches consider a number of factors that include, but are not limited to,
prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly
traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic
factors and future profitability of our business. 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.
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 2.91% for our pension plan, and 2.96% for our other post-retirement benefit plans as of
December 31, 2021, which represent a 34 and 28 basis-point increase as compared to the discount rates selected at
December 31, 2020, respectively. Our post-retirement benefits expense under these plans is determined using the
discount rate as of the beginning of the year, which was 2.57% for our pension plan and 2.68% for our other-
postretirement benefit plan for 2021, and will be 2.91% for our pension plan, and 2.96% for our other post-retirement
benefit plans for 2022.
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
22
23
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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)
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
consolidated statement of operations in the same period that they are reflected in our rates charged for utility 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, North Carolina, and Kentucky, we may bill our utility customers, in certain circumstances, in accordance with
a rate filing that is pending before the respective regulatory commission, which would allow interim rates 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.
Our long-lived assets, which consist primarily of utility plant in service, operating lease right-of-use assets and intangible
assets, 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 s 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. During the year ended December 31, 2021, the Company recorded an
impairment loss to write down a portion of the operating lease right-of-use asset for office space not used in operations.
Refer to Note 1 – Summary of Significant Accounting Policies – Impairment of Long-Lived Assets 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, or at our discretion, we may perform a quantitative goodwill
impairment test by determining the fair value of a reporting unit by weighting the results from the income approach and
the market approach. These valuation approaches consider a number of factors that include, but are not limited to,
prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly
traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic
factors and future profitability of our business. 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.
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 2.91% for our pension plan, and 2.96% for our other post-retirement benefit plans as of
December 31, 2021, which represent a 34 and 28 basis-point increase as compared to the discount rates selected at
December 31, 2020, respectively. Our post-retirement benefits expense under these plans is determined using the
discount rate as of the beginning of the year, which was 2.57% for our pension plan and 2.68% for our other-
postretirement benefit plan for 2021, and will be 2.91% for our pension plan, and 2.96% for our other post-retirement
benefit plans for 2022.
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
22
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)
while maintaining risk at acceptable levels through the diversification of investments across and within various asset
categories. For 2021, we used a 5.6% expected return on plan assets assumption, and are currently reviewing this
assumption for 2022 and expect it may decrease slightly in 2022.
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 2022 our pension
contribution is expected to be $20,390. 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, 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.
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.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Report On Internal Control Over Financial Reporting
Management of Essential Utilities, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. The Company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) 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 (3) 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
In assessing the effectiveness of internal control over financial reporting, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework (2013). As a result of management’s assessment and based on the criteria in the framework, management has
concluded that, as of December 31, 2021, the Company’s internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included
Christopher H. Franklin
Daniel J. Schuller
Chairman, President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
deteriorate.
herein.
a
March 1, 2022
24
25
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
while maintaining risk at acceptable levels through the diversification of investments across and within various asset
categories. For 2021, we used a 5.6% expected return on plan assets assumption, and are currently reviewing this
assumption for 2022 and expect it may decrease slightly in 2022.
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 2022 our pension
contribution is expected to be $20,390. 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, 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.
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.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Management’s Report On Internal Control Over Financial Reporting
Management of Essential Utilities, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. The Company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) 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 (3) 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.
In assessing the effectiveness of internal control over financial reporting, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework (2013). As a result of management’s assessment and based on the criteria in the framework, management has
concluded that, as of December 31, 2021, the Company’s internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included
herein.
a
Christopher H. Franklin
Chairman, President and Chief Executive Officer
Daniel J. Schuller
Executive Vice President and Chief Financial Officer
March 1, 2022
24
25
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, 2021 and 2020, and the related
consolidated statements of operations and comprehensive income, of equity, and of cash flows for each of the three years
in the period ended December 31, 2021, including the related notes and schedule of condensed parent company financial
statements as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2021 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, 2021, 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
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.
Accounting for Rate Regulation
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, 2021, regulatory assets were $1.4 billion and regulatory liabilities were $0.8 billion.
Regulated public utilities follow the Financial Accounting Standards Board’s 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 a regulated operating
company 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
26
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, 2021 and 2020, and the related
consolidated statements of operations and comprehensive income, of equity, and of cash flows for each of the three years
in the period ended December 31, 2021, including the related notes and schedule of condensed parent company financial
statements as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2021 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, 2021, 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
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.
Accounting for Rate Regulation
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, 2021, regulatory assets were $1.4 billion and regulatory liabilities were $0.8 billion.
Regulated public utilities follow the Financial Accounting Standards Board’s 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 a regulated operating
company 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
26
27
on various aspects of such proceedings, and in these instances, may challenge the prudence of business policies and
practices, seek cost disallowances or request other relief.
The principal considerations for our determination that performing procedures relating to management’s accounting for
rate regulation is a critical audit matter are the significant judgment by management when assessing the impact of
regulation on the accounting for regulatory assets and liabilities, which in turn led to a high degree of auditor judgment
and effort in performing procedures and in evaluating audit evidence related to whether the regulatory assets will be
recovered and liabilities will be refunded.
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, including controls
over the recovery of regulatory assets and the refund of regulatory 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 recovery of regulatory assets and refund of regulatory liabilities, (ii) assessing the
reasonableness of management’s accounting judgments related to new and updated regulatory orders and guidelines, and
(iii) testing the calculation of regulatory assets and liabilities based on provisions outlined in regulatory correspondence.
Philadelphia, Pennsylvania
March 1, 2022
We have served as the Company’s auditor since 2000.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
Property, plant and equipment, at cost
Less: accumulated depreciation
Net property, plant and equipment
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Unbilled revenues
Inventory - materials and supplies
Inventory - gas stored
Prepayments and other current assets
Regulatory assets
Total current assets
Regulatory assets
Deferred charges and other assets, net
Funds restricted for construction activity
Operating lease right-of-use assets
Goodwill
Intangible assets
Total assets
See accompanying notes to consolidated financial statements.
December 31,
2021
2020
$
$
12,610,376
2,358,510
10,251,866
11,620,019
2,107,142
9,512,877
10,567
141,025
119,896
33,756
75,804
36,597
20,150
437,795
1,429,840
141,955
1,313
2,340,815
48,930
5,764
4,827
154,775
118,538
21,669
36,732
38,594
5,085
380,220
1,362,788
56,002
1,268
2,324,547
60,334
7,241
$
14,658,278
$
13,705,277
28
29
on various aspects of such proceedings, and in these instances, may challenge the prudence of business policies and
practices, seek cost disallowances or request other relief.
The principal considerations for our determination that performing procedures relating to management’s accounting for
rate regulation is a critical audit matter are the significant judgment by management when assessing the impact of
regulation on the accounting for regulatory assets and liabilities, which in turn led to a high degree of auditor judgment
and effort in performing procedures and in evaluating audit evidence related to whether the regulatory assets will be
recovered and liabilities will be refunded.
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, including controls
over the recovery of regulatory assets and the refund of regulatory 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 recovery of regulatory assets and refund of regulatory liabilities, (ii) assessing the
reasonableness of management’s accounting judgments related to new and updated regulatory orders and guidelines, and
(iii) testing the calculation of regulatory assets and liabilities based on provisions outlined in regulatory correspondence.
Philadelphia, Pennsylvania
March 1, 2022
We have served as the Company’s auditor since 2000.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
Property, plant and equipment, at cost
Less: accumulated depreciation
Net property, plant and equipment
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Unbilled revenues
Inventory - materials and supplies
Inventory - gas stored
Prepayments and other current assets
Regulatory assets
Total current assets
Regulatory assets
Deferred charges and other assets, net
Funds restricted for construction activity
Goodwill
Operating lease right-of-use assets
Intangible assets
Total assets
See accompanying notes to consolidated financial statements.
December 31,
2021
2020
$
12,610,376
2,358,510
10,251,866
11,620,019
2,107,142
9,512,877
10,567
141,025
119,896
33,756
75,804
36,597
20,150
437,795
1,429,840
141,955
1,313
2,340,815
48,930
5,764
14,658,278
$
4,827
154,775
118,538
21,669
36,732
38,594
5,085
380,220
1,362,788
56,002
1,268
2,324,547
60,334
7,241
13,705,277
$
$
28
29
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands of dollars, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
Essential Utilities stockholders' equity:
Liabilities and Equity
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 256,102,388
and 248,571,355 as of December 31, 2021 and December 31, 2020
Capital in excess of par value
Retained earnings
Treasury stock, at cost, 3,234,765 and 3,180,887 shares as of December 31, 2021 and
December 31, 2020
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
Regulatory liabilities
Other accrued liabilities
Total current liabilities
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits
Customers' advances for construction
Regulatory liabilities
Asset retirement obligations
Operating lease liabilities
Pension and other postretirement benefit liabilities
Other
Total deferred credits and other liabilities
Contributions in aid of construction
Total liabilities and equity
See accompanying notes to consolidated financial statements.
December 31,
2021
2020
$
128,050
3,705,814
1,434,201
$
124,285
3,379,057
1,261,862
(83,615)
5,184,450
5,815,211
35,707
5,779,504
(81,327)
4,683,877
5,545,890
38,146
5,507,744
132,146
65,000
192,932
81,722
40,815
37,924
384
124,140
675,063
1,406,537
103,619
769,617
1,256
48,230
50,226
43,666
2,423,151
84,353
78,198
177,489
44,003
39,408
37,172
19,866
123,384
603,873
1,258,098
99,014
773,310
1,336
55,642
91,896
56,713
2,336,009
596,110
14,658,278
573,774
$ 13,705,277
$
Operating revenues
Operating expenses:
Operations and maintenance
Purchased gas
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 loss (earnings) in joint venture
Other
Income before income taxes
Provision for income tax benefit
Net income
Comprehensive income
Net income per common share:
Average common shares outstanding during the period:
Basic
Diluted
Basic
Diluted
See accompanying notes to consolidated financial statements.
Years ended December 31,
2021
2020
2019
$
1,878,144 $
1,462,698 $
889,692
1,275,435
1,028,012
602,709
434,686
340,159
550,580
340,262
292,191
5,761
86,641
207,709
(2,384)
(20,792)
-
-
-
(976)
(2,848)
422,000
(9,612)
528,611
165,745
251,443
5,616
76,597
188,435
(5,363)
(12,687)
-
-
(661)
3,374
(3,383)
264,971
(19,878)
333,102
-
158,179
(1,703)
59,955
549,533
125,383
(25,406)
(16,172)
23,742
18,528
(923)
(2,210)
5,691
211,526
(13,017)
224,543
$
$
$
$
431,612 $
284,849 $
431,612 $
284,849 $
224,543
1.68 $
1.67 $
1.14 $
1.12 $
1.04
1.04
257,487
258,180
249,768
254,629
215,550
215,931
30
31
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
Essential Utilities stockholders' equity:
Liabilities and Equity
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 256,102,388
and 248,571,355 as of December 31, 2021 and December 31, 2020
$
128,050
$
Capital in excess of par value
Retained earnings
December 31, 2020
Total stockholders' equity
Treasury stock, at cost, 3,234,765 and 3,180,887 shares as of December 31, 2021 and
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
Regulatory liabilities
Other accrued liabilities
Total current liabilities
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits
Customers' advances for construction
Regulatory liabilities
Asset retirement obligations
Operating lease liabilities
Pension and other postretirement benefit liabilities
Other
Total deferred credits and other liabilities
Contributions in aid of construction
Total liabilities and equity
See accompanying notes to consolidated financial statements.
December 31,
2021
2020
3,705,814
1,434,201
(83,615)
5,184,450
5,815,211
35,707
5,779,504
132,146
65,000
192,932
81,722
40,815
37,924
384
124,140
675,063
1,406,537
103,619
769,617
1,256
48,230
50,226
43,666
124,285
3,379,057
1,261,862
(81,327)
4,683,877
5,545,890
38,146
5,507,744
84,353
78,198
177,489
44,003
39,408
37,172
19,866
123,384
603,873
1,258,098
99,014
773,310
1,336
55,642
91,896
56,713
2,423,151
2,336,009
596,110
573,774
$
14,658,278
$ 13,705,277
Operating revenues
Operating expenses:
Operations and maintenance
Purchased gas
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 loss (earnings) in joint venture
Other
Income before income taxes
Provision for income tax benefit
Net income
Comprehensive 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,
2021
1,878,144 $
2020
1,462,698 $
2019
889,692
$
550,580
340,262
292,191
5,761
86,641
1,275,435
528,611
165,745
251,443
5,616
76,597
1,028,012
333,102
-
158,179
(1,703)
59,955
549,533
602,709
434,686
340,159
207,709
(2,384)
(20,792)
-
-
(976)
-
(2,848)
422,000
(9,612)
431,612 $
188,435
(5,363)
(12,687)
-
-
(661)
3,374
(3,383)
264,971
(19,878)
284,849 $
125,383
(25,406)
(16,172)
23,742
18,528
(923)
(2,210)
5,691
211,526
(13,017)
224,543
431,612 $
284,849 $
224,543
1.68 $
1.67 $
1.14 $
1.12 $
1.04
1.04
257,487
258,180
249,768
254,629
215,550
215,931
$
$
$
$
30
31
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(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
Total stockholders' equity
Long-term debt of subsidiaries (substantially collateralized by utility plant):
Maturity Date Range
2023 to 2033
2021 to 2039
2022 to 2058
2021 to 2056
2021 to 2059
2021 to 2043
2022 to 2036
2022 to 2027
2021 to 2025
2021 to 2026
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%
December 31,
2021
2020
$
128,050 $
3,705,814
1,434,201
(83,615)
5,184,450
2,341
9,341
312,751
1,359,284
1,286,024
16,119
32,475
28,980
2,772
11,800
3,061,887
124,285
3,379,057
1,261,862
(81,327)
4,683,877
2,805
10,260
265,557
1,316,872
1,315,812
17,804
33,955
29,890
4,425
16,900
3,014,280
Notes payable to bank under revolving credit agreement, variable rate, due 2023
Unsecured notes payable:
300,000
385,000
Amortizing notes at 3.00% due 2022
Notes at 2.40% due 2031
Notes at 2.704% due 2030
Notes ranging from 3.01% to 3.59%, due 2029 through 2050
Notes at 4.28%, due 2049
Notes ranging from 5.64% to 5.95%, due 2021 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
20,470
400,000
500,000
1,125,000
500,000
40,000
5,947,357
132,146
5,815,211
35,707
5,779,504
60,502
-
500,000
1,125,000
500,000
45,461
5,630,243
84,353
5,545,890
38,146
5,507,744
Total capitalization
$
10,963,954 $ 10,191,621
See accompanying notes to consolidated financial statements.
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
18,685
1,244,414
Issuance of common stock from stock purchase contracts
Issuance of common stock under dividend reinvestment plan
equity units
(4,846,601 shares)
(236,666 shares)
2,423
(2,423)
Repurchase of stock (52,359 shares)
Equity compensation plan (146,867 shares)
Exercise of stock options (119,306 shares)
Stock-based compensation
Balance at December 31, 2019
Other
Net income
Dividends declared ($0.97 per share)
Issuance of common stock from private placement (21,661,095
Issuance of common stock from stock purchase contracts
Issuance of common stock under dividend reinvestment plan
shares)
(2,335,654 shares)
(388,978 shares)
10,831
718,470
1,168
(1,168)
Capital in
Common
excess of par
stock
value
Retained
earnings
Treasury
stock
$
90,576 $
820,378 $
1,174,245 $
(75,835) $
-
-
224,543
(188,512)
111,935
2,636,555
(77,702)
-
-
-
-
-
-
-
-
-
-
-
-
118
-
73
60
194
120
37
64
187
-
103
61
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,867)
(204)
1,210,072
284,849
(232,571)
(4,365)
740
(81,327)
(488)
1,261,862
431,612
(258,650)
(3,291)
1,003
(623)
557,389
8,841
-
(73)
1,838
7,368
(1,177)
-
-
-
-
16,328
-
(120)
1,552
8,276
(836)
(64)
16,612
-
(103)
4,111
9,998
(186)
124,285
3,379,057
3,350
296,389
Total
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
284,849
(232,571)
729,301
16,522
(4,365)
1,589
7,788
(96)
4,683,877
431,612
(258,650)
-
-
-
16,799
299,739
(3,291)
-
4,172
9,375
817
$
128,050 $
3,705,814 $
1,434,201 $
(83,615) $
5,184,450
Repurchase of stock (82,320 shares)
Equity compensation plan (239,512 shares)
Exercise of stock options (74,832 shares)
Stock-based compensation
Balance at December 31, 2020
Other
Net income
Dividends declared ($1.0378 per share)
Issuance of common stock from stock purchase contracts
Issuance of common stock under dividend reinvestment plan
Issuance of common stock from forward equity sale agreement
(127,749 shares)
(374,824 shares)
(6,700,000 shares)
Repurchase of stock (76,732 shares)
Equity compensation plan (206,163 shares)
Exercise of stock options (122,297 shares)
Stock-based compensation
Other
Balance at December 31, 2021
See accompanying notes to consolidated financial statements.
32
33
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(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
Total stockholders' equity
Long-term debt of subsidiaries (substantially collateralized by utility plant):
Interest Rate Range
Maturity Date 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%
2023 to 2033
2021 to 2039
2022 to 2058
2021 to 2056
2021 to 2059
2021 to 2043
2022 to 2036
2022 to 2027
2021 to 2025
2021 to 2026
Unsecured notes payable:
Amortizing notes at 3.00% due 2022
Notes at 2.40% due 2031
Notes at 2.704% due 2030
Notes ranging from 3.01% to 3.59%, due 2029 through 2050
Notes at 4.28%, due 2049
Notes ranging from 5.64% to 5.95%, due 2021 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
December 31,
2021
2020
$
128,050 $
3,705,814
1,434,201
(83,615)
5,184,450
2,341
9,341
312,751
1,359,284
1,286,024
16,119
32,475
28,980
2,772
11,800
20,470
400,000
500,000
1,125,000
500,000
40,000
5,947,357
132,146
5,815,211
35,707
5,779,504
124,285
3,379,057
1,261,862
(81,327)
4,683,877
2,805
10,260
265,557
1,316,872
1,315,812
17,804
33,955
29,890
4,425
16,900
60,502
-
500,000
1,125,000
500,000
45,461
5,630,243
84,353
5,545,890
38,146
5,507,744
3,061,887
3,014,280
Notes payable to bank under revolving credit agreement, variable rate, due 2023
300,000
385,000
Total capitalization
$
10,963,954 $ 10,191,621
See accompanying notes to consolidated financial statements.
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
Balance at December 31, 2019
Net income
Dividends declared ($0.97 per share)
Issuance of common stock from private placement (21,661,095
shares)
Issuance of common stock from stock purchase contracts
(2,335,654 shares)
Issuance of common stock under dividend reinvestment plan
(388,978 shares)
Repurchase of stock (82,320 shares)
Equity compensation plan (239,512 shares)
Exercise of stock options (74,832 shares)
Stock-based compensation
Other
Balance at December 31, 2020
Net income
Dividends declared ($1.0378 per share)
Issuance of common stock from stock purchase contracts
(127,749 shares)
Issuance of common stock under dividend reinvestment plan
(374,824 shares)
Issuance of common stock from forward equity sale agreement
(6,700,000 shares)
Repurchase of stock (76,732 shares)
Equity compensation plan (206,163 shares)
Exercise of stock options (122,297 shares)
Stock-based compensation
Other
Common
stock
90,576 $
Capital in
excess of par
value
820,378 $
$
-
-
18,685
-
-
1,244,414
-
557,389
2,423
(2,423)
118
-
73
60
-
-
111,935
-
-
8,841
-
(73)
1,838
7,368
(1,177)
2,636,555
-
-
10,831
718,470
1,168
(1,168)
194
-
120
37
-
-
124,285
-
-
64
187
3,350
-
103
61
-
-
16,328
-
(120)
1,552
8,276
(836)
3,379,057
-
-
(64)
16,612
296,389
-
(103)
4,111
9,998
(186)
3,705,814 $
Retained
earnings
1,174,245 $
224,543
(188,512)
-
-
-
-
-
-
-
(204)
-
1,210,072
284,849
(232,571)
-
-
-
-
-
-
(488)
-
1,261,862
431,612
(258,650)
-
-
-
-
-
-
(623)
-
1,434,201 $
Treasury
stock
(75,835) $
-
-
-
-
-
-
(1,867)
-
-
-
-
(77,702)
-
-
-
-
-
(4,365)
-
-
-
740
(81,327)
-
-
-
-
-
(3,291)
-
-
-
1,003
(83,615) $
Total
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
284,849
(232,571)
729,301
-
16,522
(4,365)
-
1,589
7,788
(96)
4,683,877
431,612
(258,650)
-
16,799
299,739
(3,291)
-
4,172
9,375
817
5,184,450
Balance at December 31, 2021
$
128,050 $
See accompanying notes to consolidated financial statements.
32
33
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 on sale of utility system and other assets
Loss on interest rate swap agreements
Loss on debt extinguishment
Settlement of interest rate swap agreements
Net change in receivables, inventory, deferred purchased gas costs 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 $4,510, $4,434 and $4,231
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 issuance of common stock from private placement
Proceeds from issuance of common stock from forward equity sale agreement
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,
2020
2021
2019
$
431,612 $
284,849 $
224,543
Note 1 – Summary of Significant Accounting Policies
297,952
(8,514)
27,336
10,078
(1,589)
-
-
-
(109,605)
5,190
(15,135)
7,354
644,679
257,059
(17,782)
32,325
8,160
(642)
-
-
-
(35,348)
(1,819)
(20,282)
1,504
508,024
(1,020,519)
(36,326)
1,819
(1,032)
(1,056,058)
(835,642)
(3,501,835)
2,115
1,696
(4,333,666)
15,264
(7,725)
(13,350)
1,095,171
(769,546)
-
37,719
16,799
-
299,739
-
4,172
(3,291)
(258,650)
817
417,119
5,740
4,827
10,567 $
9,585
(8,337)
(129,407)
3,366,838
(1,820,571)
-
33,059
16,522
729,301
-
-
1,589
(4,365)
(232,571)
(96)
1,961,547
(1,864,095)
1,868,922
4,827 $
201,792 $
5,692
169,048 $
4,853
95,945 $
36,882
98,569 $
36,181
156,476
(10,436)
5,306
7,368
(1,328)
23,742
18,528
(83,520)
(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
$
$
$
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.
34
35
Nature of Operations ─ Essential Utilities, Inc. (“Essential Utilities,” the “Company,” “we,” “our”, or “us”) is the holding
company for regulated utilities providing water, wastewater, or natural gas services concentrated in Pennsylvania, Ohio,
Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Kentucky under the Aqua and Peoples
brands. One of our largest operating subsidiaries is Aqua Pennsylvania, Inc., which accounted for approximately 55% of
our Regulated Water segment’s operating revenues and approximately 68% of our Regulated Water segment’s income for
2021. As of December 31, 2021, Aqua Pennsylvania provided water or wastewater services to approximately one-half of
the total number of Regulated Water customers 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
water or wastewater utility subsidiaries provide similar services in seven additional states. Additionally, pursuant to the
Company’s growth strategy, commencing on March 16, 2020 with the completion of the Peoples Gas Acquisition, the
Company began to provide natural gas distribution services to customers in western Pennsylvania, Kentucky, and West
Virginia. Approximately 93% of the total number of natural gas utility customers we serve are in western Pennsylvania.
Lastly, the Company’s market-based activities are conducted through Aqua Infrastructure LLC, and Aqua Resources, Inc.,
and certain other non-regulated subsidiaries of Peoples. Prior to our October 2020 sale of our investment in a joint
venture, Aqua Infrastructure provided non-utility raw water supply services for firms in the natural gas drilling industry.
Aqua Resources offers, through a third-party, water and sewer line protection solutions and repair services to households.
Other non-regulated subsidiaries of Peoples provide utility service line protection services to households and operate gas
marketing and production businesses.
The Company has identified twelve operating segments and has two reportable segments. The Regulated Water segment
is comprised of eight operating segments representing its water and wastewater regulated utility companies, which are
organized by the states where the Company provides water and wastewater services. 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. The Regulated Natural Gas segment is comprised of one
operating segment representing natural gas utility companies, acquired in the Peoples Gas Acquisition, where the
Company provides natural gas distribution services. In addition, our non-regulated natural gas operations, 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 and Regulated Natural Gas
segments, 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 a regulated operating company 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.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Adjustments to reconcile net income to net cash flows from operating activities:
Cash flows from operating activities:
Net income
Depreciation and amortization
Deferred income taxes
Provision for doubtful accounts
Stock-based compensation
Gain on sale of utility system and other assets
Loss on interest rate swap agreements
Loss on debt extinguishment
Settlement of interest rate swap agreements
Net change in receivables, inventory, deferred purchased gas costs 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:
used during construction of $4,510, $4,434 and $4,231
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 issuance of common stock from private placement
Proceeds from issuance of common stock from forward equity sale agreement
Property, plant and equipment additions, including the debt component of allowance for funds
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:
Years ended December 31,
2021
2020
2019
$
431,612 $
284,849 $
224,543
297,952
(8,514)
27,336
10,078
(1,589)
-
-
-
(109,605)
5,190
(15,135)
7,354
644,679
257,059
(17,782)
32,325
8,160
(642)
-
-
-
(35,348)
(1,819)
(20,282)
1,504
508,024
(1,020,519)
(835,642)
(36,326)
(3,501,835)
1,819
(1,032)
2,115
1,696
15,264
(7,725)
(13,350)
1,095,171
(769,546)
9,585
(8,337)
(129,407)
3,366,838
(1,820,571)
37,719
16,799
299,739
-
-
-
4,172
(3,291)
33,059
16,522
729,301
-
-
-
1,589
(4,365)
(258,650)
(232,571)
817
417,119
5,740
4,827
(96)
1,961,547
(1,864,095)
1,868,922
156,476
(10,436)
5,306
7,368
(1,328)
23,742
18,528
(83,520)
(4,335)
5,108
(8,597)
5,668
338,523
(550,273)
(59,687)
2,893
2,464
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
(1,056,058)
(4,333,666)
(604,603)
$
$
$
10,567 $
4,827 $
1,868,922
201,792 $
169,048 $
5,692
4,853
95,945 $
98,569 $
36,882
36,181
89,228
970
60,628
30,693
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.
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.
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, wastewater, or natural gas services concentrated in Pennsylvania, Ohio,
Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Kentucky under the Aqua and Peoples
brands. One of our largest operating subsidiaries is Aqua Pennsylvania, Inc., which accounted for approximately 55% of
our Regulated Water segment’s operating revenues and approximately 68% of our Regulated Water segment’s income for
2021. As of December 31, 2021, Aqua Pennsylvania provided water or wastewater services to approximately one-half of
the total number of Regulated Water customers 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
water or wastewater utility subsidiaries provide similar services in seven additional states. Additionally, pursuant to the
Company’s growth strategy, commencing on March 16, 2020 with the completion of the Peoples Gas Acquisition, the
Company began to provide natural gas distribution services to customers in western Pennsylvania, Kentucky, and West
Virginia. Approximately 93% of the total number of natural gas utility customers we serve are in western Pennsylvania.
Lastly, the Company’s market-based activities are conducted through Aqua Infrastructure LLC, and Aqua Resources, Inc.,
and certain other non-regulated subsidiaries of Peoples. Prior to our October 2020 sale of our investment in a joint
venture, Aqua Infrastructure provided non-utility raw water supply services for firms in the natural gas drilling industry.
Aqua Resources offers, through a third-party, water and sewer line protection solutions and repair services to households.
Other non-regulated subsidiaries of Peoples provide utility service line protection services to households and operate gas
marketing and production businesses.
The Company has identified twelve operating segments and has two reportable segments. The Regulated Water segment
is comprised of eight operating segments representing its water and wastewater regulated utility companies, which are
organized by the states where the Company provides water and wastewater services. 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. The Regulated Natural Gas segment is comprised of one
operating segment representing natural gas utility companies, acquired in the Peoples Gas Acquisition, where the
Company provides natural gas distribution services. In addition, our non-regulated natural gas operations, 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 and Regulated Natural Gas
segments, 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 a regulated operating company 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.
34
35
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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
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.
The current novel coronavirus (“COVID-19”) pandemic has, at times, caused significant social and economic restrictions
that have been imposed in the United States and abroad, which resulted in significant volatility in the global economy and
led to reduced economic activity in some industries. In the preparation of these financial statements and related
disclosures, we have assessed the impact that the COVID-19 pandemic has had on our estimates, assumptions, forecasts,
and accounting policies. Because of the essential nature of our business, we do not believe the COVID-19 pandemic had
a material impact on our estimates, assumptions and forecasts used in the preparation of our financial statements, although
we continue to monitor this closely. As the COVID-19 situation is ever evolving, future events and effects related to the
COVID-19 pandemic, including the effects of potential vaccination requirements, cannot be determined with precision,
and actual results could significantly differ from our estimates or forecasts.
Basis of Presentation – The consolidated financial statements include the accounts of the Company and its subsidiaries.
All intercompany accounts and transactions have been eliminated.
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. Utility 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, utility 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, 2021 and 2020,
utility plant includes a net credit acquisition adjustment of $9,055 and $12,215, respectively, which is generally being
amortized from 2 to 59 years. Amortization of the acquisition adjustments totaled $2,842 in 2021, $2,895 in 2020, and
$6,076 in 2019.
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, 2021,
$52,810 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.
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.
Impairment of Long-Lived Assets - Long-lived assets of the Company, which consist primarily of utility plant in service,
operating lease right-of-use assets and intangible assets, 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, 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 year ended December 31, 2021, the Company recorded an impairment loss
to write down a portion of the operating lease right-of-use asset for office space not used in operations to fair value.
Refer to Note 10 – Leases, for further details.
Regulatory assets are reviewed for the continued application of the FASB accounting guidance for regulated operations.
The Company’s 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.
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, 2021,
$1,635 of these costs have been incurred since the last respective rate proceeding and the Company expects to recover
these costs in future rates.
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 rates as the utility
plant is depreciated. The amount of AFUDC related to equity funds in 2021 was $16,282, 2020 was $8,253, and 2019
was $11,941. No interest was capitalized by our market-based businesses.
36
37
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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
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.
The current novel coronavirus (“COVID-19”) pandemic has, at times, caused significant social and economic restrictions
that have been imposed in the United States and abroad, which resulted in significant volatility in the global economy and
led to reduced economic activity in some industries. In the preparation of these financial statements and related
disclosures, we have assessed the impact that the COVID-19 pandemic has had on our estimates, assumptions, forecasts,
and accounting policies. Because of the essential nature of our business, we do not believe the COVID-19 pandemic had
a material impact on our estimates, assumptions and forecasts used in the preparation of our financial statements, although
we continue to monitor this closely. As the COVID-19 situation is ever evolving, future events and effects related to the
COVID-19 pandemic, including the effects of potential vaccination requirements, cannot be determined with precision,
and actual results could significantly differ from our estimates or forecasts.
Basis of Presentation – The consolidated financial statements include the accounts of the Company and its subsidiaries.
All intercompany accounts and transactions have been eliminated.
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. Utility 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, utility 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, 2021 and 2020,
utility plant includes a net credit acquisition adjustment of $9,055 and $12,215, respectively, which is generally being
amortized from 2 to 59 years. Amortization of the acquisition adjustments totaled $2,842 in 2021, $2,895 in 2020, and
$6,076 in 2019.
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, 2021,
$52,810 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.
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.
Impairment of Long-Lived Assets - Long-lived assets of the Company, which consist primarily of utility plant in service,
operating lease right-of-use assets and intangible assets, 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, 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 year ended December 31, 2021, the Company recorded an impairment loss
to write down a portion of the operating lease right-of-use asset for office space not used in operations to fair value.
Refer to Note 10 – Leases, for further details.
Regulatory assets are reviewed for the continued application of the FASB accounting guidance for regulated operations.
The Company’s 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.
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, 2021,
$1,635 of these costs have been incurred since the last respective rate proceeding and the Company expects to recover
these costs in future rates.
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 rates as the utility
plant is depreciated. The amount of AFUDC related to equity funds in 2021 was $16,282, 2020 was $8,253, and 2019
was $11,941. No interest was capitalized by our market-based businesses.
36
37
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Lease Accounting ─ The Company evaluates the contracts it enters into to determine whether such contracts contain leases.
A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for
a period of time in exchange for consideration. We enter into operating lease contracts for the right to utilize certain land,
office facilities, office equipment, and vehicles from third parties. For contracts that extend for a period greater than 12
months, we recognize a right of use asset and a corresponding lease liability on our consolidated balance sheet. The present
value of each lease is based on the future minimum lease payments in accordance with Accounting Standards Codification
(“ASC”) 842 and is determined by discounting these payments using an incremental borrowing rate.
Recognition of Revenues ─ The Company recognizes revenue as utility 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:
2021
Water Revenues
Wastewater
Revenues
Natural Gas
Revenues Other Revenues
Residential
Commercial
Fire protection
Industrial
Gas transportation
Other water
Other wastewater
Customer rate credits
Other utility
Revenues from contracts with customers
Alternative revenue program
Other and eliminations
Consolidated
$
$
561,996 $
151,071
35,984
30,230
-
53,488
-
-
-
832,769
1,760
-
834,529 $
99,931 $
22,060
-
1,729
-
-
8,860
-
-
132,580
(264)
-
132,316 $
530,338 $
99,596
-
3,427
198,195
-
-
(5,000)
32,812
859,368
534
-
859,902 $
-
-
-
-
-
-
-
-
13,358
13,358
-
38,039
51,397
Revenues from contracts with customers:
2020
Water Revenues
Wastewater
Revenues
Natural Gas
Revenues
Other Revenues
$
567,486 $
95,051 $
19,062
314,274 $
50,239
Residential
Commercial
Fire protection
Industrial
Gas transportation
Other water
Other wastewater
Customer rate credits
Other utility
Alternative revenue program
Other and eliminations
Consolidated
143,479
35,340
29,764
32,372
(3,757)
-
-
-
87
-
1,619
5,385
(323)
-
-
-
-
114
-
6,923
133,685
-
-
-
(18,924)
20,243
506,440
124
-
$
804,771 $
120,908 $
506,564 $
Revenues from contracts with customers
804,684
120,794
2019
Revenues from contracts with customers:
Water Revenues Wastewater Revenues Other Revenues
Residential
Commercial
Fire protection
Industrial
Other water
Other wastewater
Other utility
Revenues from contracts with customers
Alternative revenue program
Other and eliminations
Consolidated
$
$
518,192
145,599
33,589
30,667
39,353
767,400
-
-
80
-
83,561
15,222
$
1,765
4,656
-
-
-
105,204
(89)
-
$
767,480
$
105,115
$
On March 16, 2020, the Company completed the Peoples Gas Acquisition, which expanded the Company’s regulated
utility business to include natural gas distribution. The natural gas revenues of Peoples are included for the period since
the date of the acquisition.
Revenues from Contracts with Customers – These revenues are composed of four main categories: water, wastewater,
natural gas, and other. Water revenues represent revenues earned for supplying customers with water service.
Wastewater revenues represent revenues earned for treating wastewater and releasing it into the environment. Natural gas
revenues represent revenues earned for the gas commodity and delivery of natural gas to customers. Other revenues are
associated fees that relate to our utility businesses but are not water, wastewater, or natural gas revenues. Refer to the
description below for a discussion of the performance obligation for each of these revenue streams.
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12,861
12,861
17,594
30,455
13,835
13,835
3,262
17,097
38
39
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Lease Accounting ─ The Company evaluates the contracts it enters into to determine whether such contracts contain leases.
A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for
a period of time in exchange for consideration. We enter into operating lease contracts for the right to utilize certain land,
office facilities, office equipment, and vehicles from third parties. For contracts that extend for a period greater than 12
months, we recognize a right of use asset and a corresponding lease liability on our consolidated balance sheet. The present
value of each lease is based on the future minimum lease payments in accordance with Accounting Standards Codification
(“ASC”) 842 and is determined by discounting these payments using an incremental borrowing rate.
Recognition of Revenues ─ The Company recognizes revenue as utility 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:
2021
Water Revenues
Wastewater
Revenues
Natural Gas
Revenues Other Revenues
$
561,996 $
99,931 $
22,060
530,338 $
99,596
151,071
35,984
30,230
53,488
-
-
-
-
-
1,729
8,860
-
-
-
-
-
-
3,427
198,195
-
-
-
(5,000)
32,812
859,368
534
-
-
-
-
-
-
-
-
-
-
13,358
13,358
38,039
51,397
Revenues from contracts with customers
Alternative revenue program
Other and eliminations
Consolidated
832,769
1,760
132,580
(264)
$
834,529 $
132,316 $
859,902 $
Residential
Commercial
Fire protection
Industrial
Gas transportation
Other water
Other wastewater
Customer rate credits
Other utility
Revenues from contracts with customers:
2020
Water Revenues
Wastewater
Revenues
Natural Gas
Revenues
Other Revenues
Residential
Commercial
Fire protection
Industrial
Gas transportation
Other water
Other wastewater
Customer rate credits
Other utility
Revenues from contracts with customers
Alternative revenue program
Other and eliminations
Consolidated
2019
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
$
$
567,486 $
143,479
35,340
29,764
-
32,372
-
(3,757)
-
804,684
87
-
804,771 $
95,051 $
19,062
-
1,619
-
-
5,385
(323)
-
120,794
114
-
120,908 $
314,274 $
50,239
-
6,923
133,685
-
-
(18,924)
20,243
506,440
124
-
506,564 $
-
-
-
-
-
-
-
-
12,861
12,861
-
17,594
30,455
Water Revenues 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
On March 16, 2020, the Company completed the Peoples Gas Acquisition, which expanded the Company’s regulated
utility business to include natural gas distribution. The natural gas revenues of Peoples are included for the period since
the date of the acquisition.
Revenues from Contracts with Customers – These revenues are composed of four main categories: water, wastewater,
natural gas, and other. Water revenues represent revenues earned for supplying customers with water service.
Wastewater revenues represent revenues earned for treating wastewater and releasing it into the environment. Natural gas
revenues represent revenues earned for the gas commodity and delivery of natural gas to customers. Other revenues are
associated fees that relate to our utility businesses but are not water, wastewater, or natural gas revenues. Refer to the
description below for a discussion of the performance obligation for each of these revenue streams.
38
39
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Tariff Revenues – These revenues are categorized by customer class: residential, commercial, fire protection,
industrial, gas transportation, other water, and other wastewater. The rates that generate these revenues are
approved by the respective state utility commission, and revenues are billed cyclically and accrued for when
unbilled. The regulated natural gas rates are set and adjusted for increases or decreases in our purchased gas costs
through purchased gas adjustment mechanisms. Purchased gas adjustment mechanisms provide us with a means
to recover purchased gas costs on an ongoing basis without filing a rate case. Other water and other wastewater
revenues consists primarily of fines, penalties, surcharges, and availability lot fees. Our performance obligation
for tariff revenues is to provide potable water, wastewater treatment service, or delivery and sale of natural gas to
customers. This performance obligation is satisfied over time as the services are rendered. The amounts that the
Company has a right to invoice for tariff revenues reflect the right to consideration from the customers in an
amount that corresponds directly with the value transferred to the customer for the performance completed to
date.
Other Utility Revenues – Other utility revenues represent revenues earned primarily from: antenna revenues,
which represents fees received from telecommunication operators that have put cellular antennas on our water
towers; operation and maintenance and billing contracts, which represent fees earned from municipalities for our
operation of their water or wastewater treatment services or performing billing services; and fees earned from
developers for accessing our water mains, miscellaneous service revenue from gas distribution operations, gas
processing and handling revenue, sales of natural gas at market-based rates and contracted fixed prices, sales of
gas purchased from third parties, and other gas marketing activities. The performance obligations vary for these
revenues, but all are primarily recognized over time as the service is delivered.
Alternative Revenue Program:
o Water / Wastewater Revenues – These revenues represent the difference between the actual billed utility
volumetric water and wastewater revenues for Aqua Illinois and the revenues set in the last Aqua Illinois
rate case. In accordance with the Illinois Commerce Commission, we recognize revenues based on the
target amount established in the last rate case, and then record either a regulatory asset or liability based
on the cumulative annual difference between the target and actual amounts billed, which results in either a
payment from customers or a refund due to customers. The cumulative annual difference is either
refunded to customers or collected from customers over a nine-month period.
o Natural Gas Revenues – These revenues represent the weather-normalization adjustment (“WNA”)
mechanism in place for our natural gas customers served in Kentucky. The WNA serves to minimize the
effects of weather on the Company’s results for its residential and small commercial natural gas
customers. This regulatory mechanism adjusts revenues earned for the variance between actual and
normal weather and can have either positive (warmer than normal) or negative (colder than normal)
effects on revenues. Customer bills are adjusted in the December through April billing months, with rates
adjusted for the difference between actual revenues and revenues calculated under this mechanism billed
to the customers.
These revenue programs represent a contract between the utility and its regulators, not customers, and therefore
are not within the scope of the FASB’s accounting guidance for recognizing revenue from contracts with
customers.
Other and Eliminations – Other and eliminations consist of our market-based revenues, which comprises: our
non-regulated natural gas operations, Aqua Infrastructure, and Aqua Resources (described below), and
intercompany eliminations for revenue billed between our subsidiaries. Our non-regulated natural gas operations
consist of utility service line protection solutions and repair services for households and the operation of gas
marketing and production entities. Revenue is recognized and the performance obligation is satisfied over time as
the service is delivered.
Aqua Infrastructure is the holding company for our former 49% investment in a joint venture that operated a
private pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale of north
central Pennsylvania. Prior to our October 30, 2020 sale of our investment in the joint venture, the joint venture
earned revenues through providing non-utility raw water supply services to natural gas drilling companies which
enter into water supply contracts. The performance obligation was to deliver non-potable water to the joint
venture’s customers. Aqua Infrastructure’s share of the revenues recognized by the joint venture was reflected,
net, in equity earnings in joint venture on our consolidated statements of operations and comprehensive income.
Aqua Resources earned revenues by providing non-regulated water and wastewater services through an operating
and maintenance contract, which concluded in 2020, and continues to earn revenue through third-party water and
sewer service line protection and repair services. For the contract operations and maintenance business, the
performance obligations were performing agreed upon contract services to operate the water and wastewater
system. For the service line protection business, the performance obligations are allowing the use of our logo to a
third-party water and sewer service line repair provider. Revenues are primarily recognized over time as service
is delivered.
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 $81,722 and $44,003 at December 31, 2021 and 2020, 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 lifetime expected credit losses 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.
method.
Inventory – Gas Stored – The Company accounts for gas in storage inventory using the weighted average cost of gas
Investment in Joint Venture – The Company used the equity method of accounting to account for our former 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. In 2020, the Company sold its investment in joint venture and recorded a charge
of $3,700 associated with the sale. Our share of equity loss (earnings) in the joint venture was reported in the
consolidated statements of operations and comprehensive income as equity loss (earnings) in joint venture. During 2020
and 2019, we received distributions of $2,137 and $3,185, respectively.
40
41
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Tariff Revenues – These revenues are categorized by customer class: residential, commercial, fire protection,
industrial, gas transportation, other water, and other wastewater. The rates that generate these revenues are
approved by the respective state utility commission, and revenues are billed cyclically and accrued for when
unbilled. The regulated natural gas rates are set and adjusted for increases or decreases in our purchased gas costs
through purchased gas adjustment mechanisms. Purchased gas adjustment mechanisms provide us with a means
to recover purchased gas costs on an ongoing basis without filing a rate case. Other water and other wastewater
revenues consists primarily of fines, penalties, surcharges, and availability lot fees. Our performance obligation
for tariff revenues is to provide potable water, wastewater treatment service, or delivery and sale of natural gas to
customers. This performance obligation is satisfied over time as the services are rendered. The amounts that the
Company has a right to invoice for tariff revenues reflect the right to consideration from the customers in an
amount that corresponds directly with the value transferred to the customer for the performance completed to
date.
Other Utility Revenues – Other utility revenues represent revenues earned primarily from: antenna revenues,
which represents fees received from telecommunication operators that have put cellular antennas on our water
towers; operation and maintenance and billing contracts, which represent fees earned from municipalities for our
operation of their water or wastewater treatment services or performing billing services; and fees earned from
developers for accessing our water mains, miscellaneous service revenue from gas distribution operations, gas
processing and handling revenue, sales of natural gas at market-based rates and contracted fixed prices, sales of
gas purchased from third parties, and other gas marketing activities. The performance obligations vary for these
revenues, but all are primarily recognized over time as the service is delivered.
Alternative Revenue Program:
o Water / Wastewater Revenues – These revenues represent the difference between the actual billed utility
volumetric water and wastewater revenues for Aqua Illinois and the revenues set in the last Aqua Illinois
rate case. In accordance with the Illinois Commerce Commission, we recognize revenues based on the
target amount established in the last rate case, and then record either a regulatory asset or liability based
on the cumulative annual difference between the target and actual amounts billed, which results in either a
payment from customers or a refund due to customers. The cumulative annual difference is either
refunded to customers or collected from customers over a nine-month period.
o Natural Gas Revenues – These revenues represent the weather-normalization adjustment (“WNA”)
mechanism in place for our natural gas customers served in Kentucky. The WNA serves to minimize the
effects of weather on the Company’s results for its residential and small commercial natural gas
customers. This regulatory mechanism adjusts revenues earned for the variance between actual and
normal weather and can have either positive (warmer than normal) or negative (colder than normal)
effects on revenues. Customer bills are adjusted in the December through April billing months, with rates
adjusted for the difference between actual revenues and revenues calculated under this mechanism billed
to the customers.
These revenue programs represent a contract between the utility and its regulators, not customers, and therefore
are not within the scope of the FASB’s accounting guidance for recognizing revenue from contracts with
customers.
Other and Eliminations – Other and eliminations consist of our market-based revenues, which comprises: our
non-regulated natural gas operations, Aqua Infrastructure, and Aqua Resources (described below), and
intercompany eliminations for revenue billed between our subsidiaries. Our non-regulated natural gas operations
consist of utility service line protection solutions and repair services for households and the operation of gas
marketing and production entities. Revenue is recognized and the performance obligation is satisfied over time as
the service is delivered.
Aqua Infrastructure is the holding company for our former 49% investment in a joint venture that operated a
private pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale of north
central Pennsylvania. Prior to our October 30, 2020 sale of our investment in the joint venture, the joint venture
earned revenues through providing non-utility raw water supply services to natural gas drilling companies which
enter into water supply contracts. The performance obligation was to deliver non-potable water to the joint
venture’s customers. Aqua Infrastructure’s share of the revenues recognized by the joint venture was reflected,
net, in equity earnings in joint venture on our consolidated statements of operations and comprehensive income.
Aqua Resources earned revenues by providing non-regulated water and wastewater services through an operating
and maintenance contract, which concluded in 2020, and continues to earn revenue through third-party water and
sewer service line protection and repair services. For the contract operations and maintenance business, the
performance obligations were performing agreed upon contract services to operate the water and wastewater
system. For the service line protection business, the performance obligations are allowing the use of our logo to a
third-party water and sewer service line repair provider. Revenues are primarily recognized over time as service
is delivered.
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 $81,722 and $44,003 at December 31, 2021 and 2020, 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 lifetime expected credit losses 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.
Inventory – Gas Stored – The Company accounts for gas in storage inventory using the weighted average cost of gas
method.
Investment in Joint Venture – The Company used the equity method of accounting to account for our former 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. In 2020, the Company sold its investment in joint venture and recorded a charge
of $3,700 associated with the sale. Our share of equity loss (earnings) in the joint venture was reported in the
consolidated statements of operations and comprehensive income as equity loss (earnings) in joint venture. During 2020
and 2019, we received distributions of $2,137 and $3,185, respectively.
40
41
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 or at our discretion, we may perform a quantitative goodwill
impairment test by determining the fair value of a reporting unit. 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.
Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level
below an operating segment (also known as a component). A component of an operating segment is a reporting unit if the
component constitutes a business for which discrete financial information is available, and segment management regularly
reviews the operating results of that component. We assigned assets and liabilities to each reporting unit based on either
specific identification or by using judgment for the remaining assets and liabilities that are not specific to a reporting unit.
Goodwill was assigned to the reporting units based on a combination of specific identification and relative fair values.
The Company performed a quantitative assessment for its annual test of the goodwill attributable to its Regulated Natural
Gas reporting unit as of July 31, 2021. We estimated the fair value of the reporting unit by weighting results from the
market approach and the income approach. Key assumptions in the valuation methodologies for goodwill included
growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our
industry. Based on our analysis, we determined that the fair values of our Regulated Natural Gas reporting unit exceeded
its carrying values, indicating none of its goodwill was impaired.
The Company performed a qualitative assessment for its annual test of the goodwill attributable to its Regulated Water
and Aqua Resources reporting units as of July 31, 2021, 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:
Regulated
Water
Regulated
Natural
Gas
Other
Balance at December 31, 2019
$
Goodwill acquired
Reclassifications to utility plant acquisition adjustment
Balance at December 31, 2020
Goodwill acquired
Measurement period purchase price allocation adjustments
Reclassifications to utility plant acquisition adjustment
58,981 $
2,596
(2,918)
58,659
-
-
(132)
- $
4,841 $
2,261,047
-
2,261,047
-
16,400
-
-
-
4,841
-
-
-
Balance at December 31, 2021
$
58,527 $ 2,277,447 $
4,841 $
Consolidated
63,822
2,263,643
(2,918)
2,324,547
-
16,400
(132)
2,340,815
The measurement period purchase price allocation adjustments resulted from the completion of the Peoples Gas
Acquisition on March 16, 2020, which resulted in goodwill of $2,277,447 which was subject to adjustment over the one
year measurement period that ended on March 15, 2021. Refer to Note 2 – Acquisitions for information about the
goodwill attributed to our Regulated Natural Gas segment.
The reclassification of goodwill to utility plant acquisition adjustment results from either a regulatory order or a
mechanism approved by the applicable utility commission. A regulatory order may provide for the one-time transfer of
certain acquired goodwill. The mechanism provides for the transfer over time, and the recovery through customer rates, of
goodwill associated with some acquisitions upon achieving specific objectives.
Intangible assets – The Company’s intangible assets consist of customer relationships for our non-regulated natural gas
operations, and non-compete agreements with certain former employees of Peoples. These intangible assets are amortized
on a straight-line basis over their estimated useful lives of fifteen years for the customer relationships and five years for
the non-compete agreements.
Derivative Instruments – The Company’s natural gas commodity price risk, driven mainly by price fluctuations of natural
gas, is mitigated by its purchased-gas cost adjustment mechanisms. The Company also uses derivative instruments to
economically hedge the cost of anticipated natural gas purchases during the winter heating months that seeks to offset the
risk to the Company’s utility customers from upward market price volatility. These strategies include requirements
contracts, spot purchase contracts and underground storage to meet regulated customers’ natural gas requirements that
may have fixed or variable pricing. The variable price contracts qualify as derivative instruments; however, because the
contract price is the prevailing price at the future transaction date the contract has no determinable fair value. The fixed
price contracts and firm commitments to purchase a fixed quantity of gas in the future qualify for the normal purchases
and normal sales exception that is allowed for contracts that are probable of delivery in the normal course of business and,
as such, are accounted for under the accrual basis and are not recorded at fair value in the Company’s consolidated
financial statements.
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, prepaid pension and other post-
retirement benefit plans assets, and the non-current portion of Peoples’ financing notes receivable, which amounted to
$28,576, $25,978, and $65,744 as of December 31, 2021; and, $25,780, $0, and $0 as of December 31, 2020, respectively.
The assets of the deferred compensation plan are invested in mutual funds which are carried on the consolidated balance
sheet at fair market value, and changes in fair value are included in other expense (income), refer to Note 12 – Fair Value
of Financial Instruments for further details. Refer to Note 16 – Pension Plans and Other Post-Retirement Benefit Plans
for further information on the prepaid pension and other post-retirement benefit plan assets.
Pursuant to agreements entered into by Peoples in 2019, Peoples committed to design, construct, and operate over a 20-
year period, three onsite natural gas fueled energy plants on customer-owned property in the western Pennsylvania
area. Under the provisions of ASC 842, Leases, the Company determined that indicators of control over the assets
constructed were not met, as such this failed sale-leaseback transaction was accounted for as a financing arrangement in
accordance with ASC Topic 310, Receivables. During the period of construction of the plants, which began in 2020,
expenditures incurred by Peoples on the projects were recorded in property, plant and equipment and amounted to
$58,380 as of December 31, 2020. During 2021, when construction was completed and the plants became on-line and
began generation activity, the accumulated balances of the projects included in property, plant and equipment of $71,665
was reclassified as a note receivable and included within deferred charges and other assets in the consolidated balance
sheet. Amounts becoming due for payment by the customer in the current year are included within prepayments and other
current assets in the consolidated balance sheets, which amounted to $2,423 as of December 31, 2021. Interest income is
recognized on these financing notes receivable using an imputed interest rate ranging from 3.4% to 4.3% and is recorded
as interest income in the consolidated statements of operations and comprehensive income. For the year ended December
31, 2021, interest income on financing note receivable amounted to $1,971.
42
43
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 or at our discretion, we may perform a quantitative goodwill
impairment test by determining the fair value of a reporting unit. 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.
Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level
below an operating segment (also known as a component). A component of an operating segment is a reporting unit if the
component constitutes a business for which discrete financial information is available, and segment management regularly
reviews the operating results of that component. We assigned assets and liabilities to each reporting unit based on either
specific identification or by using judgment for the remaining assets and liabilities that are not specific to a reporting unit.
Goodwill was assigned to the reporting units based on a combination of specific identification and relative fair values.
The Company performed a quantitative assessment for its annual test of the goodwill attributable to its Regulated Natural
Gas reporting unit as of July 31, 2021. We estimated the fair value of the reporting unit by weighting results from the
market approach and the income approach. Key assumptions in the valuation methodologies for goodwill included
growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our
industry. Based on our analysis, we determined that the fair values of our Regulated Natural Gas reporting unit exceeded
its carrying values, indicating none of its goodwill was impaired.
The Company performed a qualitative assessment for its annual test of the goodwill attributable to its Regulated Water
and Aqua Resources reporting units as of July 31, 2021, 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, 2019
Goodwill acquired
Balance at December 31, 2020
Goodwill acquired
Reclassifications to utility plant acquisition adjustment
Measurement period purchase price allocation adjustments
Reclassifications to utility plant acquisition adjustment
$
58,981 $
- $
4,841 $
Other
Consolidated
Regulated
Water
2,596
(2,918)
58,659
-
-
(132)
Regulated
Natural
Gas
2,261,047
-
-
-
16,400
2,261,047
4,841
63,822
2,263,643
(2,918)
2,324,547
-
16,400
(132)
-
-
-
-
-
Balance at December 31, 2021
$
58,527 $ 2,277,447 $
4,841 $
2,340,815
The measurement period purchase price allocation adjustments resulted from the completion of the Peoples Gas
Acquisition on March 16, 2020, which resulted in goodwill of $2,277,447 which was subject to adjustment over the one
year measurement period that ended on March 15, 2021. Refer to Note 2 – Acquisitions for information about the
goodwill attributed to our Regulated Natural Gas segment.
The reclassification of goodwill to utility plant acquisition adjustment results from either a regulatory order or a
mechanism approved by the applicable utility commission. A regulatory order may provide for the one-time transfer of
certain acquired goodwill. The mechanism provides for the transfer over time, and the recovery through customer rates, of
goodwill associated with some acquisitions upon achieving specific objectives.
Intangible assets – The Company’s intangible assets consist of customer relationships for our non-regulated natural gas
operations, and non-compete agreements with certain former employees of Peoples. These intangible assets are amortized
on a straight-line basis over their estimated useful lives of fifteen years for the customer relationships and five years for
the non-compete agreements.
Derivative Instruments – The Company’s natural gas commodity price risk, driven mainly by price fluctuations of natural
gas, is mitigated by its purchased-gas cost adjustment mechanisms. The Company also uses derivative instruments to
economically hedge the cost of anticipated natural gas purchases during the winter heating months that seeks to offset the
risk to the Company’s utility customers from upward market price volatility. These strategies include requirements
contracts, spot purchase contracts and underground storage to meet regulated customers’ natural gas requirements that
may have fixed or variable pricing. The variable price contracts qualify as derivative instruments; however, because the
contract price is the prevailing price at the future transaction date the contract has no determinable fair value. The fixed
price contracts and firm commitments to purchase a fixed quantity of gas in the future qualify for the normal purchases
and normal sales exception that is allowed for contracts that are probable of delivery in the normal course of business and,
as such, are accounted for under the accrual basis and are not recorded at fair value in the Company’s consolidated
financial statements.
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, prepaid pension and other post-
retirement benefit plans assets, and the non-current portion of Peoples’ financing notes receivable, which amounted to
$28,576, $25,978, and $65,744 as of December 31, 2021; and, $25,780, $0, and $0 as of December 31, 2020, respectively.
The assets of the deferred compensation plan are invested in mutual funds which are carried on the consolidated balance
sheet at fair market value, and changes in fair value are included in other expense (income), refer to Note 12 – Fair Value
of Financial Instruments for further details. Refer to Note 16 – Pension Plans and Other Post-Retirement Benefit Plans
for further information on the prepaid pension and other post-retirement benefit plan assets.
Pursuant to agreements entered into by Peoples in 2019, Peoples committed to design, construct, and operate over a 20-
year period, three onsite natural gas fueled energy plants on customer-owned property in the western Pennsylvania
area. Under the provisions of ASC 842, Leases, the Company determined that indicators of control over the assets
constructed were not met, as such this failed sale-leaseback transaction was accounted for as a financing arrangement in
accordance with ASC Topic 310, Receivables. During the period of construction of the plants, which began in 2020,
expenditures incurred by Peoples on the projects were recorded in property, plant and equipment and amounted to
$58,380 as of December 31, 2020. During 2021, when construction was completed and the plants became on-line and
began generation activity, the accumulated balances of the projects included in property, plant and equipment of $71,665
was reclassified as a note receivable and included within deferred charges and other assets in the consolidated balance
sheet. Amounts becoming due for payment by the customer in the current year are included within prepayments and other
current assets in the consolidated balance sheets, which amounted to $2,423 as of December 31, 2021. Interest income is
recognized on these financing notes receivable using an imputed interest rate ranging from 3.4% to 4.3% and is recorded
as interest income in the consolidated statements of operations and comprehensive income. For the year ended December
31, 2021, interest income on financing note receivable amounted to $1,971.
42
43
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 included 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.
Customers’ Advances for Construction and Contributions in Aid of Construction ─ Utility mains, other utility property
or, in some instances, cash advances to reimburse the Company for its costs to construct utility 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 for our regulated water
business. Contributions in aid of construction include direct non-refundable contributions and the portion of customers'
advances for construction that become non-refundable. For our regulated gas business, non-refundable contributions are
netted against the cost of the related utility mains or other utility property.
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.
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, 2021 and 2020.
Recent Accounting Pronouncements ─
Pronouncements to be adopted upon the effective date:
In August 2020, the FASB issued updated accounting guidance on accounting for convertible instruments and contracts in
an entity’s own equity. The updated guidance reduces the number of accounting models for convertible debt and
convertible preferred stock instruments and makes certain disclosure amendments intended to improve the information
provided to users. Additionally, the guidance also amends the derivative guidance for the “own stock” scope exception,
which exempts qualifying instruments from being accounted for as derivatives if certain criteria are met. Further, the
standard changes the way certain convertible instruments are treated when calculating earnings per share. The updated
accounting guidance is effective for fiscal years beginning after December 15, 2021 with early adoption permitted
beginning in 2021. The adoption of this standard is not expected to have a material impact to the Company’s financial
statements.
In October 2021, the FASB issued accounting guidance on accounting for acquired revenue contracts with customers in a
business combination. The guidance specifies for all acquired revenue contracts, regardless of their timing of payment,
the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a
business combination, as well as how to measure those contract assets and contract liabilities. The updated accounting
guidance is effective for fiscal years beginning after December 15, 2022 with early adoption permitted. The Company is
evaluating the requirements of the updated guidance to determine the impact of adoption.
Pronouncements adopted during the fiscal year:
In March 2020, the FASB issued accounting guidance that provides companies with optional guidance, including
expedients and exceptions for applying generally accepted accounting principles to contracts and other transactions
affected by reference rate reform, such as the London Interbank Offered Rate (LIBOR). The accounting guidance was
effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022.
The Company adopted the guidance in the fourth quarter of 2021 and there was no impact on its Consolidated Financial
Statements upon adoption.
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. As permitted, we adopted this updated guidance on January 1, 2021, which did not have a material impact on our
consolidated financial statements.
44
45
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 included 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.
Customers’ Advances for Construction and Contributions in Aid of Construction ─ Utility mains, other utility property
or, in some instances, cash advances to reimburse the Company for its costs to construct utility 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 for our regulated water
business. Contributions in aid of construction include direct non-refundable contributions and the portion of customers'
advances for construction that become non-refundable. For our regulated gas business, non-refundable contributions are
netted against the cost of the related utility mains or other utility property.
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.
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, 2021 and 2020.
Recent Accounting Pronouncements ─
Pronouncements to be adopted upon the effective date:
In August 2020, the FASB issued updated accounting guidance on accounting for convertible instruments and contracts in
an entity’s own equity. The updated guidance reduces the number of accounting models for convertible debt and
convertible preferred stock instruments and makes certain disclosure amendments intended to improve the information
provided to users. Additionally, the guidance also amends the derivative guidance for the “own stock” scope exception,
which exempts qualifying instruments from being accounted for as derivatives if certain criteria are met. Further, the
standard changes the way certain convertible instruments are treated when calculating earnings per share. The updated
accounting guidance is effective for fiscal years beginning after December 15, 2021 with early adoption permitted
beginning in 2021. The adoption of this standard is not expected to have a material impact to the Company’s financial
statements.
In October 2021, the FASB issued accounting guidance on accounting for acquired revenue contracts with customers in a
business combination. The guidance specifies for all acquired revenue contracts, regardless of their timing of payment,
the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a
business combination, as well as how to measure those contract assets and contract liabilities. The updated accounting
guidance is effective for fiscal years beginning after December 15, 2022 with early adoption permitted. The Company is
evaluating the requirements of the updated guidance to determine the impact of adoption.
Pronouncements adopted during the fiscal year:
In March 2020, the FASB issued accounting guidance that provides companies with optional guidance, including
expedients and exceptions for applying generally accepted accounting principles to contracts and other transactions
affected by reference rate reform, such as the London Interbank Offered Rate (LIBOR). The accounting guidance was
effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022.
The Company adopted the guidance in the fourth quarter of 2021 and there was no impact on its Consolidated Financial
Statements upon adoption.
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. As permitted, we adopted this updated guidance on January 1, 2021, which did not have a material impact on our
consolidated financial statements.
44
45
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant
to the Company.
Note 2 – Acquisitions
Peoples Gas Acquisition
On March 16, 2020 (the “Closing Date”), the Company completed the acquisition of Peoples Natural Gas (the “Peoples
Gas Acquisition”), which expanded the Company’s regulated utility business to include natural gas distribution, serving
approximately 750,000 natural gas utility customers in western Pennsylvania, West Virginia, and Kentucky. The
Company paid cash consideration of $3,465,344, which was subject to adjustment based upon the terms of the purchase
agreement. Purchase price adjustments included the completion of a closing balance sheet, which was provided to the
seller, and an adjustment for utility capital expenditures made by the seller during the period between November 1, 2018
and the Closing Date. There was a dispute between the parties regarding this adjustment for utility capital expenditures.
In November 2021, the dispute between the parties regarding the adjustment for utility capital expenditures was resolved
in accordance with the provisions of the purchase agreement and an inconsequential payment was made between the
parties. The purchase price paid by the Company was determined as follows:
Base purchase price
Adjustments:
Estimated change in working capital
Certain estimated capital expenditures
Assumption of indebtedness
Cash consideration
$
$
4,275,000
43,935
247,500
(1,101,091)
3,465,344
The assumption of $1,101,091 of indebtedness as of the Closing Date, consisted of $920,091 of senior notes and $181,000
of short-term debt. The acquisition was financed through a series of financing transactions which included the issuance of
common stock from a public offering and a private placement, a tangible equity unit offering, and short and long-term
debt. Refer to Note 11 – Long-term Debt and Loans Payable, and Note 13 – Stockholder’s Equity for further information
on these financings.
The Company accounted for the Peoples Gas Acquisition as a business combination using the acquisition method of
accounting. The purchase price was allocated to the net tangible and intangible assets based upon their estimated fair
values at the date of the acquisition. The purchase price allocation was preliminary and was subject to revision through
the end of the measurement period on March 15, 2021. During the first quarter of 2021, the Company recorded an
adjustment to increase goodwill by $16,400 primarily reflecting an adjustment to deferred income taxes and the valuation
of accounts receivable. Goodwill recorded for the Peoples Gas Acquisition is not expected to be deductible for tax
purposes. The following table summarizes the purchase price allocation as of the acquisition date and measurement period
adjustments as of March 15, 2021:
Amounts
Previously
Recognized as of
Acquisition Date (a)
Measurement
Period
Adjustments
Amounts
Recognized as of
Acquisition Date
(as Adjusted)
Property, plant and equipment, net
$
2,476,551 $
-
$
Current assets
Regulatory assets
Goodwill
Other long-term assets
Total assets acquired
Current portion of long-term debt
Loans payable
Other current liabilities
Long-term debt
Deferred income taxes
Regulatory liabilities
Other long-term liabilities
Total liabilities assumed
Net assets acquired
242,531
286,751
2,261,047
75,071
5,341,951
5,136
181,000
186,120
999,460
213,647
123,029
168,215
(9,197)
(22,293)
16,400
-
(15,090)
-
-
(200)
-
(20,522)
6,389
(757)
(15,090)
$
1,876,607
3,465,344
$
-
$
2,476,551
233,334
264,458
2,277,447
75,071
5,326,861
5,136
181,000
185,920
999,460
193,125
129,418
167,458
1,861,517
3,465,344
(a) As reported in the Essential Utilities, Inc. Form 10-K for the period ended December 31, 2020.
The fair value of long-term debt was determined based on prevailing market prices for similar debt issuances as of March
16, 2020, which resulted in an adjustment to increase the carrying amount by $84,569. The fair value adjustment is being
amortized over the remaining life of the debt.
Goodwill is attributable to the assembled workforce of Peoples, planned growth in new markets, and planned growth in
rate base through continued investment in utility infrastructure. Goodwill recorded for the Peoples Gas Acquisition is not
expected to be deductible for tax purposes.
The Company incurred transaction-related expenses for the Peoples Gas Acquisition, which consisted of costs recorded as
operations and maintenance expenses in the first quarter of 2020 of $25,397, and in 2019 of $22,891, respectively,
primarily representing expenses associated with investment banking fees, including bridge financing, employee related
costs, obtaining regulatory approvals, legal expenses, and integration planning. Additionally, for the year to date 2019
period through settlement on April 24, 2019, the change in fair value of interest rate swap agreements of $23,742
represents expense recognized from the mark-to-market adjustment. The interest rate swap agreements were settled on
April 24, 2019, which coincided with debt financings to partially fund the Peoples Gas Acquisition. There were no
further transaction-related expenses for the Peoples Gas Acquisition after the first quarter of 2020.
46
47
Recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant
to the Company.
Note 2 – Acquisitions
Peoples Gas Acquisition
On March 16, 2020 (the “Closing Date”), the Company completed the acquisition of Peoples Natural Gas (the “Peoples
Gas Acquisition”), which expanded the Company’s regulated utility business to include natural gas distribution, serving
approximately 750,000 natural gas utility customers in western Pennsylvania, West Virginia, and Kentucky. The
Company paid cash consideration of $3,465,344, which was subject to adjustment based upon the terms of the purchase
agreement. Purchase price adjustments included the completion of a closing balance sheet, which was provided to the
seller, and an adjustment for utility capital expenditures made by the seller during the period between November 1, 2018
and the Closing Date. There was a dispute between the parties regarding this adjustment for utility capital expenditures.
In November 2021, the dispute between the parties regarding the adjustment for utility capital expenditures was resolved
in accordance with the provisions of the purchase agreement and an inconsequential payment was made between the
parties. The purchase price paid by the Company was determined as follows:
Base purchase price
Adjustments:
Estimated change in working capital
Certain estimated capital expenditures
Assumption of indebtedness
Cash consideration
$
$
4,275,000
43,935
247,500
(1,101,091)
3,465,344
The assumption of $1,101,091 of indebtedness as of the Closing Date, consisted of $920,091 of senior notes and $181,000
of short-term debt. The acquisition was financed through a series of financing transactions which included the issuance of
common stock from a public offering and a private placement, a tangible equity unit offering, and short and long-term
debt. Refer to Note 11 – Long-term Debt and Loans Payable, and Note 13 – Stockholder’s Equity for further information
on these financings.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company accounted for the Peoples Gas Acquisition as a business combination using the acquisition method of
accounting. The purchase price was allocated to the net tangible and intangible assets based upon their estimated fair
values at the date of the acquisition. The purchase price allocation was preliminary and was subject to revision through
the end of the measurement period on March 15, 2021. During the first quarter of 2021, the Company recorded an
adjustment to increase goodwill by $16,400 primarily reflecting an adjustment to deferred income taxes and the valuation
of accounts receivable. Goodwill recorded for the Peoples Gas Acquisition is not expected to be deductible for tax
purposes. The following table summarizes the purchase price allocation as of the acquisition date and measurement period
adjustments as of March 15, 2021:
Amounts
Previously
Recognized as of
Acquisition Date (a)
Measurement
Period
Adjustments
Amounts
Recognized as of
Acquisition Date
(as Adjusted)
Property, plant and equipment, net
Current assets
Regulatory assets
Goodwill
Other long-term assets
Total assets acquired
Current portion of long-term debt
Loans payable
Other current liabilities
Long-term debt
Deferred income taxes
Regulatory liabilities
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$
$
2,476,551 $
242,531
286,751
2,261,047
75,071
5,341,951
5,136
181,000
186,120
999,460
213,647
123,029
168,215
1,876,607
3,465,344
-
$
(9,197)
(22,293)
16,400
-
(15,090)
-
-
(200)
-
(20,522)
6,389
(757)
(15,090)
$
-
$
2,476,551
233,334
264,458
2,277,447
75,071
5,326,861
5,136
181,000
185,920
999,460
193,125
129,418
167,458
1,861,517
3,465,344
(a) As reported in the Essential Utilities, Inc. Form 10-K for the period ended December 31, 2020.
The fair value of long-term debt was determined based on prevailing market prices for similar debt issuances as of March
16, 2020, which resulted in an adjustment to increase the carrying amount by $84,569. The fair value adjustment is being
amortized over the remaining life of the debt.
Goodwill is attributable to the assembled workforce of Peoples, planned growth in new markets, and planned growth in
rate base through continued investment in utility infrastructure. Goodwill recorded for the Peoples Gas Acquisition is not
expected to be deductible for tax purposes.
The Company incurred transaction-related expenses for the Peoples Gas Acquisition, which consisted of costs recorded as
operations and maintenance expenses in the first quarter of 2020 of $25,397, and in 2019 of $22,891, respectively,
primarily representing expenses associated with investment banking fees, including bridge financing, employee related
costs, obtaining regulatory approvals, legal expenses, and integration planning. Additionally, for the year to date 2019
period through settlement on April 24, 2019, the change in fair value of interest rate swap agreements of $23,742
represents expense recognized from the mark-to-market adjustment. The interest rate swap agreements were settled on
April 24, 2019, which coincided with debt financings to partially fund the Peoples Gas Acquisition. There were no
further transaction-related expenses for the Peoples Gas Acquisition after the first quarter of 2020.
46
47
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The results of Peoples have been included in our consolidated financial statements as of the Closing Date. Peoples
contributed revenues of $520,944 and earnings of $57,377 for the period from the Closing Date to December 31, 2020.
The following pro forma summary presents consolidated unaudited information as if the Peoples Gas Acquisition had
occurred on January 1, 2019:
Operating revenues
Net income
$
Years ended December 31,
2020
1,743,766
367,492
$
2019
1,798,346
318,170
The supplemental pro forma information is not necessarily representative of the actual results that may have occurred for
these periods or of the results that may occur in the future. This supplemental pro forma information is based upon the
historical operating results of Peoples for periods prior to the Closing Date, and is adjusted to reflect the effect of non-
recurring acquisition-related costs, incurred in 2020 and 2019 as if they occurred on January 1, 2019, including $20,628
($25,197 pre-tax) and $16,464 ($21,406 pre-tax) of expenses incurred in 2020 and 2019, respectively, primarily
associated with investment banking fees, obtaining regulatory approvals, legal expenses and other direct costs of the
Peoples Gas Acquisition, adjustments to reflect net acquisition financing as of January 1, 2019 of $39,567 ($50,883 pre-
tax), the elimination of interest on debt that was not assumed in the acquisition of $7,971 ($11,210 pre-tax), and the
elimination of a management fee charged quarterly to Peoples by its former parent company of $885 ($1,245 pre-tax).
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the
Company committed to addressing the replacement of gathering pipe over a seven year timeframe for an estimated cost of
$120,000, which will be recoverable through customer rates. Additionally, the Company committed to provide $23,004
of one-time customer rate credits to its Pennsylvania natural gas utility customers and water and wastewater customers
served by Aqua Pennsylvania. The Company granted $4,080 of customer rate credits to its water and wastewater
customers during the third quarter of 2020, and $18,924 to its natural gas utility customers in the fourth quarter of 2020 to
satisfy the $23,004 commitment.
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. 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.
Water and Wastewater Utility Acquisitions – Pending Completion
In December 2021, the Company entered into a purchase agreement to acquire the water utility assets of the Southern
Oaks Water System, which serves approximately 740 customers for $3,300.
In October 2021, the Company entered into a purchase agreement to acquire the wastewater utility assets of the City of
Beaver Falls, Pennsylvania which consists of approximately 7,600 customers for $41,250. In July 2021, the Company
entered into a purchase agreement to acquire the water utility assets of Shenandoah Borough, Pennsylvania which consists
of approximately 2,930 customers for $12,000. In April 2021, the Company entered into a purchase agreement to acquire
certain water or wastewater utility assets of Oak Brook, Illinois which consists of approximately 4,000 customers for
$12,500. In January 2021, the Company entered into purchase agreements to acquire, in separate transactions, the
wastewater utility system assets of East Whiteland Township, Pennsylvania and Willistown Township, Pennsylvania
which consist of approximately 10,500 customers for $72,400. In September 2020, the Company entered into a purchase
agreement to acquire the wastewater utility system assets of Lower Makefield Township, Pennsylvania, which consists of
approximately 11,000 customers for $53,000.
The purchase price for these pending acquisitions are subject to certain adjustments at closing, and are subject to
regulatory approval, including the final determination of the fair value of the rate based acquired. We plan to finance the
purchase price of these acquisitions by utilizing our revolving credit facility until permanent debt and common equity are
secured. The closing for the wastewater assets of Lower Makefield Township is expected to occur in the first quarter of
2022, and the closings of our acquisitions of East Whiteland Township, Willistown Township, Oak Brook and
Shenandoah Borough are expected to occur in the second half of 2022. The closings of our Beaver Falls and Southern
Oaks acquisitions are expected to occur late in 2022 or in early 2023. Closing for our utility acquisitions are subject to the
timing of the regulatory approval process.
In September 2019, the Company entered into a purchase agreement to acquire the wastewater utility system assets of the
Delaware County Regional Water Quality Control Authority (“DELCORA”), which consists of approximately 16,000
customers, or the equivalent of 198,000 retail customers, in 42 municipalities in Southeast Pennsylvania for $276,500. In
May 2020, Delaware County, Pennsylvania filed a lawsuit alleging that DELCORA does not have the legal authority to
establish and fund a customer trust with the net proceeds of the transaction. In December 2020, the judge in the Delaware
County Court lawsuit issued an order that (1) the County cannot interfere with the purchase agreement between
DELCORA and the Company, (2) the County cannot terminate DELCORA prior to the closing of the transaction, and (3)
that the establishment of the customer trust was valid. Delaware County appealed this decision to Commonwealth Court
of Pennsylvania, where this case is continuing. A three-judge panel heard oral arguments on October 18, 2021; a decision
is expected in the next several months. The administrative law judges in the regulatory approval process recommended
that the Company’s application be denied, and subsequently, the Company provided exceptions to the recommended
decision. On March 25, 2021, the Pennsylvania Public Utility Commission ruled that the case be remanded back to the
Office of Administrative Law Judge and vacated the original administrative law judges’ recommended decision. On April
16, 2021, the administrative law judge issued an order staying the proceeding until the Delaware County Court lawsuit is
final and unappealable. The purchase price for this pending acquisition is subject to certain adjustments at closing, and is
subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to
finance the purchase price of this acquisition by the issuance of common stock and by utilizing our revolving credit
facility until permanent debt is secured. Closing of our acquisition of DELCORA is expected to occur in late 2022 or early
2023, subject to the timing of the regulatory approval process and DELCORA’s above-referenced litigation with
Delaware County.
Water and Wastewater Utility Acquisitions - Completed
In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves
992 customers in Harris County, Texas, and the wastewater utility system assets of the Village of Bourbonnais, which
serves approximately 6,500 customers in Kankakee County, Illinois. The total cash purchase prices for these utility
systems were $4,000 and $32,100, respectively. The purchase price allocation for these acquisitions consisted primarily
of 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 2021 are $2,462.
In December 2020, the Company acquired the wastewater utility system asset of New Garden Township, Pennsylvania,
which serves 1,965 customers. The total cash purchase price for the utility system was $29,944. Further, in June 2020,
the Company acquired the wastewater utility system assets of East Norriton Township, Pennsylvania, which serves 4,947
customers. The total cash purchase price for the utility system was $21,000. The purchase price allocation for these
acquisitions consisted primarily of property, plant and equipment. Additionally, during 2020, we completed four
acquisitions of water and wastewater utility systems for $12,335 in cash in three of the states in which we operate, adding
3,673 customers. 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 2020 were $8,365 in 2021 and $3,569 in 2020.
48
49
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The results of Peoples have been included in our consolidated financial statements as of the Closing Date. Peoples
contributed revenues of $520,944 and earnings of $57,377 for the period from the Closing Date to December 31, 2020.
The following pro forma summary presents consolidated unaudited information as if the Peoples Gas Acquisition had
occurred on January 1, 2019:
Operating revenues
Net income
$
Years ended December 31,
2020
1,743,766
$
367,492
2019
1,798,346
318,170
The supplemental pro forma information is not necessarily representative of the actual results that may have occurred for
these periods or of the results that may occur in the future. This supplemental pro forma information is based upon the
historical operating results of Peoples for periods prior to the Closing Date, and is adjusted to reflect the effect of non-
recurring acquisition-related costs, incurred in 2020 and 2019 as if they occurred on January 1, 2019, including $20,628
($25,197 pre-tax) and $16,464 ($21,406 pre-tax) of expenses incurred in 2020 and 2019, respectively, primarily
associated with investment banking fees, obtaining regulatory approvals, legal expenses and other direct costs of the
Peoples Gas Acquisition, adjustments to reflect net acquisition financing as of January 1, 2019 of $39,567 ($50,883 pre-
tax), the elimination of interest on debt that was not assumed in the acquisition of $7,971 ($11,210 pre-tax), and the
elimination of a management fee charged quarterly to Peoples by its former parent company of $885 ($1,245 pre-tax).
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the
Company committed to addressing the replacement of gathering pipe over a seven year timeframe for an estimated cost of
$120,000, which will be recoverable through customer rates. Additionally, the Company committed to provide $23,004
of one-time customer rate credits to its Pennsylvania natural gas utility customers and water and wastewater customers
served by Aqua Pennsylvania. The Company granted $4,080 of customer rate credits to its water and wastewater
customers during the third quarter of 2020, and $18,924 to its natural gas utility customers in the fourth quarter of 2020 to
satisfy the $23,004 commitment.
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. 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.
Water and Wastewater Utility Acquisitions – Pending Completion
In December 2021, the Company entered into a purchase agreement to acquire the water utility assets of the Southern
Oaks Water System, which serves approximately 740 customers for $3,300.
In October 2021, the Company entered into a purchase agreement to acquire the wastewater utility assets of the City of
Beaver Falls, Pennsylvania which consists of approximately 7,600 customers for $41,250. In July 2021, the Company
entered into a purchase agreement to acquire the water utility assets of Shenandoah Borough, Pennsylvania which consists
of approximately 2,930 customers for $12,000. In April 2021, the Company entered into a purchase agreement to acquire
certain water or wastewater utility assets of Oak Brook, Illinois which consists of approximately 4,000 customers for
$12,500. In January 2021, the Company entered into purchase agreements to acquire, in separate transactions, the
wastewater utility system assets of East Whiteland Township, Pennsylvania and Willistown Township, Pennsylvania
which consist of approximately 10,500 customers for $72,400. In September 2020, the Company entered into a purchase
agreement to acquire the wastewater utility system assets of Lower Makefield Township, Pennsylvania, which consists of
approximately 11,000 customers for $53,000.
The purchase price for these pending acquisitions are subject to certain adjustments at closing, and are subject to
regulatory approval, including the final determination of the fair value of the rate based acquired. We plan to finance the
purchase price of these acquisitions by utilizing our revolving credit facility until permanent debt and common equity are
secured. The closing for the wastewater assets of Lower Makefield Township is expected to occur in the first quarter of
2022, and the closings of our acquisitions of East Whiteland Township, Willistown Township, Oak Brook and
Shenandoah Borough are expected to occur in the second half of 2022. The closings of our Beaver Falls and Southern
Oaks acquisitions are expected to occur late in 2022 or in early 2023. Closing for our utility acquisitions are subject to the
timing of the regulatory approval process.
In September 2019, the Company entered into a purchase agreement to acquire the wastewater utility system assets of the
Delaware County Regional Water Quality Control Authority (“DELCORA”), which consists of approximately 16,000
customers, or the equivalent of 198,000 retail customers, in 42 municipalities in Southeast Pennsylvania for $276,500. In
May 2020, Delaware County, Pennsylvania filed a lawsuit alleging that DELCORA does not have the legal authority to
establish and fund a customer trust with the net proceeds of the transaction. In December 2020, the judge in the Delaware
County Court lawsuit issued an order that (1) the County cannot interfere with the purchase agreement between
DELCORA and the Company, (2) the County cannot terminate DELCORA prior to the closing of the transaction, and (3)
that the establishment of the customer trust was valid. Delaware County appealed this decision to Commonwealth Court
of Pennsylvania, where this case is continuing. A three-judge panel heard oral arguments on October 18, 2021; a decision
is expected in the next several months. The administrative law judges in the regulatory approval process recommended
that the Company’s application be denied, and subsequently, the Company provided exceptions to the recommended
decision. On March 25, 2021, the Pennsylvania Public Utility Commission ruled that the case be remanded back to the
Office of Administrative Law Judge and vacated the original administrative law judges’ recommended decision. On April
16, 2021, the administrative law judge issued an order staying the proceeding until the Delaware County Court lawsuit is
final and unappealable. The purchase price for this pending acquisition is subject to certain adjustments at closing, and is
subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to
finance the purchase price of this acquisition by the issuance of common stock and by utilizing our revolving credit
facility until permanent debt is secured. Closing of our acquisition of DELCORA is expected to occur in late 2022 or early
2023, subject to the timing of the regulatory approval process and DELCORA’s above-referenced litigation with
Delaware County.
Water and Wastewater Utility Acquisitions - Completed
In August 2021, the Company acquired the water utility system assets of The Commons Water Supply, Inc., which serves
992 customers in Harris County, Texas, and the wastewater utility system assets of the Village of Bourbonnais, which
serves approximately 6,500 customers in Kankakee County, Illinois. The total cash purchase prices for these utility
systems were $4,000 and $32,100, respectively. The purchase price allocation for these acquisitions consisted primarily
of 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 2021 are $2,462.
In December 2020, the Company acquired the wastewater utility system asset of New Garden Township, Pennsylvania,
which serves 1,965 customers. The total cash purchase price for the utility system was $29,944. Further, in June 2020,
the Company acquired the wastewater utility system assets of East Norriton Township, Pennsylvania, which serves 4,947
customers. The total cash purchase price for the utility system was $21,000. The purchase price allocation for these
acquisitions consisted primarily of property, plant and equipment. Additionally, during 2020, we completed four
acquisitions of water and wastewater utility systems for $12,335 in cash in three of the states in which we operate, adding
3,673 customers. 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 2020 were $8,365 in 2021 and $3,569 in 2020.
48
49
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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
were $8,419 in 2021, $8,353 in 2020 and $506 in 2019.
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. Except where noted otherwise, the gains or losses disclosed
below are reported in the consolidated statements of operations and comprehensive income as a component of operations
and maintenance expense.
In October 2020 the Company sold its investment in a joint venture. Its investment represented its 49% investment in a
joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the
Marcellus Shale of north central Pennsylvania. This investment was an unconsolidated affiliate and was accounted for
under the equity method of accounting within our Aqua Infrastructure subsidiary. In 2020, the Company recorded a
charge of $3,700 for the write-down of the Company’s investment associated with the sale and is reported in equity loss in
joint venture.
In 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 consolidated balance sheet, and in April 2019,
the Company completed the sale for proceeds of $1,882 and recognized a gain on sale of $405.
Note 4 – Property, Plant and Equipment
December 31,
2021
2020
Useful Lives
Useful Life
Approximate
Range of
Weighted
Average
Utility plant and equipment - regulated water segment
9,172,156
8,590,991
Regulated Water segment:
Utility plant and equipment
Mains and accessories
Services, hydrants, treatment plants and reservoirs
Operations structures and water tanks
Miscellaneous pumping and purification equipment
Meters, transportation and other operating equipment
Land and other non-depreciable assets
Utility construction work in progress
Net utility plant acquisition adjustment
Non-utility plant and equipment
Regulated Gas segment:
Natural gas transmission
Natural gas storage
Natural gas gathering and processing
Natural gas distribution
Meters, transportation and other operating equipment
Land and other non-depreciable assets
Utility plant and equipment - Regulated Natural Gas segment
Utility construction work-in-progress
Property, plant and equipment-Regulated Natural Gas segment
$
4,014,507 $ 3,800,878 32 - 94 years
2,672,186
376,880
1,011,487
980,208
116,888
304,373
(9,055)
21,098
365,051
60,985
131,237
1,874,040
588,716
3,872
3,023,901
97,903
3,121,804
2,425,303
5 - 89 years
352,094 14 - 80 years
9 - 76 years
5 - 84 years
976,719
898,607
137,390
225,208
(12,215)
2 - 59 years
21,681 17 - 64 years
28 years
58 years
-
-
-
-
362,477
60,846
126,105
5 - 93 years
5 - 85 years
5 - 88 years
1,540,366 25 - 78 years
580,043
5 - 95 years
3,872
2,673,709
120,645
2,794,354
76 years
56 years
48 years
42 years
28 years
-
-
67 years
47 years
59 years
63 years
25 years
-
-
Property, Plant and Equipment - Regulated Water segment
9,488,572
8,825,665
Total property, plant and equipment
$
12,610,376 $ 11,620,019
Note 5 – Accounts Receivable
Billed utility revenue
Other
Less allowance for doubtful accounts
Net accounts receivable
December 31,
2021
2020
197,815 $
1,283
199,098
58,073
141,025 $
189,280
5,594
194,874
40,099
154,775
$
$
50
51
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
were $8,419 in 2021, $8,353 in 2020 and $506 in 2019.
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. Except where noted otherwise, the gains or losses disclosed
below are reported in the consolidated statements of operations and comprehensive income as a component of operations
and maintenance expense.
In October 2020 the Company sold its investment in a joint venture. Its investment represented its 49% investment in a
joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the
Marcellus Shale of north central Pennsylvania. This investment was an unconsolidated affiliate and was accounted for
under the equity method of accounting within our Aqua Infrastructure subsidiary. In 2020, the Company recorded a
charge of $3,700 for the write-down of the Company’s investment associated with the sale and is reported in equity loss in
joint venture.
In 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 consolidated balance sheet, and in April 2019,
the Company completed the sale for proceeds of $1,882 and recognized a gain on sale of $405.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In December 2019, the Company acquired the wastewater utility system assets of Cheltenham Township, Pennsylvania,
Note 4 – Property, Plant and Equipment
December 31,
2021
2020
Approximate
Range of
Useful Lives
Weighted
Average
Useful Life
Regulated Water segment:
Utility plant and equipment
$
Mains and accessories
Services, hydrants, treatment plants and reservoirs
Operations structures and water tanks
Miscellaneous pumping and purification equipment
Meters, transportation and other operating equipment
Land and other non-depreciable assets
Utility plant and equipment - regulated water segment
Utility construction work in progress
Net utility plant acquisition adjustment
Non-utility plant and equipment
Property, Plant and Equipment - Regulated Water segment
Regulated Gas segment:
Natural gas transmission
Natural gas storage
Natural gas gathering and processing
Natural gas distribution
Meters, transportation and other operating equipment
Land and other non-depreciable assets
Utility plant and equipment - Regulated Natural Gas segment
Utility construction work-in-progress
Property, plant and equipment-Regulated Natural Gas segment
4,014,507 $ 3,800,878 32 - 94 years
2,672,186
5 - 89 years
2,425,303
352,094 14 - 80 years
376,880
9 - 76 years
976,719
1,011,487
5 - 84 years
898,607
980,208
137,390
116,888
-
8,590,991
9,172,156
225,208
304,373
(9,055)
(12,215)
21,098
9,488,572
-
2 - 59 years
21,681 17 - 64 years
8,825,665
365,051
60,985
131,237
1,874,040
588,716
3,872
3,023,901
97,903
3,121,804
362,477
60,846
126,105
5 - 93 years
5 - 85 years
5 - 88 years
1,540,366 25 - 78 years
5 - 95 years
-
580,043
3,872
2,673,709
120,645
2,794,354
76 years
56 years
48 years
42 years
28 years
-
-
28 years
58 years
67 years
47 years
59 years
63 years
25 years
-
-
-
Total property, plant and equipment
$
12,610,376 $ 11,620,019
Note 5 – Accounts Receivable
Billed utility revenue
Other
Less allowance for doubtful accounts
Net accounts receivable
December 31,
2021
2020
197,815 $
1,283
199,098
58,073
141,025 $
189,280
5,594
194,874
40,099
154,775
$
$
50
51
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company’s utility customers are located principally in the following states: 66% in Pennsylvania, 9% in Ohio, 6% in
North Carolina, 5% in Texas, and 5% in Illinois. No single customer accounted for more than one percent of the
Company's utility operating revenues during the years ended December 31, 2021, 2020, and 2019. 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 and other
Balance at December 31,
2021
2020
2019
$
$
40,099 $
27,336
(19,731)
10,369
58,073 $
7,353 $
32,325
(12,613)
13,034
40,099 $
6,914
5,306
(5,980)
1,113
7,353
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
a rate order requiring a ten year amortization period which began in 2013. Beginning in 2013, the Company amortized
$38,000, annually, of its deferred income tax benefits, which reduced current income tax expense. 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.
A portion of the income taxes regulatory liability is also related to Peoples Natural Gas’ income tax accounting change for
the tax benefits expected to be realized for the periods prior to adoption on March 16, 2020. The Company recorded a
regulatory liability for this catch-up adjustment in the amount of $160,655 in 2020 and it remained on the consolidated
balance sheet as of December 31, 2020. In May 2021, the Company received a regulatory order directing the Company to
refund the catch-up adjustment to its utility customers over a five-year period, which was initiated by the Company in
August 2021.
For Recoveries of accounts written off and other, other represents the opening balance from the Peoples Gas Acquisition
of $10,962 in 2020 and additional measurement period adjustments in 2021 of $12,851 before the measurement period
ended.
The regulatory asset or liability for purchased gas costs reflects the differences between actual purchased gas costs and the
levels of recovery for these costs in current rates. The unrecovered costs are recovered and the over-recovered costs are
refunded in future periods, typically within a year, through quarterly and annual filings with the applicable state regulatory
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:
December 31, 2021
December 31, 2020
Income taxes
Purchased gas costs
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
Regulatory
Assets
1,219,924 $
13,798
47,683
60,640
3,760
7,553
62,722
19,083
14,827
1,449,990 $
$
$
Regulatory
Liabilities
Regulatory
Assets
595,185
-
56,479
115,283
-
-
-
-
3,054
770,001
$
$
1,098,363 $
585
50,225
108,036
4,056
6,306
76,019
14,880
9,403
1,367,873 $
Regulatory
Liabilities
630,106
18,618
50,560
89,953
-
978
-
-
2,961
793,176
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. The regulatory asset / (liability) for income taxes as of
December 31, 2021 and 2020 includes an amount of $(111) and $659, respectively, related to Aqua Pennsylvania’s
deductions on qualifying utility system repairs. This regulatory asset/liability is recoverable (or refundable) in future rate
filings based on the difference between the amount of the income tax benefits that were incorporated into the Company’s
cost of service in its latest rate case as compared to the actual income tax benefits recognized.
52
53
agency.
incurred.
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
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 or
anticipated to be recovered in rates over a period ranging from approximately 10 to 37 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 10 to 20 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 2032. 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 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.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company’s utility customers are located principally in the following states: 66% in Pennsylvania, 9% in Ohio, 6% in
North Carolina, 5% in Texas, and 5% in Illinois. No single customer accounted for more than one percent of the
Company's utility operating revenues during the years ended December 31, 2021, 2020, and 2019. The following table
summarizes the changes in the Company’s allowance for doubtful accounts:
2021
2020
2019
$
40,099 $
7,353 $
27,336
(19,731)
10,369
32,325
(12,613)
13,034
$
58,073 $
40,099 $
6,914
5,306
(5,980)
1,113
7,353
For Recoveries of accounts written off and other, other represents the opening balance from the Peoples Gas Acquisition
of $10,962 in 2020 and additional measurement period adjustments in 2021 of $12,851 before the measurement period
Balance at January 1,
Amounts charged to expense
Accounts written off
Recoveries of accounts written off and other
Balance at December 31,
ended.
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
Purchased gas costs
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, 2021
December 31, 2020
Regulatory
Assets
Regulatory
Liabilities
Regulatory
Assets
Regulatory
Liabilities
$
1,219,924 $
595,185
$
1,098,363 $
630,106
13,798
47,683
60,640
3,760
7,553
62,722
19,083
14,827
56,479
115,283
-
-
-
-
-
3,054
585
50,225
108,036
4,056
6,306
76,019
14,880
9,403
18,618
50,560
89,953
978
-
-
-
2,961
$
1,449,990 $
770,001
$
1,367,873 $
793,176
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. The regulatory asset / (liability) for income taxes as of
December 31, 2021 and 2020 includes an amount of $(111) and $659, respectively, related to Aqua Pennsylvania’s
deductions on qualifying utility system repairs. This regulatory asset/liability is recoverable (or refundable) in future rate
filings based on the difference between the amount of the income tax benefits that were incorporated into the Company’s
cost of service in its latest rate case as compared to the actual income tax benefits recognized.
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
a rate order requiring a ten year amortization period which began in 2013. Beginning in 2013, the Company amortized
$38,000, annually, of its deferred income tax benefits, which reduced current income tax expense. 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.
A portion of the income taxes regulatory liability is also related to Peoples Natural Gas’ income tax accounting change for
the tax benefits expected to be realized for the periods prior to adoption on March 16, 2020. The Company recorded a
regulatory liability for this catch-up adjustment in the amount of $160,655 in 2020 and it remained on the consolidated
balance sheet as of December 31, 2020. In May 2021, the Company received a regulatory order directing the Company to
refund the catch-up adjustment to its utility customers over a five-year period, which was initiated by the Company in
August 2021.
The regulatory asset or liability for purchased gas costs reflects the differences between actual purchased gas costs and the
levels of recovery for these costs in current rates. The unrecovered costs are recovered and the over-recovered costs are
refunded in future periods, typically within a year, through quarterly and annual filings with the applicable state regulatory
agency.
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.
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 or
anticipated to be recovered in rates over a period ranging from approximately 10 to 37 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 10 to 20 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 2032. 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 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.
52
53
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 for the years ended December 31, is comprised of the following:
Current:
Federal
State
Deferred:
Federal
State
Total tax benefit
Years Ended December 31,
2021
2020
2019
accrued, and settled in the next rate filing.
$
$
$
(5,132)
4,034
(1,098)
3,036
(11,550)
(8,514)
(9,612) $
(1,831) $
(265)
(2,096)
(11,527)
(6,255)
(17,782)
(19,878) $
(4,415)
1,834
(2,581)
(3,906)
(6,530)
(10,436)
(13,017)
Aqua Pennsylvania adopted 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 $13,848. In May 2019, the
Pennsylvania Public Utility Commission issued a new rate order and as a result, the amortization period was slightly
shortened and now includes the tax benefits in establishing utility rates.
The following table provides the changes in the Company’s unrecognized tax benefits:
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
$48,965, $49,077, and $66,816 during 2021, 2020, and 2019, 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
The statutory Federal tax rate is 21% for 2021, 2020, and 2019. 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 2021, 2020, and 2019 was (2.3)%, (7.5)%, and (6.2)%, respectively. The Company remains subject to
examination by federal and state tax authorities for the 2018 through 2021 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
Impact of acquisitions and reorganizations
Other, net
Actual income tax benefit
Years Ended December 31,
2020
2021
88,620 $ 55,644 $ 44,420
2019
$
(76,534)
(1,681)
925
(611)
(53,532)
(6,896)
140
(1,484)
(48,518)
(3,616)
347
(167)
(315)
(315)
(330)
(361)
(319)
(314)
(6,323)
(15,352)
(11,715)
-
-
(4,632)
1,516
2,236
(3,340)
(9,612) $ (19,878) $ (13,017)
$
Balance at January 1,
Impact of current year activity on tax provision
Balance at December 31,
2021
2020
19,194 $
1,007
20,201 $
18,671
523
19,194
$
$
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, 2021, 2020, and 2019. The Company accrued $409 and $24 in interest and penalties relative to
their uncertain tax position during the years ended December 31, 2021 and 2020.
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, 2021 and 2020, $34,980 and $33,050, respectively, of
54
55
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 for the years ended December 31, is comprised of the following:
Current:
Federal
State
Deferred:
Federal
State
Years Ended December 31,
2021
2020
2019
$
(5,132)
$
(1,831) $
4,034
(1,098)
3,036
(11,550)
(8,514)
(265)
(2,096)
(11,527)
(6,255)
(17,782)
(4,415)
1,834
(2,581)
(3,906)
(6,530)
(10,436)
(13,017)
Total tax benefit
$
(9,612) $
(19,878) $
The statutory Federal tax rate is 21% for 2021, 2020, and 2019. 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 2021, 2020, and 2019 was (2.3)%, (7.5)%, and (6.2)%, respectively. The Company remains subject to
examination by federal and state tax authorities for the 2018 through 2021 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 acquisitions and reorganizations
Other, net
Actual income tax benefit
Years Ended December 31,
2021
2020
2019
$
88,620 $ 55,644 $ 44,420
(76,534)
(1,681)
925
(611)
(330)
(314)
(53,532)
(6,896)
140
(1,484)
(315)
(319)
(48,518)
(3,616)
347
(167)
(315)
(361)
(4,632)
(3,340)
-
-
2,236
1,516
$
(9,612) $ (19,878) $ (13,017)
Impact of Federal rate change and amortization of excess deferred income tax
(11,715)
(15,352)
(6,323)
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
$48,965, $49,077, and $66,816 during 2021, 2020, and 2019, 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 adopted 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 $13,848. In May 2019, the
Pennsylvania Public Utility Commission issued a new rate order and as a result, the amortization period was slightly
shortened and now includes the tax benefits in establishing utility rates.
The following table provides the changes in the Company’s unrecognized tax benefits:
Balance at January 1,
Impact of current year activity on tax provision
Balance at December 31,
2021
2020
19,194 $
1,007
20,201 $
18,671
523
19,194
$
$
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, 2021, 2020, and 2019. The Company accrued $409 and $24 in interest and penalties relative to
their uncertain tax position during the years ended December 31, 2021 and 2020.
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, 2021 and 2020, $34,980 and $33,050, respectively, of
54
55
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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.
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
Post-retirement benefits
Tax effect of regulatory liabilities for post-retirement benefits
Tax attribute and credit carryforwards
Operating lease liabilities
Unrecovered purchased gas costs
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
Over-recovered purchased gas costs
$
December 31,
2021
2020
28,845 $
28,211
5,186
16,080
243,131
16,064
-
7,586
345,103
(36,662)
308,441
30,155
11,441
51,914
-
206,347
17,432
5,239
10,979
333,507
(34,772)
298,735
1,510,752
1,298,127
179,825
-
222
5,406
14,034
4,739
1,714,978
205,869
30,441
195
5,744
16,457
-
1,556,833
Net deferred tax liability
$
1,406,537 $
1,258,098
The following table provides the components of taxes other than income taxes, including the expenses of Peoples for the
At December 31, 2021, the Company has a cumulative Federal NOL of $507,330. 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, 2021, the Company has a cumulative state NOL of $1,657,743 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.
At December 31, 2021, the Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position,
on a gross basis, of $80,150 and $86,251, 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 $587,480 and $1,743,994 respectively. The Company records its
unrecognized tax benefit as a component of its net deferred income tax liability.
56
On March 16, 2020, the Company completed the Peoples Gas Acquisition. On March 31, 2020, the Company changed
the method of tax accounting for certain qualifying infrastructure investments at its Peoples Natural Gas subsidiary, its
largest natural gas subsidiary in Pennsylvania. This change allows a tax deduction for qualifying utility asset
improvement costs that were formerly capitalized for tax purposes. Consistent with the Company’s accounting for
differences between book and tax expenditures for its Aqua Pennsylvania subsidiary, the Company is utilizing the flow-
through method to account for this timing difference. In addition, the Company calculated the income tax benefits for
qualifying capital expenditures made prior to March 16, 2020 (“catch-up adjustment”) and has recorded a regulatory
liability for $160,655 for these income tax benefits. In August 2020, the Company filed a petition with the Pennsylvania
Public Utility Commission proposing treatment of the catch-up adjustment. On March 11, 2021, the Company and the
statutory advocates filed a Joint Petition of Settlement (“Settlement”) representing a settlement of the parties, and, on May
6, 2021, it was approved by the Pennsylvania Public Utility Commission. The Settlement stipulates, among other points,
that the catch-up adjustment be provided to utility customers over a five-year period, and the Company can continue to
use flow-through accounting for the current tax repair benefit until its next base rate case. The five-year customer
surcredit for the catch-up adjustment was initiated in August 2021. In addition, the Company contributed $500 to a
customer-bill payment assistance program in July 2021 and in December 2021, provided $5,000 in relief to past-due
accounts for natural gas customers impacted by the COVID-19 pandemic through a rate credit fulfilling this requirement.
In connection with the completion of the Peoples Gas Acquisition, as the Company identified changes to acquired
deferred tax asset or liabilities, including the impact of valuation allowances or liabilities related to uncertain tax positions
during the one year measurement period that ended on March 15, 2021, and they were related to new information obtained
about facts and circumstances that existed as of the acquisition date, those changes were considered a measurement-period
adjustment, and resulted in an adjustment to goodwill. The Company records all other changes to deferred tax assets and
liabilities in current-period income tax expense.
On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs (“IIJ”) Act. The IIJ
contained several tax provisions, including the modification of the tax code to exclude from taxable income any
contribution in aid of construction. This provision effectively restored the exclusion that existed prior to the enactment of
TCJA and would generally apply to contributions made after December 31, 2020. The Company evaluated the tax
provisions included in the IIJ, and their impact was incorporated in the calculation of the income tax provision.
Note 8 – Taxes Other than Income Taxes
period since the completion of the acquisition on March 16, 2020:
Property
Payroll
Gross receipts, excise and franchise
Regulatory assessments
Pumping fees
Other
Years Ended December 31,
2021
2020
2019
33,946 $
$
15,777
21,789
6,968
5,761
2,400
32,054
14,462
19,053
3,130
6,028
1,870
27,735
13,500
10,303
2,916
5,112
389
59,955
Total taxes other than income taxes
86,641 $
76,597
$
$
$
57
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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.
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
Post-retirement benefits
Tax effect of regulatory liabilities for post-retirement benefits
Tax attribute and credit carryforwards
Operating lease liabilities
Unrecovered purchased gas costs
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
Over-recovered purchased gas costs
$
December 31,
2021
2020
28,845 $
28,211
5,186
16,080
243,131
16,064
-
7,586
345,103
(36,662)
308,441
30,155
11,441
51,914
-
206,347
17,432
5,239
10,979
333,507
(34,772)
298,735
1,510,752
1,298,127
179,825
-
222
5,406
14,034
4,739
205,869
30,441
195
5,744
16,457
-
On March 16, 2020, the Company completed the Peoples Gas Acquisition. On March 31, 2020, the Company changed
the method of tax accounting for certain qualifying infrastructure investments at its Peoples Natural Gas subsidiary, its
largest natural gas subsidiary in Pennsylvania. This change allows a tax deduction for qualifying utility asset
improvement costs that were formerly capitalized for tax purposes. Consistent with the Company’s accounting for
differences between book and tax expenditures for its Aqua Pennsylvania subsidiary, the Company is utilizing the flow-
through method to account for this timing difference. In addition, the Company calculated the income tax benefits for
qualifying capital expenditures made prior to March 16, 2020 (“catch-up adjustment”) and has recorded a regulatory
liability for $160,655 for these income tax benefits. In August 2020, the Company filed a petition with the Pennsylvania
Public Utility Commission proposing treatment of the catch-up adjustment. On March 11, 2021, the Company and the
statutory advocates filed a Joint Petition of Settlement (“Settlement”) representing a settlement of the parties, and, on May
6, 2021, it was approved by the Pennsylvania Public Utility Commission. The Settlement stipulates, among other points,
that the catch-up adjustment be provided to utility customers over a five-year period, and the Company can continue to
use flow-through accounting for the current tax repair benefit until its next base rate case. The five-year customer
surcredit for the catch-up adjustment was initiated in August 2021. In addition, the Company contributed $500 to a
customer-bill payment assistance program in July 2021 and in December 2021, provided $5,000 in relief to past-due
accounts for natural gas customers impacted by the COVID-19 pandemic through a rate credit fulfilling this requirement.
In connection with the completion of the Peoples Gas Acquisition, as the Company identified changes to acquired
deferred tax asset or liabilities, including the impact of valuation allowances or liabilities related to uncertain tax positions
during the one year measurement period that ended on March 15, 2021, and they were related to new information obtained
about facts and circumstances that existed as of the acquisition date, those changes were considered a measurement-period
adjustment, and resulted in an adjustment to goodwill. The Company records all other changes to deferred tax assets and
liabilities in current-period income tax expense.
On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs (“IIJ”) Act. The IIJ
contained several tax provisions, including the modification of the tax code to exclude from taxable income any
contribution in aid of construction. This provision effectively restored the exclusion that existed prior to the enactment of
TCJA and would generally apply to contributions made after December 31, 2020. The Company evaluated the tax
provisions included in the IIJ, and their impact was incorporated in the calculation of the income tax provision.
Net deferred tax liability
$
1,406,537 $
1,258,098
The following table provides the components of taxes other than income taxes, including the expenses of Peoples for the
period since the completion of the acquisition on March 16, 2020:
1,714,978
1,556,833
Note 8 – Taxes Other than Income Taxes
At December 31, 2021, the Company has a cumulative Federal NOL of $507,330. 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, 2021, the Company has a cumulative state NOL of $1,657,743 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.
At December 31, 2021, the Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position,
on a gross basis, of $80,150 and $86,251, 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 $587,480 and $1,743,994 respectively. The Company records its
unrecognized tax benefit as a component of its net deferred income tax liability.
56
Property
Gross receipts, excise and franchise
Payroll
Regulatory assessments
Pumping fees
Other
Total taxes other than income taxes
Years Ended December 31,
2021
2020
2019
33,946 $
15,777
21,789
6,968
5,761
2,400
86,641 $
32,054
14,462
19,053
3,130
6,028
1,870
76,597
$
$
27,735
13,500
10,303
2,916
5,112
389
59,955
$
$
57
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. During the second quarter of 2021, an immaterial amount was accrued for
the portion of the fine or penalty that we determined to be probable and estimable of being incurred. In addition, on
September 3, 2019, two individuals, on behalf of themselves and those similarly situated, commenced an action against
the Company’s Illinois subsidiary in the State court in Will County, Illinois related to this do not consume advisory. The
complaint seeks class action certification, attorney's fees, and "damages, including, but not limited to, out of pocket
damages, and discomfort, aggravation, and annoyance” based upon the water provided by the Company’s subsidiary to a
discrete service area in University Park Illinois. The complaint contains allegations of damages as a result of supplied
water that exceeded the standards established by the federal Lead and Copper Rule. The complaint is in the discovery
phase and class certification has not been granted. The Company is vigorously defending against this claim. A claim for
the expenses incurred has been submitted to the Company’s insurance carrier for potential recovery of a portion of these
costs, and on August 3, 2020, the Company received $2,874 in insurance proceeds. The Company continues to assess the
potential loss contingency on this matter. While the final outcome of this claim cannot be predicted with certainty, and
unfavorable outcomes could negatively impact the Company, at this time in the opinion of management, the final
resolution of this matter is not expected to have a material adverse effect on the Company’s financial position, results of
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 9 – Commitments and Contingencies
Commitments –
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 2029. The estimated annual commitments related to such purchases through 2026 are expected to average $3,322
and the aggregate of the years remaining approximates $331.
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:
2022
2023
2024
2025
2026
Thereafter
$
3,120
$
1,038
$
1,055
$
1,078
$
1,102
$
3,261
operations or cash flows.
The Company’s natural gas supply is provided by sources on the interstate pipeline system and from local western
Pennsylvania gas well production. The Company has various interstate pipeline service agreements that provide for firm
transportation capacity, firm storage capacity, and other services and include capacity reservation charges based upon the
maximum daily and annual contract quantities set forth in the agreements. Some of these agreements have minimum
volume obligations and are transacted at applicable tariff and negotiated rates to the year 2034. The estimated annual
commitments related to such purchases through 2026 are expected to average $257,057 and the aggregate of the years
remaining beyond 2026 approximates $1,759,841.
The purchased water, water treatment, and purchased gas expenses under these agreements were as follows:
Although the results of legal proceedings cannot be predicted with certainty, other than disclosed above, there are no
pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of its properties is
the subject that are material or are expected to have a material effect on the Company’s financial position, results of
operations or cash flows.
In addition to the aforementioned loss contingencies, the Company self-insures a portion of its employee medical benefit
program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for
these claims totaled $2,470 and $1,535 at December 31, 2021 and 2020 and represents a reserve for unpaid claim costs,
including an estimate for the cost of incurred but not reported claims.
Purchased water under long-term agreements
Water treatment expense under contractual agreement
Purchased natural gas under long-term agreements
Years Ended December 31,
2020
2019
2021
$
5,867 $
1,017
340,262
5,931 $
1,006
165,745
6,577
989
-
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the
Company committed to addressing the replacement of gathering pipe over a seven year timeframe for an estimated cost of
$120,000, which will be recoverable through customer rates. Additionally, the Company committed to provide $23,004
of one-time customer rate credits to its Pennsylvania natural gas utility customers and water and wastewater customers
served by Aqua Pennsylvania, Inc. In 2020, the Company granted $4,080 of customer rate credits to its Pennsylvania
water and wastewater customers and $18,924 to its Pennsylvania natural gas utility customers.
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, 2021, the aggregate amount of $17,215 is accrued for loss contingencies and is reported in the Company’s
consolidated balance sheet as other accrued liabilities and other liabilities. These accruals represent management’s best
estimate of probable loss (as defined in the accounting guidance) for loss contingencies or the low end of a range of losses
if no single probable loss can be estimated. For some loss contingencies, the Company is unable to estimate the amount
of the probable loss or range of probable losses. Further, Essential Utilities has insurance coverage for certain of these
loss contingencies, and as of December 31, 2021, estimates that approximately $2,458 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.
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 73 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.
58
59
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 9 – Commitments and Contingencies
Commitments –
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 2029. The estimated annual commitments related to such purchases through 2026 are expected to average $3,322
and the aggregate of the years remaining approximates $331.
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:
2022
2023
2024
2025
2026
Thereafter
$
3,120
$
1,038
$
1,055
$
1,078
$
1,102
$
3,261
The Company’s natural gas supply is provided by sources on the interstate pipeline system and from local western
Pennsylvania gas well production. The Company has various interstate pipeline service agreements that provide for firm
transportation capacity, firm storage capacity, and other services and include capacity reservation charges based upon the
maximum daily and annual contract quantities set forth in the agreements. Some of these agreements have minimum
volume obligations and are transacted at applicable tariff and negotiated rates to the year 2034. The estimated annual
commitments related to such purchases through 2026 are expected to average $257,057 and the aggregate of the years
remaining beyond 2026 approximates $1,759,841.
The purchased water, water treatment, and purchased gas expenses under these agreements were as follows:
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. During the second quarter of 2021, an immaterial amount was accrued for
the portion of the fine or penalty that we determined to be probable and estimable of being incurred. In addition, on
September 3, 2019, two individuals, on behalf of themselves and those similarly situated, commenced an action against
the Company’s Illinois subsidiary in the State court in Will County, Illinois related to this do not consume advisory. The
complaint seeks class action certification, attorney's fees, and "damages, including, but not limited to, out of pocket
damages, and discomfort, aggravation, and annoyance” based upon the water provided by the Company’s subsidiary to a
discrete service area in University Park Illinois. The complaint contains allegations of damages as a result of supplied
water that exceeded the standards established by the federal Lead and Copper Rule. The complaint is in the discovery
phase and class certification has not been granted. The Company is vigorously defending against this claim. A claim for
the expenses incurred has been submitted to the Company’s insurance carrier for potential recovery of a portion of these
costs, and on August 3, 2020, the Company received $2,874 in insurance proceeds. The Company continues to assess the
potential loss contingency on this matter. While the final outcome of this claim cannot be predicted with certainty, and
unfavorable outcomes could negatively impact the Company, at this time in the opinion of management, the final
resolution of this matter is not expected to have a material adverse effect on the Company’s financial position, results of
operations or cash flows.
Although the results of legal proceedings cannot be predicted with certainty, other than disclosed above, there are no
pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of its properties is
the subject that are material or are expected to have a material effect on the Company’s financial position, results of
operations or cash flows.
In addition to the aforementioned loss contingencies, the Company self-insures a portion of its employee medical benefit
program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for
these claims totaled $2,470 and $1,535 at December 31, 2021 and 2020 and represents a reserve for unpaid claim costs,
including an estimate for the cost of incurred but not reported claims.
Purchased water under long-term agreements
Water treatment expense under contractual agreement
Purchased natural gas under long-term agreements
Years Ended December 31,
2021
2020
2019
$
5,867 $
5,931 $
1,017
340,262
1,006
165,745
6,577
989
-
Associated with the approval of the Peoples Gas Acquisition from the Pennsylvania Public Utility Commission, the
Company committed to addressing the replacement of gathering pipe over a seven year timeframe for an estimated cost of
$120,000, which will be recoverable through customer rates. Additionally, the Company committed to provide $23,004
of one-time customer rate credits to its Pennsylvania natural gas utility customers and water and wastewater customers
served by Aqua Pennsylvania, Inc. In 2020, the Company granted $4,080 of customer rate credits to its Pennsylvania
water and wastewater customers and $18,924 to its Pennsylvania natural gas utility customers.
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, 2021, the aggregate amount of $17,215 is accrued for loss contingencies and is reported in the Company’s
consolidated balance sheet as other accrued liabilities and other liabilities. These accruals represent management’s best
estimate of probable loss (as defined in the accounting guidance) for loss contingencies or the low end of a range of losses
if no single probable loss can be estimated. For some loss contingencies, the Company is unable to estimate the amount
of the probable loss or range of probable losses. Further, Essential Utilities has insurance coverage for certain of these
loss contingencies, and as of December 31, 2021, estimates that approximately $2,458 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.
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 73 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.
58
59
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Maturities of operating lease liabilities and a reconciliation of the operating lease liabilities reported on our consolidated
balance sheets as of December 31, 2021 are as follows:
Operating Leases
9,732
9,294
9,009
9,028
6,666
27,520
71,249
71,249
56,071
15,178
$
$
$
$
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 and net of any
impairment. 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.
During the fourth quarter of 2021, the Company determined that there were impairment indicators that required the
Company to review a portion of office space that was not used in operations for impairment. Accordingly, the Company
performed undiscounted cash flow analyses on the related right-of-use asset group and determined that such right-of-use
asset was impaired. This resulted in a non-cash impairment charge of $4,695, representing the excess of the right-of-use
asset over its fair value, and is included within operations and maintenance expense in the consolidated statements of
operations and comprehensive income. On March 16, 2020, the Company completed the Peoples Gas Acquisition and,
upon application of the leasing standard and evaluation of acquired leases, it was determined that the market rental rate for
one of its office spaces was lower than the contractual rental rate. Accordingly a fair market value adjustment of $3,375
was recorded against the operating right-of-use assets in the consolidated balance sheets in 2020. The balance of the
right-of-use asset group, after adjustments, is being amortized over the remaining life of the lease.
Components of lease expense were as follows:
Operating lease cost
Years Ended December 31,
2020
2019
2021
$
9,716 $
8,496 $
2,183
2022
2023
2024
2025
2026
Thereafter
Total operating lease payments
Total operating lease payments
Less operating lease liabilities
Present value adjustment
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
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
$
$
$
$
Years Ended December 31,
2021
2020
9,612 $
6,324
Company.
December 31,
2021
2020
debt are as follows:
48,930 $
60,334
7,841 $
48,230
56,071 $
7,666
55,642
63,308
December 31,
2021
2020
10 years
11 years
3.62%
3.62%
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,
2021 and 2020. 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, 2021, restrictions on
the net assets of the Company were $3,926,205 of the total $5,184,450 in net assets. Included in this amount were
restrictions on Aqua Pennsylvania’s net assets of $1,523,351 of their total net assets of $2,158,273. As of December 31,
2021, $1,929,339 of Aqua Pennsylvania’s retained earnings of $1,949,339 and $244,809 of the retained earnings of
$397,547 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
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
Interest Rate Range
2022
2023
2024
2025
2026
Thereafter
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%
$
466 $
947
101,964
23,103
1,644
1,696
1,364
332
630
-
463 $
827
2,870
32,731
157,518
11,872
111
17
853
-
256 $
755
1,619
53,578
1,658
10,611
-
-
841
-
195 $
766
1,427
783
124,592
636
-
23,000
449
-
182 $
776
1,305
751
1,562
104
5,000
-
-
11,800
21,480 $
779
5,270
1,103,566
2,393,807
1,499,050
31,200
26,000
5,631
-
-
Total
$
132,146 $
207,262 $
69,318 $
151,848 $
5,065,303
60
61
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 and net of any
impairment. 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.
During the fourth quarter of 2021, the Company determined that there were impairment indicators that required the
Company to review a portion of office space that was not used in operations for impairment. Accordingly, the Company
performed undiscounted cash flow analyses on the related right-of-use asset group and determined that such right-of-use
asset was impaired. This resulted in a non-cash impairment charge of $4,695, representing the excess of the right-of-use
asset over its fair value, and is included within operations and maintenance expense in the consolidated statements of
operations and comprehensive income. On March 16, 2020, the Company completed the Peoples Gas Acquisition and,
upon application of the leasing standard and evaluation of acquired leases, it was determined that the market rental rate for
one of its office spaces was lower than the contractual rental rate. Accordingly a fair market value adjustment of $3,375
was recorded against the operating right-of-use assets in the consolidated balance sheets in 2020. The balance of the
right-of-use asset group, after adjustments, is being amortized over the remaining life of the lease.
Components of lease expense were as follows:
Operating lease cost
Years Ended December 31,
2021
2020
2019
$
9,716 $
8,496 $
2,183
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
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
$
$
$
$
Years Ended December 31,
2021
2020
9,612 $
6,324
December 31,
2021
2020
48,930 $
60,334
7,841 $
48,230
56,071 $
7,666
55,642
63,308
December 31,
2021
2020
10 years
11 years
3.62%
3.62%
Maturities of operating lease liabilities and a reconciliation of the operating lease liabilities reported on our consolidated
balance sheets as of December 31, 2021 are as follows:
2022
2023
2024
2025
2026
Thereafter
Total operating lease payments
Total operating lease payments
Less operating lease liabilities
Present value adjustment
Operating Leases
9,732
9,294
9,009
9,028
6,666
27,520
71,249
71,249
56,071
15,178
$
$
$
$
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,
2021 and 2020. 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, 2021, restrictions on
the net assets of the Company were $3,926,205 of the total $5,184,450 in net assets. Included in this amount were
restrictions on Aqua Pennsylvania’s net assets of $1,523,351 of their total net assets of $2,158,273. As of December 31,
2021, $1,929,339 of Aqua Pennsylvania’s retained earnings of $1,949,339 and $244,809 of the retained earnings of
$397,547 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.
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
$
2022
466 $
947
101,964
23,103
1,644
1,696
1,364
332
630
-
132,146 $
2023
463 $
827
2,870
32,731
157,518
11,872
111
17
853
-
207,262 $
2024
256 $
755
1,619
53,578
1,658
10,611
-
-
841
-
69,318 $
2025
195 $
766
1,427
783
124,592
636
-
23,000
449
-
151,848 $
2026
Thereafter
182 $
776
1,305
751
1,562
104
5,000
-
-
11,800
21,480 $
779
5,270
1,103,566
2,393,807
1,499,050
31,200
26,000
5,631
-
-
5,065,303
60
61
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On April 15, 2021, the Company’s operating subsidiary, Aqua Ohio, Inc., issued $100,000 of first mortgage bonds, of
which $50,000 is due in 2031 and $50,000 is due in 2051, with interest rates of 2.37% and 3.35%, respectively. The
proceeds from these bonds were used for general corporate purposes and to repay existing indebtedness. Further, on April
19, 2021, the Company issued $400,000 of long-term debt, with expenses of $4,010, which is due in 2031 with an interest
rate of 2.40%. The Company used the proceeds from this issuance to repay $50,000 of borrowings under the Aqua
Pennsylvania revolving credit facility, and the balance was used to repay in full the borrowings under its existing five year
unsecured revolving credit agreement.
In November 2020, Aqua Pennsylvania issued $150,000 of first mortgage bonds, of which $50,000 is due in 2053,
$50,000 is due in 2057, and $50,000 is due in 2058 with interest rates of 2.85%, 2.89%, and 2.90%, respectively. In May
2020, Aqua Pennsylvania issued $175,000 of first mortgage bonds, of which $75,000 is due in 2051, $50,000 is due in
2055, and $50,000 is due in 2056 with interest rates of 3.49%, 3.54%, and 3.55%, respectively. The proceeds from these
bonds were used to repay existing indebtedness and for general corporate purposes.
On April 3, 2020, the Company entered into a 364 day credit agreement that provided the Company with short-term
borrowing capacity of up to $500,000 in unsecured term loans (the “Term Loan Agreement”). The Company borrowed
the full $500,000 on April 3, 2020, which was used to strengthen its liquidity and cash position and maximize its financial
flexibility in light of the uncertainty surrounding the impact of the COVID-19 pandemic. In May and June 2020, the
Company repaid $300,000 and $200,000 of the term loans, respectively, and based on the Company’s ability to access
financial markets, we terminated the facility. The term loans bore interest at either the Adjusted LIBO Rate or the
Alternate Base Rate, as each such term is defined in the Term Loan Agreement. Amounts under the term loan could not
be re-borrowed upon repayment. Additionally, on April 13, 2020, the Company issued $1,100,000 of long-term debt, less
expenses of $10,525, of which $500,000 is due in 2030, and $600,000 is due in 2050 with interest rates of 2.704% and
3.351%, respectively. The Company used the proceeds from this issuance to repay in full the borrowings of $181,000 of
short-term debt assumed in the Peoples Gas Acquisition, $150,000 of short-term debt issued on March 13, 2020, and to
repay borrowings under its existing five year unsecured revolving credit agreement.
On March 13, 2020, the Company entered into a 364 day $150,000 credit agreement pursuant to which the Company
borrowed $150,000, which was used to fund a portion of the Peoples Gas Acquisition in lieu of additional borrowings
under our revolving credit facility, which was subsequently repaid with the proceeds from the Company’s April 2020
long-term debt issuance noted above.
The Company completed the Peoples Gas Acquisition on March 16, 2020, which resulted in the assumption of $1,101,091
of indebtedness, which included $920,091 of senior notes and $181,000 of short-term debt. The senior notes have
maturities ranging from 2020 to 2032 and interest rates that range from 2.90% to 6.42%. The short-term debt assumed at
closing was repaid with the proceeds from the Company’s April 2020 long-term debt issuance noted above.
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. 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. 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.
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 operations 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. Further, in 2020 the Company recorded an additional regulatory
asset for $3,888, as it represents an amount on which the Company expects to receive prospective rate recovery. The
recognition of this regulatory asset in 2020 has been presented in the consolidated statements of operations and
comprehensive income within the line item “Other.”
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 associated with the Company Debt Refinancing, (3) pay related costs and expenses, and (4) for general
corporate purposes.
The weighted average cost of long-term debt at December 31, 2021 and 2020 was 3.49% and 3.56%, respectively. The
weighted average cost of fixed rate long-term debt at December 31, 2021 and 2020 was 3.61% and 3.73%, respectively.
As of December 31, 2021, the Company has an amended $1,000,000 five year unsecured revolving credit facility, which
expires in December 2023. The Company’s unsecured revolving credit facility is used for other general corporate
purposes. The facility includes a $50,000 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, 2021, the Company has the following sublimits and
available capacity under the credit facility: $50,000 letter of credit sublimit, $29,078 of letters of credit available
capacity, and $300,000 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 1.31% and 1.62%, and the average borrowing was $174,026 and $221,230, during 2021 and 2020, 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 2021, 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 2021, 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, 2021 and 2020, funds borrowed under the agreement were $35,000 and $49,198,
respectively. Prior to November 2021, interest under this facility was 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. Effective November
2021, interest under this facility is based, at the borrower’s option, on the prime rate, an adjusted overnight bank funding
rate, or an adjusted Bloomberg Short-Term Bank Yield Index (BSBY) floating rate. 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 0.78% and 1.12%, and
the average borrowing was $40,312 and $37,166 , during 2021 and 2020, respectively. The maximum amount
outstanding at the end of any one month was $70,000 and $54,669 in 2021 and 2020, respectively.
62
63
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
On April 15, 2021, the Company’s operating subsidiary, Aqua Ohio, Inc., issued $100,000 of first mortgage bonds, of
which $50,000 is due in 2031 and $50,000 is due in 2051, with interest rates of 2.37% and 3.35%, respectively. The
proceeds from these bonds were used for general corporate purposes and to repay existing indebtedness. Further, on April
19, 2021, the Company issued $400,000 of long-term debt, with expenses of $4,010, which is due in 2031 with an interest
rate of 2.40%. The Company used the proceeds from this issuance to repay $50,000 of borrowings under the Aqua
Pennsylvania revolving credit facility, and the balance was used to repay in full the borrowings under its existing five year
unsecured revolving credit agreement.
In November 2020, Aqua Pennsylvania issued $150,000 of first mortgage bonds, of which $50,000 is due in 2053,
$50,000 is due in 2057, and $50,000 is due in 2058 with interest rates of 2.85%, 2.89%, and 2.90%, respectively. In May
2020, Aqua Pennsylvania issued $175,000 of first mortgage bonds, of which $75,000 is due in 2051, $50,000 is due in
2055, and $50,000 is due in 2056 with interest rates of 3.49%, 3.54%, and 3.55%, respectively. The proceeds from these
bonds were used to repay existing indebtedness and for general corporate purposes.
On April 3, 2020, the Company entered into a 364 day credit agreement that provided the Company with short-term
borrowing capacity of up to $500,000 in unsecured term loans (the “Term Loan Agreement”). The Company borrowed
the full $500,000 on April 3, 2020, which was used to strengthen its liquidity and cash position and maximize its financial
flexibility in light of the uncertainty surrounding the impact of the COVID-19 pandemic. In May and June 2020, the
Company repaid $300,000 and $200,000 of the term loans, respectively, and based on the Company’s ability to access
financial markets, we terminated the facility. The term loans bore interest at either the Adjusted LIBO Rate or the
Alternate Base Rate, as each such term is defined in the Term Loan Agreement. Amounts under the term loan could not
be re-borrowed upon repayment. Additionally, on April 13, 2020, the Company issued $1,100,000 of long-term debt, less
expenses of $10,525, of which $500,000 is due in 2030, and $600,000 is due in 2050 with interest rates of 2.704% and
3.351%, respectively. The Company used the proceeds from this issuance to repay in full the borrowings of $181,000 of
short-term debt assumed in the Peoples Gas Acquisition, $150,000 of short-term debt issued on March 13, 2020, and to
repay borrowings under its existing five year unsecured revolving credit agreement.
On March 13, 2020, the Company entered into a 364 day $150,000 credit agreement pursuant to which the Company
borrowed $150,000, which was used to fund a portion of the Peoples Gas Acquisition in lieu of additional borrowings
under our revolving credit facility, which was subsequently repaid with the proceeds from the Company’s April 2020
long-term debt issuance noted above.
The Company completed the Peoples Gas Acquisition on March 16, 2020, which resulted in the assumption of $1,101,091
of indebtedness, which included $920,091 of senior notes and $181,000 of short-term debt. The senior notes have
maturities ranging from 2020 to 2032 and interest rates that range from 2.90% to 6.42%. The short-term debt assumed at
closing was repaid with the proceeds from the Company’s April 2020 long-term debt issuance noted above.
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. 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. 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.
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 operations 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. Further, in 2020 the Company recorded an additional regulatory
asset for $3,888, as it represents an amount on which the Company expects to receive prospective rate recovery. The
recognition of this regulatory asset in 2020 has been presented in the consolidated statements of operations and
comprehensive income within the line item “Other.”
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 associated with the Company Debt Refinancing, (3) pay related costs and expenses, and (4) for general
corporate purposes.
The weighted average cost of long-term debt at December 31, 2021 and 2020 was 3.49% and 3.56%, respectively. The
weighted average cost of fixed rate long-term debt at December 31, 2021 and 2020 was 3.61% and 3.73%, respectively.
As of December 31, 2021, the Company has an amended $1,000,000 five year unsecured revolving credit facility, which
expires in December 2023. The Company’s unsecured revolving credit facility is used for other general corporate
purposes. The facility includes a $50,000 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, 2021, the Company has the following sublimits and
available capacity under the credit facility: $50,000 letter of credit sublimit, $29,078 of letters of credit available
capacity, and $300,000 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 1.31% and 1.62%, and the average borrowing was $174,026 and $221,230, during 2021 and 2020, 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 2021, 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 2021, 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, 2021 and 2020, funds borrowed under the agreement were $35,000 and $49,198,
respectively. Prior to November 2021, interest under this facility was 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. Effective November
2021, interest under this facility is based, at the borrower’s option, on the prime rate, an adjusted overnight bank funding
rate, or an adjusted Bloomberg Short-Term Bank Yield Index (BSBY) floating rate. 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 0.78% and 1.12%, and
the average borrowing was $40,312 and $37,166 , during 2021 and 2020, respectively. The maximum amount
outstanding at the end of any one month was $70,000 and $54,669 in 2021 and 2020, respectively.
62
63
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In November 2021, Peoples Natural Gas Companies renewed its $100,000 364-day secured revolving credit facility with
two banks. As of December 31, 2021 and 2020, funds borrowed under the agreement were $30,000 and $29,000,
respectively. The funds borrowed under this agreement are classified as loans payable and used to provide working
capital. Prior to November 2021, interest under this facility was 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 or at
rates offered by the banks. Beginning November 2021, interest under this facility is based, at the borrower’ option, at the
prime rate, an adjusted overnight bank funding rate, or an adjusted BSBY floating rate. A commitment fee of 0.05% is
charged on the total commitment amount of Peoples’ revolving credit agreement. The average cost of borrowing under
the facility was 1.02% and 0.96%, and the average borrowing was $23,750 and $2,417, during 2021 and 2020,
respectively. The maximum amount outstanding at the end of any one month was $30,000 and $29,000 in 2021 and 2020,
respectively.
At December 31, 2021 and 2020, 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,
2021 and 2020, funds borrowed under the short-term lines of credit were $0. The average borrowing under the lines was
$0 and $2,500 during 2021 and 2020, respectively. The maximum amount outstanding at the end of any one month was
$0 and $7,500 in 2021 and 2020, 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 2021 and 2020 was 0% and 1.11%, respectively.
Interest Income and Expense– Interest income of $2,384, $5,363, and $25,406 was recognized for the years ended
December 31, 2021, 2020, and 2019, respectively. Interest expense was $207,709, $188,435, and $125,383 in 2021,
2020, and 2019, including amounts capitalized for borrowed funds of $4,510, $4,434, and $4,231, respectively.
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. 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.
Carrying amount
Estimated fair value
The following table provides a summary of the amounts recognized in earnings for our interest rate swap agreements:
Location of Loss
Recognized
Amount of Loss Recognized in Income on
Derivatives
Years Ended December 31,
2021
2020
2019
Derivatives not designated as hedging
instrument:
Interest rate swaps
Other expense
$
- $
- $
(23,742)
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, 2021 and 2020, the carrying amount of the Company’s loans payable was $65,000 and
$78,198, respectively, which equates to their estimated fair value. The fair value of cash and cash equivalents is
determined based on Level 1 methods and assumptions. As of December 31, 2021 and 2020, the carrying amounts of the
Company's cash and cash equivalents were $10,567 and $4,827, respectively, which equates to their fair value. The
Company’s assets underlying the deferred compensation and non-qualified pension plans are determined by the fair value
of mutual funds, which are based on quoted market prices from active markets utilizing Level 1 methods and assumptions.
As of December 31, 2021 and 2020, the carrying amount of these securities was $28,576 and $25,780, respectively, 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:
Net gain recognized during the period on equity securities
Less: net gain / loss recognized during the period on equity securities sold during the
Unrealized gain recognized during the reporting period on equity securities still held at the
period
reporting date
Years ended December 31,
2021
2020
2019
$
607 $
492 $
293
-
-
-
$
607 $
492 $
293
The net gain (loss) recognized on equity securities is presented on the consolidated statements of operations and
comprehensive income on the line item “Other.”
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
$
December 31,
2021
5,947,357 $
6,482,499
2020
5,630,243
6,366,030
The fair value of long-term debt has been determined by discounting the future cash flows using current market interest
rates for similar financial instruments of the same duration utilizing level 2 methods and assumptions. The Company’s
customers’ advances for construction have a carrying value of $103,619 and $99,014 at December 31, 2021 and 2020,
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 rates. Portions of these non-
interest bearing instruments are payable annually through 2031 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.
64
65
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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, 2021 and 2020, the carrying amount of the Company’s loans payable was $65,000 and
$78,198, respectively, which equates to their estimated fair value. The fair value of cash and cash equivalents is
determined based on Level 1 methods and assumptions. As of December 31, 2021 and 2020, the carrying amounts of the
Company's cash and cash equivalents were $10,567 and $4,827, respectively, which equates to their fair value. The
Company’s assets underlying the deferred compensation and non-qualified pension plans are determined by the fair value
of mutual funds, which are based on quoted market prices from active markets utilizing Level 1 methods and assumptions.
As of December 31, 2021 and 2020, the carrying amount of these securities was $28,576 and $25,780, respectively, which
equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assets.
$0 and $2,500 during 2021 and 2020, respectively. The maximum amount outstanding at the end of any one month was
Unrealized gains and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:
In November 2021, Peoples Natural Gas Companies renewed its $100,000 364-day secured revolving credit facility with
two banks. As of December 31, 2021 and 2020, funds borrowed under the agreement were $30,000 and $29,000,
respectively. The funds borrowed under this agreement are classified as loans payable and used to provide working
capital. Prior to November 2021, interest under this facility was 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 or at
rates offered by the banks. Beginning November 2021, interest under this facility is based, at the borrower’ option, at the
prime rate, an adjusted overnight bank funding rate, or an adjusted BSBY floating rate. A commitment fee of 0.05% is
charged on the total commitment amount of Peoples’ revolving credit agreement. The average cost of borrowing under
the facility was 1.02% and 0.96%, and the average borrowing was $23,750 and $2,417, during 2021 and 2020,
respectively. The maximum amount outstanding at the end of any one month was $30,000 and $29,000 in 2021 and 2020,
respectively.
At December 31, 2021 and 2020, 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,
2021 and 2020, funds borrowed under the short-term lines of credit were $0. The average borrowing under the lines was
$0 and $7,500 in 2021 and 2020, 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 2021 and 2020 was 0% and 1.11%, respectively.
Interest Income and Expense– Interest income of $2,384, $5,363, and $25,406 was recognized for the years ended
December 31, 2021, 2020, and 2019, respectively. Interest expense was $207,709, $188,435, and $125,383 in 2021,
2020, and 2019, including amounts capitalized for borrowed funds of $4,510, $4,434, and $4,231, respectively.
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 net gain (loss) recognized on equity securities is presented on the consolidated statements of operations and
comprehensive income on the line item “Other.”
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
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. 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.
Carrying amount
Estimated fair value
$
December 31,
2021
5,947,357 $
6,482,499
2020
5,630,243
6,366,030
The following table provides a summary of the amounts recognized in earnings for our interest rate swap agreements:
Location of Loss
Recognized
Amount of Loss Recognized in Income on
Derivatives
Years Ended December 31,
2021
2020
2019
Derivatives not designated as hedging
instrument:
Interest rate swaps
Other expense
$
- $
- $
(23,742)
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 $103,619 and $99,014 at December 31, 2021 and 2020,
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 rates. Portions of these non-
interest bearing instruments are payable annually through 2031 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.
64
65
Net gain recognized during the period on equity securities
Less: net gain / loss recognized during the period on equity securities sold during the
period
Unrealized gain recognized during the reporting period on equity securities still held at the
reporting date
Years ended December 31,
2019
2020
293
-
-
-
$
607 $
492 $
293
607 $
492 $
2021
$
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 13 – Stockholders’ Equity
At December 31, 2021, the Company had 600,000,000 shares of common stock authorized; par value $0.50. Shares
outstanding and treasury shares held were as follows:
Shares outstanding
Treasury shares
Forward Equity Sale
2021
252,867,623
3,234,765
December 31,
2020
245,390,468
3,180,887
2019
220,758,719
3,112,565
In August 2020, the Company entered into a forward equity sale agreement for 6,700,000 shares of common stock with a
third party (the “forward purchaser”). In connection with the forward equity sale agreement, the forward purchaser
borrowed an equal number of shares of the Company’s common stock from stock lenders and sold the borrowed shares to
the public. The Company did not receive any proceeds from the sale of its common stock by the forward purchaser until
settlement of the shares underlying the forward equity sale agreement. The actual proceeds to be received by the
Company would have varied depending upon the settlement date, the number of shares designated for settlement on that
settlement date and the method of settlement. The forward equity sale agreement was accounted for as an equity
instrument and was recorded at a fair value of $0 at inception. The fair value was not adjusted as the Company continued
to meet the accounting requirements for equity instruments.
On August 9, 2021, the Company settled the forward equity sale agreement in full by physical share settlement. The
Company issued 6,700,000 shares and received cash proceeds of $299,739 at a forward price of $44.74 per share.
Pursuant to the agreement, the forward price was computed based upon the initial forward price of $46.00 per share,
adjusted for a floating interest rate factor equal to a specified daily rate less a spread and scheduled dividends during the
term of the agreement. The Company used the proceeds received upon settlement of the forward equity sale agreement to
fund general corporate purposes, including for water and wastewater utility acquisitions, working capital and capital
expenditures. The forward equity sale agreement has now been completely settled, and there are no additional shares
subject to the forward equity sale agreement.
Private Placement
At December 31, 2021, the Company had 1,770,819 shares of authorized but unissued Series Preferred Stock, $1.00 par
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”). On March 16, 2020, in connection with the closing of the Peoples Gas
Acquisition, the Company closed on the Private Placement and received gross proceeds of $749,907, less expenses of
$20,606. In June 2021, the Company filed a registration statement on Form S-3 ASR registering the Private Placement
shares for resale.
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 Stock Purchase Agreement contains customary representations, warranties and covenants of the Company and the
Investor, and the parties have agreed to indemnify each other for losses related to breaches of their respective
representations and warranties. At the closing of the Private Placement, the Company reimbursed the Investor for
reasonable out-of-pocket diligence expenses of $4,000.
66
67
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. As of December 31, 2021, 6,196,766 stock purchase contracts have been
early settled by the holders of the contracts, resulting in the issuance of 7,310,004 shares of the Company’s common
stock. As of December 31, 2021, the balance of stock purchase contracts is 7,603,234. 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, 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.
value.
$487,155.
In April 2021, the Company filed a universal shelf registration, through a filing with the Securities and Exchange
Commission (“SEC”), to allow for the potential future offer and 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, 2021 is
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.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 13 – Stockholders’ Equity
At December 31, 2021, the Company had 600,000,000 shares of common stock authorized; par value $0.50. Shares
outstanding and treasury shares held were as follows:
Shares outstanding
Treasury shares
Forward Equity Sale
2021
252,867,623
3,234,765
December 31,
2020
245,390,468
3,180,887
2019
220,758,719
3,112,565
In August 2020, the Company entered into a forward equity sale agreement for 6,700,000 shares of common stock with a
third party (the “forward purchaser”). In connection with the forward equity sale agreement, the forward purchaser
borrowed an equal number of shares of the Company’s common stock from stock lenders and sold the borrowed shares to
the public. The Company did not receive any proceeds from the sale of its common stock by the forward purchaser until
settlement of the shares underlying the forward equity sale agreement. The actual proceeds to be received by the
Company would have varied depending upon the settlement date, the number of shares designated for settlement on that
settlement date and the method of settlement. The forward equity sale agreement was accounted for as an equity
instrument and was recorded at a fair value of $0 at inception. The fair value was not adjusted as the Company continued
to meet the accounting requirements for equity instruments.
On August 9, 2021, the Company settled the forward equity sale agreement in full by physical share settlement. The
Company issued 6,700,000 shares and received cash proceeds of $299,739 at a forward price of $44.74 per share.
Pursuant to the agreement, the forward price was computed based upon the initial forward price of $46.00 per share,
adjusted for a floating interest rate factor equal to a specified daily rate less a spread and scheduled dividends during the
term of the agreement. The Company used the proceeds received upon settlement of the forward equity sale agreement to
fund general corporate purposes, including for water and wastewater utility acquisitions, working capital and capital
expenditures. The forward equity sale agreement has now been completely settled, and there are no additional shares
subject to the forward equity sale agreement.
Private Placement
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”). On March 16, 2020, in connection with the closing of the Peoples Gas
Acquisition, the Company closed on the Private Placement and received gross proceeds of $749,907, less expenses of
$20,606. In June 2021, the Company filed a registration statement on Form S-3 ASR registering the Private Placement
shares for resale.
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 Stock Purchase Agreement contains customary representations, warranties and covenants of the Company and the
Investor, and the parties have agreed to indemnify each other for losses related to breaches of their respective
representations and warranties. At the closing of the Private Placement, the Company reimbursed the Investor for
reasonable out-of-pocket diligence expenses of $4,000.
66
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. As of December 31, 2021, 6,196,766 stock purchase contracts have been
early settled by the holders of the contracts, resulting in the issuance of 7,310,004 shares of the Company’s common
stock. As of December 31, 2021, the balance of stock purchase contracts is 7,603,234. 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, 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, 2021, the Company had 1,770,819 shares of authorized but unissued Series Preferred Stock, $1.00 par
value.
In April 2021, the Company filed a universal shelf registration, through a filing with the Securities and Exchange
Commission (“SEC”), to allow for the potential future offer and 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, 2021 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.
67
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 issued throughout the year. 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 2021, and 2020, the Company
sold 374,824 and 388,978 original issue shares of common stock through the dividend reinvestment portion of the Plan,
for net proceeds of $16,799 and $16,522, respectively. In 2019, 183,731 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.
The Company’s accumulated other comprehensive income is reported in the consolidated statements of equity. 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 and the minimum
number of shares to be issued upon settlement of the stock purchase contracts issued under the tangible equity units.
Diluted net income per share is based on the weighted average number of common shares outstanding and potentially
dilutive shares, and the expected number of shares to be issued upon settlement of the stock purchase contracts issued
under the tangible equity units, based on the applicable market value of our common stock. The dilutive effect of
employee stock-based compensation and shares issuable under the forward equity sale agreement (from the date the
Company entered into the forward equity sale agreement to the settlement date) are included in the computation of diluted
net income per share. The dilutive effect of stock-based compensation and shares issuable under the forward equity sale
agreement are calculated by using the treasury stock method and expected proceeds upon exercise or issuance of the
stock-based compensation and settlement of the forward equity sale agreement. The treasury stock method assumes that
the proceeds from stock-based compensation and settlement of the forward equity sale agreement are used to purchase the
Company’s common stock at the average market price during the period. The following table summarizes the shares, in
thousands, used in computing basic and diluted net income per share:
Average common shares outstanding during the period for basic computation
Effect of dilutive securities:
Forward equity sale agreement
Issuance of common stock from private placement
Tangible equity units
Employee stock-based compensation
Average common shares outstanding during the period for diluted computation
Years ended December 31,
2020
2021
257,487
189
-
-
504
258,180
249,768
-
4,438
-
423
254,629
2019
215,550
-
-
-
381
215,931
For the year ended December 31, 2020, the average common shares outstanding during the period for diluted computation
reflects the impact of the issuance of common stock from the March 16, 2020 private placement as if the shares were
issued on January 1, 2020.
For the years ended December 31, 2021, 2020 and 2019, 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. Additionally, the dilutive effect of
performance share units and restricted share units granted are included in the Company’s calculation of diluted net income
per share.
For the years ended December 31, 2021, 2020, and 2019, the average common shares outstanding during the period for
basic computation includes the weighted-average impact of 9,041,687, 9,370,646 and 10,533,133 shares, respectively,
based on the minimum number of shares of 8,963,964, 9,091,179 and 11,425,345, respectively, to be issued in April 2022
upon settlement of the stock purchase contracts issued in April 2019 under the tangible equity units.
68
69
Equity per common share was $20.50 and $19.09 at December 31, 2021 and 2020, 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, 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, 2021, 2,099,761 shares
were still available for issuance under the Plan. No further grants may be made under the Company’s 2004 Equity
Compensation Plan.
Performance Share Units – During 2021 and 2020, 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 2021 and 2020
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 utilities (a market-based condition)
Metric 2 – Achievement of a targeted cumulative level of rate base growth as a result of
acquisitions (a performance-based condition)
Metric 3 – Achievement of targets for maintaining consolidated operations and maintenance
expenses over the three year measurement period (a performance-based condition)
The following table provides the compensation expense and income tax benefit for PSUs:
Performance Grant
2021 and 2020
38.46%
30.77%
30.77%
Stock-based compensation within operations and maintenance expense
Income tax benefit
Years ended December 31,
2021
2020
2019
$
7,150 $
3,630 $
2,038
957
2,741
767
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 issued throughout the year. 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 2021, and 2020, the Company
sold 374,824 and 388,978 original issue shares of common stock through the dividend reinvestment portion of the Plan,
Equity per common share was $20.50 and $19.09 at December 31, 2021 and 2020, 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.
for net proceeds of $16,799 and $16,522, respectively. In 2019, 183,731 shares of the Company were purchased under the
Note 15 – Employee Stock and Incentive Plan
dividend reinvestment portion of the Plan by the Company’s transfer agent in the open-market for $7,777.
The Company’s accumulated other comprehensive income is reported in the consolidated statements of equity. 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 and the minimum
number of shares to be issued upon settlement of the stock purchase contracts issued under the tangible equity units.
Diluted net income per share is based on the weighted average number of common shares outstanding and potentially
dilutive shares, and the expected number of shares to be issued upon settlement of the stock purchase contracts issued
under the tangible equity units, based on the applicable market value of our common stock. The dilutive effect of
employee stock-based compensation and shares issuable under the forward equity sale agreement (from the date the
Company entered into the forward equity sale agreement to the settlement date) are included in the computation of diluted
net income per share. The dilutive effect of stock-based compensation and shares issuable under the forward equity sale
agreement are calculated by using the treasury stock method and expected proceeds upon exercise or issuance of the
stock-based compensation and settlement of the forward equity sale agreement. The treasury stock method assumes that
the proceeds from stock-based compensation and settlement of the forward equity sale agreement are used to purchase the
Company’s common stock at the average market price during the period. The following table summarizes the shares, in
thousands, used in computing basic and diluted net income per share:
Average common shares outstanding during the period for basic computation
Effect of dilutive securities:
Forward equity sale agreement
Issuance of common stock from private placement
Tangible equity units
Employee stock-based compensation
Average common shares outstanding during the period for diluted computation
Years ended December 31,
2021
257,487
2020
2019
249,768
215,550
189
-
-
4,438
-
-
-
-
-
504
258,180
423
381
254,629
215,931
For the year ended December 31, 2020, the average common shares outstanding during the period for diluted computation
reflects the impact of the issuance of common stock from the March 16, 2020 private placement as if the shares were
issued on January 1, 2020.
For the years ended December 31, 2021, 2020 and 2019, 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. Additionally, the dilutive effect of
performance share units and restricted share units granted are included in the Company’s calculation of diluted net income
per share.
For the years ended December 31, 2021, 2020, and 2019, the average common shares outstanding during the period for
basic computation includes the weighted-average impact of 9,041,687, 9,370,646 and 10,533,133 shares, respectively,
based on the minimum number of shares of 8,963,964, 9,091,179 and 11,425,345, respectively, to be issued in April 2022
upon settlement of the stock purchase contracts issued in April 2019 under the tangible equity units.
Under the Company’s Amended and Restated Equity Compensation Plan, (the “Plan”) approved by the Company’s
shareholders on May 2, 2019, to replace the 2004 Equity Compensation Plan, stock options, stock units, stock awards,
stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-
employee directors, and consultants and advisors. The Plan authorizes 6,250,000 shares for issuance under the plan. A
maximum of 3,125,000 shares under the Plan may be issued pursuant to stock 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, 2021, 2,099,761 shares
were still available for issuance under the Plan. No further grants may be made under the Company’s 2004 Equity
Compensation Plan.
Performance Share Units – During 2021 and 2020, 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 2021 and 2020
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 utilities (a market-based condition)
Metric 2 – Achievement of a targeted cumulative level of rate base growth as a result of
acquisitions (a performance-based condition)
Metric 3 – Achievement of targets for maintaining consolidated operations and maintenance
expenses over the three year measurement period (a performance-based condition)
The following table provides the compensation expense and income tax benefit for PSUs:
Performance Grant
2021 and 2020
38.46%
30.77%
30.77%
Stock-based compensation within operations and maintenance expense
Income tax benefit
Years ended December 31,
2020
2021
2019
$
7,150 $
2,038
3,630 $
957
2,741
767
68
69
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes nonvested PSU transactions for the year ended December 31, 2021:
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
283,007 $
151,711
70,783
(8,789)
(141,328)
355,384
34.57
43.18
49.41
46.34
31.36
42.19
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,
2021
2020
2019
3.0
0.24%
32.1%
43.18 $
6,050 $
5,321 $
3.0
0.66%
24.2%
55.25 $
9,030 $
5,215 $
-
-
-
-
3,181
2,569
$
$
$
As of December 31, 2021, $9,295 of unrecognized compensation costs related to PSUs is expected to be recognized over
a weighted average period of approximately 1.77 years. The aggregate intrinsic value of PSUs as of December 31, 2021
was $13,270. 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.
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
$
3,360 $
2,180 $
Income tax benefit
Years ended December 31,
2021
2020
2019
953
585
1,650
466
The following table summarizes nonvested RSU transactions for the year ended December 31, 2021:
Nonvested stock units at beginning of period
Stock units vested and issued
Granted
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
163,906 $
85,626
(50,406)
(5,439)
193,687
Weighted
Average Fair
Value
40.80
44.44
35.45
43.38
43.76
Years ended December 31,
2021
2020
2019
$
44.44 $
49.19 $
2,108
1,726
2,130
1,203
36.25
1,456
1,341
As of December 31, 2021, $3,851 of unrecognized compensation costs related to RSUs is expected to be recognized over
a weighted average period of approximately 1.79 years. The aggregate intrinsic value of RSUs as of December 31, 2021
was $10,399. 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.
70
71
The following table summarizes nonvested PSU transactions for the year ended December 31, 2021:
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
283,007 $
151,711
70,783
(8,789)
(141,328)
355,384
Weighted
Average Fair
Value
34.57
43.18
49.41
46.34
31.36
42.19
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
Years ended December 31,
2021
2020
2019
3.0
0.24%
32.1%
43.18 $
6,050 $
5,321 $
3.0
0.66%
24.2%
55.25 $
9,030 $
5,215 $
-
-
-
-
3,181
2,569
Weighted average fair value of PSUs granted
Intrinsic value of vested PSUs
Fair value of vested PSUs
$
$
$
As of December 31, 2021, $9,295 of unrecognized compensation costs related to PSUs is expected to be recognized over
a weighted average period of approximately 1.77 years. The aggregate intrinsic value of PSUs as of December 31, 2021
was $13,270. 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.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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,
2021
3,360 $
953
2020
2,180 $
585
2019
1,650
466
The following table summarizes nonvested RSU transactions for the year ended December 31, 2021:
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
163,906 $
85,626
(50,406)
(5,439)
193,687
40.80
44.44
35.45
43.38
43.76
Years ended December 31,
2020
2021
44.44 $
2,108
1,726
49.19 $
2,130
1,203
2019
36.25
1,456
1,341
As of December 31, 2021, $3,851 of unrecognized compensation costs related to RSUs is expected to be recognized over
a weighted average period of approximately 1.79 years. The aggregate intrinsic value of RSUs as of December 31, 2021
was $10,399. 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.
70
71
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 and 2018 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 Company did not grant stock options for the years ended December 31, 2021 and 2020.
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
$
480 $
136
Years ended December 31,
2021
2020
1,322 $
374
2019
2,280
643
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:
2021:
Expected term (years)
Risk-free interest rate
Expected volatility
Dividend yield
Grant date fair value per option
Year ended December 31,
2019
5.47
2.53%
17.7%
2.44%
$ 5.25
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.
As of December 31, 2021, there was $63 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 0.16
72
73
The following table summarizes stock option transactions for the year ended December 31, 2021:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (years)
Aggregate
Intrinsic Value
Outstanding, beginning of year
Granted
Forfeited
Expired / Cancelled
Exercised
Outstanding at end of year
Shares
947,680 $
-
(10,478)
(1,413)
(122,297)
813,492 $
35.22
-
35.92
34.54
34.11
35.37
6.9 $
6.8 $
14,899
10,842
Exercisable at end of year
584,652 $
35.15
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,
$
2021
2020
2019
1,709 $
1,485
1,849
1,673
$
2,552
422
The following table summarizes information about the options outstanding and options exercisable as of December 31,
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Life (years)
Shares
59,159
97,500
654,374
2,459
813,492
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
5.2 $
6.2
7.2
7.2
6.9 $
30.50
34.51
35.93
37.80
35.37
58,962 $
97,500
428,190
-
584,652 $
30.49
34.51
35.93
-
35.15
Range of prices:
$30.00 - 33.99
$34.00 - 34.99
$35.00 - 35.99
$36.00 and above
years.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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
The following table summarizes stock option transactions for the year ended December 31, 2021:
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 and 2018 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 Company did not grant stock options for the years ended December 31, 2021 and 2020.
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,
2021
2020
$
480 $
1,322 $
136
374
2019
2,280
643
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
Year ended December 31,
2019
5.47
2.53%
17.7%
2.44%
$ 5.25
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.
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (years)
Aggregate
Intrinsic Value
Outstanding, beginning of year
Granted
Forfeited
Expired / Cancelled
Exercised
Outstanding at end of year
Shares
947,680 $
-
(10,478)
(1,413)
(122,297)
813,492 $
35.22
-
35.92
34.54
34.11
35.37
Exercisable at end of year
584,652 $
35.15
6.9 $
6.8 $
14,899
10,842
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,
$
2021
2020
2019
1,709 $
1,485
1,849
1,673
$
2,552
422
The following table summarizes information about the options outstanding and options exercisable as of December 31,
2021:
Options Outstanding
Options Exercisable
Range of prices:
$30.00 - 33.99
$34.00 - 34.99
$35.00 - 35.99
$36.00 and above
Shares
59,159
97,500
654,374
2,459
813,492
Weighted
Average
Remaining
Life (years)
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
5.2 $
6.2
7.2
7.2
6.9 $
30.50
34.51
35.93
37.80
35.37
58,962 $
97,500
428,190
-
584,652 $
30.49
34.51
35.93
-
35.15
As of December 31, 2021, there was $63 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 0.16
years.
72
73
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Restricted Stock – Restricted stock awards provide the grantee with the rights of a shareholder, including the right to
receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction
period. Restricted stock awards result in compensation expense that is equal to the fair market value of the stock on the
date of the grant and is amortized ratably over the restriction period. The Company expects forfeitures of restricted stock
to be de minimis. The Company did not grant restricted stock for the year ended December 31, 2019.
The following table provides the compensation cost and income tax benefit for stock-based compensation related to
restricted stock:
Year ended December 31,
2021
2020
2019
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
130 $
37
333 $
96
-
-
The following table summarizes restricted stock transactions for the year ended December 31, 2021:
Nonvested shares at beginning of period
Granted
Vested
Nonvested shares at end of period
Number of Shares
13,228
1,068
(13,228)
1,068
$
$
Weighted Average
Fair Value
34.02
46.83
34.02
46.83
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
$
The following table summarizes the value of stock awards:
Years ended December 31,
2021
2020
2019
700 $
202
695 $
201
698
202
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 the date their respective pension plan was closed to new participants. 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 their respective
pension plan was closed, 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.
On March 16, 2020, the Company completed the Peoples Gas Acquisition and assumed the pension and other
postretirement benefit plans for its employees. On April 1, 2020, the Company merged the pension plans acquired in the
Peoples Gas Acquisition into the Company’s Pension Plan.
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 $11,069 and
$10,889 to participants who elected this option during 2021 and 2020, respectively.
In addition to providing pension benefits, the Company offers post-retirement benefits other than pensions to employees
retiring with a minimum level of service and hired before their respective plan closed to new participants. 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.
Years ended December 31,
2021
2020
2019
Intrinsic and fair value of stock awards vested
Weighted average fair value of stock awards granted
$
700 $
47.46
695 $
41.97
698
41.75
The following table summarizes stock award transactions for year ended December 31, 2021:
Nonvested stock awards at beginning of period
Granted
Vested
Nonvested stock awards at end of period
Number of
Stock Awards
Weighted
Average Fair
Value
- $
14,749
(14,749)
-
-
47.46
47.46
-
74
75
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 the date their respective pension plan was closed to new participants. 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 their respective
pension plan was closed, 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.
On March 16, 2020, the Company completed the Peoples Gas Acquisition and assumed the pension and other
postretirement benefit plans for its employees. On April 1, 2020, the Company merged the pension plans acquired in the
Peoples Gas Acquisition into the Company’s Pension Plan.
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 $11,069 and
$10,889 to participants who elected this option during 2021 and 2020, respectively.
In addition to providing pension benefits, the Company offers post-retirement benefits other than pensions to employees
retiring with a minimum level of service and hired before their respective plan closed to new participants. 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.
Restricted Stock – Restricted stock awards provide the grantee with the rights of a shareholder, including the right to
receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction
period. Restricted stock awards result in compensation expense that is equal to the fair market value of the stock on the
date of the grant and is amortized ratably over the restriction period. The Company expects forfeitures of restricted stock
to be de minimis. The Company did not grant restricted stock for the year ended December 31, 2019.
The following table provides the compensation cost and income tax benefit for stock-based compensation related to
restricted stock:
Stock-based compensation within operations and maintenance expense
$
Income tax benefit
The following table summarizes restricted stock transactions for the year ended December 31, 2021:
Year ended December 31,
2021
2020
2019
130 $
333 $
37
96
-
-
Nonvested shares at beginning of period
Granted
Vested
Nonvested shares at end of period
Number of Shares
Weighted Average
Fair Value
13,228
1,068
(13,228)
1,068
$
$
34.02
46.83
34.02
46.83
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
The following table summarizes the value of stock awards:
Intrinsic and fair value of stock awards vested
Weighted average fair value of stock awards granted
The following table summarizes stock award transactions for year ended December 31, 2021:
Nonvested stock awards at beginning of period
Granted
Vested
Nonvested stock awards at end of period
Years ended December 31,
2021
2020
2019
700 $
202
695 $
201
698
202
Years ended December 31,
2021
2020
700 $
47.46
695 $
41.97
2019
698
41.75
$
Weighted
Number of
Average Fair
Stock Awards
Value
- $
14,749
(14,749)
-
47.46
47.46
-
-
74
75
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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:
obligation in excess of plan assets:
The following table provides selected information about plans with accumulated benefit obligation and projected benefit
Years:
2022
2023
2024
2025
2026
2027-2031
Pension Benefits
Other Post-retirement Benefits
$
$
31,670
32,165
31,666
32,154
31,513
149,483
5,514
5,703
5,644
5,786
5,961
31,739
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
Acquisitions
Benefit obligation at December 31,
Change in plan assets:
Fair value of plan assets at January 1,
Actual return on plan assets
Employer contributions
Participants' contributions
Benefits paid
Acquisitions
Fair value of plan assets at December 31,
Funded status of plan:
Net liability recognized at December 31,
Pension Benefits
2021
2020
Other Post-retirement Benefits
2021
2020
$
486,219 $
3,503
13,018
(17,378)
-
(32,415)
-
452,947
310,381 $
3,775
13,710
37,632
-
(28,150)
148,871
486,219
426,801
23,901
14,834
-
(32,415)
-
433,121
266,461
54,732
16,274
-
(28,150)
117,484
426,801
$
125,375
2,793
3,358
(12,001)
36
(4,910)
114,651
98,995
12,484
598
36
(4,805)
-
107,308
79,542
2,276
3,687
5,181
795
(6,287)
40,181
125,375
54,011
11,910
5,034
795
(6,199)
33,444
98,995
$
19,826 $
59,418 $
7,343
$
26,380
recognized as components of net periodic benefit cost as of December 31:
The following table provides the net liability recognized on the consolidated balance sheets at December 31,:
Non-current asset
Current liability
Noncurrent liability
Net liability recognized
Pension Benefits
2021
2020
2,474 $
(1,144)
(21,156)
(19,826) $
- $
(551)
(58,867)
(59,418) $
Other Post-retirement Benefits
2021
23,504
(1,777)
(29,070)
(7,343)
2020
$
$
11,446
(895)
(36,931)
(26,380)
$
$
76
77
Selected information for plans with projected benefit
obligation in excess of plan assets:
Projected benefit obligation
Fair value of plan assets
Selected information for plans with accumulated benefit
obligation in excess of plan assets:
Accumulated benefit obligation
Fair value of plan assets
December 31, 2021
December 31, 2020
Other
Other
Pension
Benefits
Post-retirement
Benefits
Pension
Benefits
Post-retirement
Benefits
$
23,601 $
-
N/A $
486,219 $
N/A
426,801
N/A
N/A
$
17,129 $
-
42,463 $
458,658 $
11,616
426,801
96,342
63,567
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
Net periodic benefit cost (credit)
Pension Benefits
Other Post-retirement Benefits
2021
2020
2019
2021
2020
$
3,503 $
3,775 $
2,718 $
2,793 $
2,276 $
13,018
(23,165)
559
2,907
13,710
(21,249)
591
7,967
11,817
(15,272)
620
7,927
7,810 $
3,358
(4,155)
(432)
219
3,687
(4,079)
(464)
622
$
(3,178) $
4,794 $
1,783 $
2,042 $
1,536
2019
819
2,999
(2,482)
(464)
664
The Company records the underfunded/overfunded status of its pension and other post-retirement benefit plans on its
consolidated balance sheets and records a regulatory asset/liability 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.
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 and regulatory liabilities that have not been
Net actuarial loss (gain)
Prior service cost (credit)
Total recognized in regulatory assets
(liabilities)
$
$
Pension Benefits
2021
2020
Other Post-retirement Benefits
2020
64,247 $
83,967 $
(16,323)
965
1,524
2021
-
$
$
7,224
(432)
6,792
65,212 $
85,491 $
(16,323)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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
The following table provides selected information about plans with accumulated benefit obligation and projected benefit
obligation in excess of plan assets:
Selected information for plans with projected benefit
obligation in excess of plan assets:
Projected benefit obligation
Fair value of plan assets
Selected information for plans with accumulated benefit
obligation in excess of plan assets:
Accumulated benefit obligation
Fair value of plan assets
December 31, 2021
Other
Post-retirement
Benefits
Pension
Benefits
December 31, 2020
Other
Post-retirement
Benefits
Pension
Benefits
$
23,601 $
-
N/A $
N/A
486,219 $
426,801
N/A
N/A
$
17,129 $
-
42,463 $
11,616
458,658 $
426,801
96,342
63,567
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
Net periodic benefit cost (credit)
Pension Benefits
2021
3,503 $
13,018
(23,165)
559
2,907
(3,178) $
2020
3,775 $
13,710
(21,249)
591
7,967
4,794 $
2019
2,718 $
11,817
(15,272)
620
7,927
7,810 $
$
$
Other Post-retirement Benefits
2019
2021
2,793 $
3,358
(4,155)
(432)
219
1,783 $
2020
2,276 $
3,687
(4,079)
(464)
622
2,042 $
819
2,999
(2,482)
(464)
664
1,536
The Company records the underfunded/overfunded status of its pension and other post-retirement benefit plans on its
consolidated balance sheets and records a regulatory asset/liability 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.
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 and regulatory liabilities that have not been
recognized as components of net periodic benefit cost as of December 31:
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:
indicated:
Years:
2022
2023
2024
2025
2026
2027-2031
Change in benefit obligation:
Benefit obligation at January 1,
Actuarial (gain) loss
Plan participants' contributions
Service cost
Interest cost
Benefits paid
Acquisitions
Benefit obligation at December 31,
Change in plan assets:
Fair value of plan assets at January 1,
Actual return on plan assets
Employer contributions
Participants' contributions
Benefits paid
Acquisitions
Fair value of plan assets at December 31,
Funded status of plan:
Pension Benefits
Other Post-retirement Benefits
$
$
31,670
32,165
31,666
32,154
31,513
149,483
Pension Benefits
Other Post-retirement Benefits
2021
2020
2021
2020
$
310,381 $
125,375
$
79,542
486,219 $
3,503
13,018
(17,378)
(32,415)
-
-
452,947
426,801
23,901
14,834
-
-
(32,415)
433,121
3,775
13,710
37,632
-
(28,150)
148,871
486,219
266,461
54,732
16,274
-
(28,150)
117,484
426,801
2,793
3,358
(12,001)
36
(4,910)
114,651
98,995
12,484
598
36
(4,805)
-
107,308
5,514
5,703
5,644
5,786
5,961
31,739
2,276
3,687
5,181
795
(6,287)
40,181
125,375
54,011
11,910
5,034
795
(6,199)
33,444
98,995
Net liability recognized at December 31,
$
19,826 $
59,418 $
7,343
$
26,380
The following table provides the net liability recognized on the consolidated balance sheets at December 31,:
Non-current asset
Current liability
Noncurrent liability
Net liability recognized
Pension Benefits
2021
2020
2,474 $
(1,144)
(21,156)
- $
(551)
(58,867)
(19,826) $
(59,418) $
Other Post-retirement Benefits
2021
23,504
(1,777)
(29,070)
(7,343)
2020
$
$
11,446
(895)
(36,931)
(26,380)
$
$
Net actuarial loss (gain)
Prior service cost (credit)
Total recognized in regulatory assets
(liabilities)
$
$
Pension Benefits
2021
2020
64,247 $
965
83,967 $
1,524
2020
7,224
(432)
6,792
$
$
65,212 $
85,491 $
(16,323)
2021
(16,323)
-
Other Post-retirement Benefits
76
77
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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
2020
2021
Other Post-
retirement Benefits
2021
2020
2.91%
2.57%
3.0-4.0% 3.0-4.0%
2.96%
n/a
2.68%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
6.25%
5.0%
2027
6.25%
5.0%
2025
Return seeking assets
Liability hedging assets
Total
Percentage of Plan Assets at December 31,
Target Allocation
50 to 70%
30 to 50%
100%
2021
53%
47%
100%
2020
54%
46%
100%
The fair value of the Company’s pension plans’ assets at December 31, 2021 by asset class are as follows:
The significant assumptions related to the Company’s net periodic benefit costs are as follows:
Pension Benefits
2020
2019
2021
Other Post-retirement Benefits
2019
2020
2021
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
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.
2.57%
5.60%
4.30%
3.35%
6.50%
6.00%
3.0-4.0% 3.0-4.0% 3.0-4.0%
2.68%
5.60%
n/a
3.42%
6.00%
n/a
4.34%
4.1-6.5%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
6.3%
5.0%
2025
6.3%
6.6%
5.0%
2025
5.0%
2023
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.
78
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 2021, the Company used a 5.6% expected return on plan
assets assumption. 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 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:
Level 1
Level 2
Level 3
NAV (a)
$
20,290 $
- $
- $
-
$
Assets measured at
-
-
-
-
-
-
-
-
-
-
134,394
39,163
56,191
177,574
-
$
5,509
25,799 $
- $
- $
407,322
$
Total
20,290
134,394
39,163
56,191
177,574
5,509
433,121
(a) Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the
The fair value of the Company’s pension plans’ assets at December 31, 2020 by asset class are as follows:
Common stock
Return seeking assets:
Global equities
Hedge / diversifying strategies
Credit
Liability hedging assets
Cash and cash equivalents
Total pension assets
fair value hierarchy.
Common stock
Return seeking assets:
Global equities
Hedge / diversifying strategies
Credit
Liability hedging assets
Cash and cash equivalents
Total pension assets
-
-
-
-
-
-
-
-
Level 1
Level 2
Level 3
$
17,620 $
- $
- $
-
$
Assets
measured at
NAV (a)
-
-
-
-
-
-
-
-
-
-
120,220
38,417
53,378
140,891
-
- $
- $
352,906
$
Total
17,620
120,220
38,417
53,378
140,891
56,275
426,801
$
56,275
73,895 $
79
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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:
Pension Benefits
retirement Benefits
2021
2020
2021
2020
Other Post-
2.91%
2.57%
2.96%
2.68%
3.0-4.0% 3.0-4.0%
n/a
n/a
Weighted Average Assumptions Used to Determine Benefit Obligations as of December
31,
Discount rate
Rate of compensation increase
December 31,
Health care cost trend rate
Assumed Health Care Cost Trend Rates Used to Determine Benefit Obligations as of
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.
The significant assumptions related to the Company’s net periodic benefit costs are as follows:
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
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.
Pension Benefits
2021
2020
2019
Other Post-retirement Benefits
2021
2020
2019
2.57%
5.60%
3.35%
6.00%
4.30%
6.50%
3.0-4.0% 3.0-4.0% 3.0-4.0%
2.68%
5.60%
n/a
3.42%
6.00%
n/a
4.34%
4.1-6.5%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
6.3%
5.0%
2025
6.3%
6.6%
5.0%
2025
5.0%
2023
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.
78
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 2021, the Company used a 5.6% expected return on plan
assets assumption. 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 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:
n/a
n/a
n/a
n/a
n/a
n/a
6.25%
6.25%
5.0%
2027
5.0%
2025
Return seeking assets
Liability hedging assets
Total
Percentage of Plan Assets at December 31,
Target Allocation
50 to 70%
30 to 50%
100%
2021
53%
47%
100%
2020
54%
46%
100%
The fair value of the Company’s pension plans’ assets at December 31, 2021 by asset class are as follows:
Common stock
Return seeking assets:
Global equities
Hedge / diversifying strategies
Credit
Liability hedging assets
Cash and cash equivalents
Total pension assets
Level 1
Level 2
Level 3
$
20,290 $
- $
- $
-
-
-
-
5,509
25,799 $
-
-
-
-
-
- $
-
-
-
-
-
- $
$
Assets measured at
NAV (a)
-
$
134,394
39,163
56,191
177,574
-
407,322
$
Total
20,290
134,394
39,163
56,191
177,574
5,509
433,121
(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, 2020 by asset class are as follows:
Common stock
Return seeking assets:
Global equities
Hedge / diversifying strategies
Credit
Liability hedging assets
Cash and cash equivalents
Total pension assets
Level 1
Level 2
Level 3
Assets
measured at
NAV (a)
$
17,620 $
-
-
-
-
56,275
73,895 $
79
$
- $
-
-
-
-
-
- $
- $
-
-
-
-
-
- $
-
$
120,220
38,417
53,378
140,891
-
352,906
$
Total
17,620
120,220
38,417
53,378
140,891
56,275
426,801
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Equity securities include our common stock in the amounts of $20,290 or 4.7% and $17,620 or 4.1% of total pension
plans’ assets as of December 31, 2021 and 2020, respectively.
The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset class are as
follows:
Return seeking assets
Liability hedging assets
Total
Target Allocation
50 to 70%
30 to 50%
100%
2021
68%
32%
100%
2020
64%
36%
100%
Percentage of Plan Assets at December 31,
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2021 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)
$
$
36,753 $
9,609
17,241
4,406
68,009 $
- $
-
-
-
- $
- $
-
-
-
- $
22,544 $
4,391
12,364
39,299
$
Total
59,297
14,000
29,605
4,406
107,308
(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, 2020 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)
$
$
31,984 $
6,761
17,021
7,498
63,264 $
- $
-
-
-
- $
- $
-
-
-
- $
20,673
3,453
11,605
-
35,731
$
$
Total
52,657
10,214
28,626
7,498
98,995
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,
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 2022 our
pension contribution is expected to be $20,390.
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 $19,569,
$15,445, and $6,259, for the years ended December 31, 2021, 2020, and 2019, respectively.
80
81
follows:
follows:
Return seeking assets
Liability hedging assets
Total
Target Allocation
50 to 70%
30 to 50%
100%
2021
68%
32%
100%
2020
64%
36%
100%
Percentage of Plan Assets at December 31,
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2021 by asset class are as
Level 1
Level 2
Level 3
NAV (a)
Total
Assets measured at
36,753 $
- $
- $
9,609
17,241
4,406
-
-
-
-
-
-
22,544 $
4,391
12,364
59,297
14,000
29,605
4,406
Return seeking assets:
Global equities
Real estate securities
Liability hedging assets
Cash and cash equivalents
fair value hierarchy.
follows:
Return seeking assets:
Global equities
Real estate securities
Liability hedging assets
Cash and cash equivalents
$
$
$
$
Total other post-retirement assets
68,009 $
- $
- $
39,299
$
107,308
(a) Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2020 by asset class are as
Level 1
Level 2
Level 3
Assets
measured at
NAV (a)
31,984 $
- $
- $
20,673
$
6,761
17,021
7,498
-
-
-
-
-
-
3,453
11,605
-
Total
52,657
10,214
28,626
7,498
98,995
Total other post-retirement assets
63,264 $
- $
- $
35,731
$
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Equity securities include our common stock in the amounts of $20,290 or 4.7% and $17,620 or 4.1% of total pension
plans’ assets as of December 31, 2021 and 2020, respectively.
The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset class are as
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,
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 2022 our
pension contribution is expected to be $20,390.
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 $19,569,
$15,445, and $6,259, for the years ended December 31, 2021, 2020, and 2019, respectively.
80
81
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 17 –Rate Activity
Note 18 – Segment Information
On August 20, 2021, Aqua Pennsylvania, filed an application with the Pennsylvania Public Utility Commission designed
to increase water and wastewater rates by $97,685 or 17.9% on an annual basis. The Company anticipates a final order to
be issued by May 2022.
In May 2019, the Pennsylvania Public Utility Commission granted Aqua Pennsylvania a water and wastewater increase
designed to increase total operating revenues by $47,000 on an annual basis, 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 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 were designed with
$158,865 of tax benefits to be flowed-through to income 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.
On October 26, 2020, the Company’s water and wastewater utility operating divisions in North Carolina received an order
from the North Carolina Utilities Commission resulting in an increase of $3,426 in annual revenue, and new rates went
into effect on October 26, 2020.
In May 2019, the Company’s operating subsidiary in New Jersey 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, North Carolina, and New Jersey rate awards noted above, the Company’s operating
subsidiaries were allowed annualized rate increases of $3,390 in 2021, $4,480 in 2020, and $974 in 2019, represented by
six, five, and two rate decisions, respectively. Revenues from these rate increases realized in the year of grant were
approximately $2,995, $1,594, and $974 in 2021, 2020, and 2019, respectively. On January 3, 2022, the Company’s
natural gas operating division in Kentucky received an order from the Kentucky Public Service Commission resulting in
an increase of $5,238 in annual revenues, and new rates went into effect on January 4, 2022.
Rate cases are also underway for certain of our water and wastewater utility operating divisions in Ohio.
Eight states in which the Company operates permit water and 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. Additionally, Pennsylvania and
Kentucky allow for the use of an infrastructure rehabilitation surcharge for natural gas 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 2021, 2020, and 2019 of $33,771, $13,039, and $16,007, respectively.
On March 16, 2020, the Company completed the Peoples Gas Acquisition, marking the Company’s entrance into the
regulated natural gas business. The operating results of Peoples are included in the consolidated financial statements for
the period since the acquisition date. As a result, the Company now has twelve operating segments and two reportable
segments. The Regulated Water segment is comprised of eight operating segments representing its water and wastewater
regulated utility companies, which are organized by the states where the Company provides water and wastewater
services. The eight water and wastewater utility operating segments are aggregated into one reportable segment, because
each of these operating segments has the following similarities: economic characteristics, nature of services, production
processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment.
The Regulated Natural Gas segment is comprised of one operating segment representing natural gas utility companies,
acquired in the Peoples Gas Acquisition, for which the Company provides natural gas distribution services.
In addition to the Company’s two reportable segments, we include three of our operating segments within the Other
category below. These segments are not quantitatively significant and are comprised of our non-regulated natural gas
operations, Aqua Infrastructure, and Aqua Resources. Our non-regulated natural gas operations consist of utility service
line protection solutions and repair services to households and the operation of gas marketing and production entities.
Prior to our October 30, 2020 sale of our investment in joint venture, Aqua Infrastructure provided non-utility raw water
supply services for firms in the natural gas drilling industry. Aqua Resources offers, through a third party, water and
sewer service line protection solutions and repair services to households. In addition to these segments, Other is
comprised of business activities not included in the reportable segments, corporate costs that have not been allocated to
the Regulated Water and Regulated Natural Gas segments, and intersegment eliminations. Corporate costs include
general and administrative expenses, and interest expense. The Company reports these corporate costs within Other as
they relate to corporate-focused responsibilities and decisions and are not included in internal measures of segment
operating performance used by the Company to measure the underlying performance of the operating segments.
The following table presents information about the Company’s reportable segments, including the operating results and
capital expenditures of the Regulated Natural Gas segment for the period since the completion of the Peoples Gas
Acquisition on March 16, 2020:
Operating revenues
Operations and maintenance expense
2021
Purchased gas
Depreciation and amortization
Taxes other than income taxes
Operating income
Interest expense, net (a)
Allowance for funds used during construction
Other
Income before income taxes
Provision for income taxes (benefit)
Net income (loss)
Capital expenditures
Total assets
Regulated
Water
Regulated
Natural Gas
Other and
Eliminations
Consolidated
$
980,203 $
859,902 $
38,039 $
1,878,144
332,598
-
182,074
63,264
402,267
108,356
(19,258)
(7,167)
320,336
26,633
226,194
313,390
113,238
20,801
186,279
75,628
(1,534)
4,005
108,180
(40,013)
(8,212)
26,872
2,640
2,576
14,163
21,341
-
(662)
(6,516)
3,768
550,580
340,262
297,952
86,641
602,709
205,325
(20,792)
(3,824)
422,000
(9,612)
431,612
$
$
$
293,703 $
621,595 $
148,193 $
397,419 $
(10,284) $
1,505 $
1,020,519
8,403,586 $
5,960,602
294,090 $
14,658,278
82
83
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 18 – Segment Information
On March 16, 2020, the Company completed the Peoples Gas Acquisition, marking the Company’s entrance into the
regulated natural gas business. The operating results of Peoples are included in the consolidated financial statements for
the period since the acquisition date. As a result, the Company now has twelve operating segments and two reportable
segments. The Regulated Water segment is comprised of eight operating segments representing its water and wastewater
regulated utility companies, which are organized by the states where the Company provides water and wastewater
services. The eight water and wastewater utility operating segments are aggregated into one reportable segment, because
each of these operating segments has the following similarities: economic characteristics, nature of services, production
processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment.
The Regulated Natural Gas segment is comprised of one operating segment representing natural gas utility companies,
acquired in the Peoples Gas Acquisition, for which the Company provides natural gas distribution services.
In addition to the Company’s two reportable segments, we include three of our operating segments within the Other
category below. These segments are not quantitatively significant and are comprised of our non-regulated natural gas
operations, Aqua Infrastructure, and Aqua Resources. Our non-regulated natural gas operations consist of utility service
line protection solutions and repair services to households and the operation of gas marketing and production entities.
Prior to our October 30, 2020 sale of our investment in joint venture, Aqua Infrastructure provided non-utility raw water
supply services for firms in the natural gas drilling industry. Aqua Resources offers, through a third party, water and
sewer service line protection solutions and repair services to households. In addition to these segments, Other is
comprised of business activities not included in the reportable segments, corporate costs that have not been allocated to
the Regulated Water and Regulated Natural Gas segments, and intersegment eliminations. Corporate costs include
general and administrative expenses, and interest expense. The Company reports these corporate costs within Other as
they relate to corporate-focused responsibilities and decisions and are not included in internal measures of segment
operating performance used by the Company to measure the underlying performance of the operating segments.
The following table presents information about the Company’s reportable segments, including the operating results and
capital expenditures of the Regulated Natural Gas segment for the period since the completion of the Peoples Gas
Acquisition on March 16, 2020:
Note 17 –Rate Activity
be issued by May 2022.
On August 20, 2021, Aqua Pennsylvania, filed an application with the Pennsylvania Public Utility Commission designed
to increase water and wastewater rates by $97,685 or 17.9% on an annual basis. The Company anticipates a final order to
In May 2019, the Pennsylvania Public Utility Commission granted Aqua Pennsylvania a water and wastewater increase
designed to increase total operating revenues by $47,000 on an annual basis, 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 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 were designed with
$158,865 of tax benefits to be flowed-through to income 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.
On October 26, 2020, the Company’s water and wastewater utility operating divisions in North Carolina received an order
from the North Carolina Utilities Commission resulting in an increase of $3,426 in annual revenue, and new rates went
into effect on October 26, 2020.
In May 2019, the Company’s operating subsidiary in New Jersey 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, North Carolina, and New Jersey rate awards noted above, the Company’s operating
subsidiaries were allowed annualized rate increases of $3,390 in 2021, $4,480 in 2020, and $974 in 2019, represented by
six, five, and two rate decisions, respectively. Revenues from these rate increases realized in the year of grant were
approximately $2,995, $1,594, and $974 in 2021, 2020, and 2019, respectively. On January 3, 2022, the Company’s
natural gas operating division in Kentucky received an order from the Kentucky Public Service Commission resulting in
an increase of $5,238 in annual revenues, and new rates went into effect on January 4, 2022.
Rate cases are also underway for certain of our water and wastewater utility operating divisions in Ohio.
Eight states in which the Company operates permit water and 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. Additionally, Pennsylvania and
Kentucky allow for the use of an infrastructure rehabilitation surcharge for natural gas 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 2021, 2020, and 2019 of $33,771, $13,039, and $16,007, respectively.
Consolidated
1,878,144
550,580
340,262
297,952
86,641
602,709
205,325
(20,792)
(3,824)
Regulated
Water
Regulated
Natural Gas
Other and
Eliminations
2021
Operating revenues
Operations and maintenance expense
Purchased gas
Depreciation and amortization
Taxes other than income taxes
Operating income
Interest expense, net (a)
Allowance for funds used during construction
Other
Income before income taxes
Provision for income taxes (benefit)
Net income (loss)
Capital expenditures
Total assets
$
$
$
$
980,203 $
332,598
-
182,074
63,264
402,267
108,356
(19,258)
(7,167)
320,336
26,633
293,703 $
621,595 $
8,403,586 $
859,902 $
226,194
313,390
113,238
20,801
186,279
75,628
(1,534)
4,005
108,180
(40,013)
148,193 $
397,419 $
5,960,602
38,039 $
(8,212)
26,872
2,640
2,576
14,163
21,341
-
(662)
(6,516)
3,768
(10,284) $
1,505 $
294,090 $
422,000
(9,612)
431,612
1,020,519
14,658,278
82
83
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
2020
Operating revenues
Operations and maintenance expense
Purchased gas
Depreciation and amortization
Taxes other than income taxes
Operating income (loss)
Interest expense, net (a)
Allowance for funds used during construction
Equity loss in joint venture
Other
Income before income taxes
Provision for income taxes (benefit)
Net income (loss)
Capital expenditures
Total assets
Regulated
Water
Regulated
Natural Gas
Other and
Eliminations
$
$
$
$
938,540 $
309,608
-
171,152
60,505
397,275
101,810
(11,231)
-
422
306,274
22,481
283,793 $
542,199 $
7,838,034 $
506,564 $
198,383
154,103
84,201
13,307
56,570
29,016
(1,456)
-
(2,308)
31,318
(25,133)
56,451 $
292,121 $
5,303,507 $
17,594 $
20,620
11,642
1,706
2,785
(19,159)
52,246
-
3,374
(2,158)
(72,621)
(17,226)
(55,395) $
1,322 $
563,736 $
Consolidated
1,462,698
528,611
165,745
257,059
76,597
434,686
183,072
(12,687)
3,374
(4,044)
264,971
(19,878)
284,849
835,642
13,705,277
2019
Operating revenues
Operations and maintenance expense
Depreciation and amortization
Taxes other than income taxes
Operating income (loss)
Interest expense, net (a)
Allowance for funds used during construction
Change in fair value of interest rate swap agreements
Equity earnings in joint venture
Other
Income before income taxes
Income tax benefit
Net income (loss)
Capital expenditures
Total assets
Regulated Water
886,430
315,052
155,898
59,955
355,525
97,941
(16,172)
-
-
103
273,653
(1,267)
274,920
550,273
7,269,404
$
$
$
$
$
$
$
$
Other and
Eliminations
Consolidated
3,262 $
18,050
578
-
(15,366)
2,036
-
23,742
(2,210)
23,193
(62,127)
(11,750)
(50,377) $
- $
2,092,581 $
889,692
333,102
156,476
59,955
340,159
99,977
(16,172)
23,742
(2,210)
23,296
211,526
(13,017)
224,543
550,273
9,361,985
(a) The regulated water and regulated natural gas segments report interest expense that includes long-term debt that was pushed-down to the regulated operating
subsidiaries from Essential Utilities, Inc.
84
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Operating revenues
Operations and maintenance expense
2020
Purchased gas
Depreciation and amortization
Taxes other than income taxes
Operating income (loss)
Interest expense, net (a)
Allowance for funds used during construction
Equity loss in joint venture
Other
Income before income taxes
Provision for income taxes (benefit)
Net income (loss)
Capital expenditures
Total assets
Regulated
Water
Regulated
Natural Gas
Other and
Eliminations
Consolidated
17,594 $
1,462,698
$
938,540 $
309,608
506,564 $
198,383
154,103
84,201
13,307
56,570
29,016
(1,456)
-
(2,308)
31,318
(25,133)
20,620
11,642
1,706
2,785
(19,159)
52,246
-
3,374
(2,158)
(72,621)
(17,226)
-
171,152
60,505
397,275
101,810
(11,231)
-
422
306,274
22,481
283,793 $
542,199 $
$
$
$
56,451 $
292,121 $
(55,395) $
1,322 $
7,838,034 $
5,303,507 $
563,736 $
13,705,277
2019
Operating revenues
Operations and maintenance expense
Depreciation and amortization
Taxes other than income taxes
Operating income (loss)
Interest expense, net (a)
Allowance for funds used during construction
Change in fair value of interest rate swap agreements
Equity earnings in joint venture
Other
Income before income taxes
Income tax benefit
Net income (loss)
Capital expenditures
Total assets
Regulated Water
Consolidated
Other and
Eliminations
3,262 $
18,050
578
-
(15,366)
2,036
-
23,742
(2,210)
23,193
(62,127)
(11,750)
(50,377) $
- $
886,430
315,052
155,898
59,955
355,525
97,941
(16,172)
-
-
103
273,653
(1,267)
274,920
550,273
$
$
$
$
(a) The regulated water and regulated natural gas segments report interest expense that includes long-term debt that was pushed-down to the regulated operating
subsidiaries from Essential Utilities, Inc.
528,611
165,745
257,059
76,597
434,686
183,072
(12,687)
3,374
(4,044)
264,971
(19,878)
284,849
835,642
889,692
333,102
156,476
59,955
340,159
99,977
(16,172)
23,742
(2,210)
23,296
211,526
(13,017)
224,543
550,273
$
$
$
$
84
The graph below matches the cumulative 5-Year total return of holders of Essential Utilities, Inc.’s common stock
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
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 (including reinvestment of
assumes that the value of the investment in our common stock, in each index (including reinvestment of
dividends) was $100 on 12/31/2016 and tracks it through 12/31/2021.
dividends) was $100 on 12/31/2016 and tracks it through 12/31/2021.
Comparison of Five Year Cumulative Total Return*
Comparison of Five Year Cumulative Total Return*
Among Essential Utilities, Inc., the S&P 500 Index, and S&P MidCap 400 Utilities Index
Among Essential Utilities, Inc., the S&P 500 Index, and S&P MidCap 400 Utilities Index
7,269,404
2,092,581 $
9,361,985
*$100 invested on 12/31/16 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
*$100 invested on 12/31/16 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2022 Standard & Poor’s, a division of S&P Global. All rights reserved.
Copyright© 2022 Standard & Poor’s, a division of S&P Global. All rights reserved.
Years as of December 31
Years as of December 31
2016
2016
2017
2017
2018
2018
2019
2019
2020
2020
2021
2021
Essential Utilities, Inc.
Essential Utilities, Inc.
100.00
100.00
133.76
133.76
119.47
119.47
167.75
167.75
172.66
172.66
200.35
200.35
S&P 500 Index
S&P 500 Index
100.00
100.00
121.83
121.83
116.49
116.49
153.17
153.17
181.35
181.35
233.41
233.41
S&P MidCap 400 Utilities Index
S&P MidCap 400 Utilities Index
100.00
100.00
108.23
108.23
116.11
116.11
129.56
129.56
112.90
112.90
133.68
133.68
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
85
Financial Reports and Investor Relations
Independent Registered Public Accounting Firm
Copies of the company’s public financial reports,
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
Investor Relations Department
Essential Utilities Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Corporate Governance
Stock Exchange
The Common Stock of the company is listed on the
New York Stock Exchange (NYSE) and under the ticker
symbol WTRG.
We are committed to maintaining high standards of
Dividend Reinvestment and Direct Stock
corporate governance and are in compliance with
Purchase Plan
the corporate governance rules of the Securities and
The company’s Dividend Reinvestment and Direct
Exchange Commission (SEC) and the New York Stock
Stock Purchase Plan (“Plan”) enables shareholders
Exchange. Copies of our key corporate governance
to reinvest all, or a designated portion of, dividends
documents, including our Corporate Governance
paid on up to 100,000 shares of Common Stock in
Guidelines, Code of Ethical Business Conduct, and the
additional shares of Common Stock at a discretionary
charters of each committee of our Board of Directors
discount from a price based on the market value of
can be obtained from the corporate governance
the stock. The discount between 0 and 5.0 percent on
portion of the investor relations section of our website,
the shares purchased or issued to meet the dividend
Essential.co. Amendments to the Code of Ethical
reinvestment requirement will be designated by us in
Business, and in the event of any grant of waiver from
our sole discretion prior to the purchase or issuance
a provision of the Code of Conduct requiring disclosure
of such shares. We reserve the right to change, reduce
under applicable SEC rules will be disclosed on our
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.
website.
Annual Meeting
The 2022 Annual Meeting of Shareholders of Essential
Utilities, Inc. will be held virtually via live webcast on
Wednesday, May 4, 2022, at 8 a.m. Eastern Time, at
www.virtualshareholdermeeting.com/WTRG2022.
Transfer Agent and Registrar
Computershare
P.O. Box 505000
Louisville, KY 40233
800.205.8314 or
www.computershare.com/investor
86
IRA, Roth IRA, Education IRA
How to obtain a separate set of voting materials
An IRA, Roth IRA or Coverdell Education Savings
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
Proxy Materials or set of proxy material and wish to
of Common Stock. Participants in the Plan may
receive a separate copy for each shareholder in your
roll over an existing IRA or other qualified plan
household for the 2021 annual meeting, you may write
distribution in cash into an IRA under the Plan to
or call us to request a separate copy of this material at
purchase the company’s Common Stock. Participants
no cost to you at 610.645.1021 or write us at:
may also 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.
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.
Attn: Investor Relations
Essential Utilities Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA, 19010
Email: investorrelations@essential.co
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.
Shareholders interested in direct deposit should call
Account Access
the company’s transfer agent at 800.205.8314.
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.
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.
87
Dividends
Essential Utilities has paid dividends for 77 consecutive years. The normal Common Stock dividend dates for 2022
and the first six months of 2023 are:
Declaration Date
Ex-Dividend Date
Record Date
Payment Date
January 31, 2022
February 10, 2022
February 11, 2022
March 1, 2022
May 2, 2022
May 12, 2022
May 13, 2022
June 1, 2022
August 1, 2022
August 11, 2022
August 12, 2022
September 1, 2022
October 31, 2022
November 10, 2022
November 11, 2022
December 1, 2022
January 30, 2023
February 9, 2023
February 10, 2023
March 1, 2023
May 1, 2023
May 11, 2023
May 12, 2023
June 1, 2023
To be an owner of record, and therefore eligible
Escheatment is the act of reporting and transferring
to receive the quarterly dividend, shares must have
property to a state when the rightful owner has an
been purchased before the ex-dividend date. Owners
invalid address or has not made contact or initiated a
of any share(s) on or after the ex-dividend date
transaction during the state’s designated dormancy
will not receive the dividend for that quarter. The
period. Escheated assets are transferred to the state for
previous owner – the owner of record – will receive
safekeeping (and often liquidated) until the rightful
the 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.
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.
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.
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
88
OUR MISSION:
To sustain life and improve economic prosperity by
safely and reliably delivering Earth’s most essential
resources to our customers and communities.
OUR VALUES: INTEGRITY RESPECT EXCELLENCE
BOARD OF DIRECTORS
Christopher H. Franklin
Chairman, Chief Executive
Officer and President
Essential Utilities Inc.
Director since 2015
Daniel J. Hilferty
Chairman and Chief
Executive Officer
Dune View Strategies
Director since 2017
Ellen T. Ruff
Former President
Duke Energy Corporation
Director since 2006
Elizabeth B. Amato
Former Executive Vice President
and Chief Human Resources Officer
United Technologies Corporation
Director since 2018
David A. Ciesinski
President, Chief Executive
Officer and Director
Lancaster Colony Corporation
President, T. Marzetti Company
Director since 2021
Francis O. Idehen
Former Chief Operating Officer
GCM Grosvenor
Director since 2019
Lee C. Stewart
Private Financial Consultant
Director since 2018
Edwina Kelly
Senior Principal
Canada Pension Plan
Investment Board
Director since 2021
OFFICERS
Christopher C. Womack
Chairman, President and
Chief Executive Officer
Georgia Power
Director since 2019
Christopher H. Franklin
Chairman, Chief Executive
Officer and President
Christopher P. Luning
Executive Vice President
General Counsel and Secretary
Robert A. Rubin
Senior Vice President
Chief Accounting Officer
Richard S. Fox
Executive Vice President
Chief Operating Officer
Matthew R. 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.
2021 Annual Report | 89
Essential Utilities, Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010
NYSE: WTRG
877.987.2782
www.Essential.co
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