ESSENTIAL UTILITIES, INC. 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 endedDecember 31, 2020 , filed with theSEC onMarch 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 CompanyEssential Utilities, Inc. , (Essential Utilities , the Company, we, us, or our), aPennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or natural gas services to an estimated five million people inPennsylvania ,Ohio ,Texas ,Illinois ,North Carolina ,New Jersey ,Indiana ,Virginia ,West Virginia , andKentucky 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 theCity of Philadelphia and in 27 other counties inPennsylvania . Our other regulated water or wastewater utility subsidiaries provide similar services in seven additional states. Additionally, pursuant to the Company's growth strategy, commencing onMarch 16, 2020 , with the completion of thePeoples Gas Acquisition, the Company began to provide natural gas distribution services to customers in westernPennsylvania ,Kentucky , andWest Virginia . Approximately 93% of the total number of natural gas utility customers we serve are in westernPennsylvania . Lastly, the Company's market-based activities are conducted throughAqua Infrastructure, LLC andAqua Resources, Inc. and certain other non-regulated subsidiaries of Peoples. Prior to ourOctober 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 theOctober 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. 40
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(In thousands of dollars, except per share amounts)
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 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.
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(In thousands of dollars, except per share amounts)
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.
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(In thousands of dollars, except per share amounts)
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.
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.
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(In thousands of dollars, except per share amounts)
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;
?earnings before interest, taxes, and depreciation (EBITD);
?income adjusted to remove transaction-related expenses associated with the
Peoples Gas Acquisition;
?earnings before income taxes;
?net income; and
?the dividend rate on common stock.
In addition, we consider other key measures in evaluating our utility business
performance within our Regulated Water 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 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.
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(In thousands of dollars, except per share amounts)
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.
Other Operational Measures Considered by Management
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.
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(In thousands of dollars, except per share amounts)
On occasion, drought warnings and water use restrictions are issued by
governmental authorities for portions of our service territories in response to
extended periods of dry weather conditions, regardless of our ability to meet
unrestricted customer water demands. The timing and duration of the warnings and
restrictions can have an impact on our water revenues and net income. In
general, water consumption in the summer months is affected by drought warnings
and restrictions to a higher degree because discretionary and recreational use
of water is highest during the summer months, particularly in our northern
service territories. At other times of the year, warnings and restrictions
generally have less of an effect on water consumption. Portions of our northern
and central Texas service areas have conservation water restrictions. Drought
warnings and watches result in the public being asked to voluntarily reduce
water consumption.
The geographic diversity of our utility customer base reduces the effect of our
exposure to extreme or unusual weather conditions in any one area of the
country. During the year ended December 31, 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.
?
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(In thousands of dollars, except per share amounts)
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, 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Operating revenues:
Regulated water segment $ 980,203 $ 938,540 $ 886,430 $ 41,663 $ 52,110
Regulated gas segment 859,902 506,564 - 353,338 506,564
Other and eliminations 38,039 17,594 3,262 20,445 14,332
Consolidated operating revenues
415,446 $ 573,006
Operations and maintenance expense $ 550,580 $ 528,611 $ 333,102 $ 21,969 $ 195,509
Net income (1) $ 431,612 $ 284,849 $ 224,543 $ 146,763 $ 60,306
Capital expenditures $ 1,020,519 $ 835,642 $ 550,273 $ 184,877 $ 285,369
Operating Statistics
Selected operating results as a
percentage of operating revenues:
Operations and maintenance 29.3% 36.1% 37.4% -6.8% -1.3%
Depreciation and amortization 15.9% 17.6% 17.6% -1.7% 0.0%
Taxes other than income taxes 4.6% 5.2% 6.7% -0.6% -1.5%
Interest expense, net of interest
income 10.9% 12.9% 14.1% -2.0% -1.2%
Net income (1) 23.0% 19.5% 25.2% 3.5% -5.7%
Return on Essential Utilities
stockholders' equity (1) 8.3% 6.1% 5.8% 2.2% 0.3%
Ratio of capital expenditures to
depreciation expense 3.5 3.3 3.5 0.2 -0.2
Effective tax rate (2.3%) (7.5%) (6.2%) 5.2% (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.
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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 .
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(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.
Net income -
Years ended December 31,
2021 2020 2019
Operating income $ 602,709 $ 434,686 $ 340,159
Net income 431,612 284,849 224,543Diluted net income per share 1.67 1.12 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.
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(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
Sendout (in millions of gallons)
Pennsylvania 42,198 41,683 42,074 515 (391)
Ohio 13,971 14,020 13,346 (49) 674
Illinois 8,764 8,651 8,712 113 (61)
Texas 7,212 7,393 6,937 (181) 456
North Carolina 5,984 5,780 5,727 204 53
Other states 6,191 6,299 6,113 (108) 186
Subtotal 84,320 83,826 82,909 494 917
Elimination (154) (65) (65) (89) -
Total sendout by state 84,166 83,761 82,844 405 917
Utility customers:
Residential water 842,200 832,902 822,817 9,298 10,085
Commercial water 42,864 42,535 41,892 329 643
Industrial water 1,331 1,338 1,339 (7) (1)
Other water 17,932 18,561 18,984 (629) (423)
Wastewater 162,478 151,965 141,672 10,513 10,293
Total water and wastewater
utility customers 1,066,805 1,047,301 1,026,704 19,504 20,597
Operating revenues:
Residential water $ 561,996 $ 567,485 $ 518,192 $ (5,489) $ 49,293
Commercial water 151,071 143,479 145,599 7,592 (2,120)
Industrial water 30,230 29,764 30,667 466 (903)
Other water 89,472 67,712 72,942 21,760 (5,230)
Wastewater 132,316 121,117 105,204 11,199 15,913
Customer rate credits - (4,080) - 4,080 (4,080)
Other utility 15,118 13,063 13,826 2,055 (763)
Total operating revenues 980,203 938,540 886,430 41,663 52,110
Operating expenses:
Operations and maintenance
expense 332,598 309,608 315,052 22,990 (5,444)
Depreciation and amortization 182,074 171,152 155,898 10,922 15,254
Taxes other than income taxes 63,264 60,505 59,955 2,759 550
Operating income 402,267 397,275 355,525 4,992 41,750
Other expense, net 81,931 91,001 81,872 (9,070) 9,129
Income before income taxes 320,336 306,274 273,653 14,062 32,621
Provision for income taxes
(benefit) 26,633 22,481 (1,267) 4,152 23,748
Net income $ 293,703 $ 283,793 $ 274,920 $ 9,910 $ 8,873
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(In thousands of dollars, except per share amounts)
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.
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.
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(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 ,:
2021 2020 (a) 2021 vs. 2020
Gas utility customers:
Residential gas 692,174 690,642 1,532
Commercial gas 59,595 59,424 171
Industrial gas 1,475 1,436 39
Total gas utility customers 753,244 751,502 1,742
Delivered volumes (thousand cubic feet)
Residential gas 56,542,038 33,675,963 22,866,075
Commercial gas 33,403,899 20,082,555 13,321,344
Industrial gas 49,726,237 37,936,661 11,789,576
Total delivered volumes 139,672,174 91,695,179 47,976,995
Heating Degree Days (b) 5,139 3,013 2,126
Average Heating Degree Days (c) 5,466 2,973 2,493
2021 2020 (a) 2021 vs. 2020
Operating revenues:
Residential gas $ 530,338 $ 314,274 $ 216,064
Commercial gas 99,596 50,239 49,357
Industrial gas 3,427 6,923 (3,496)
Gas transportation 198,195 133,685 64,510
Customer rate credits (5,000) (18,924) 13,924
Other utility 33,346 20,367 12,979
Total operating revenues 859,902 506,564 353,338
Operating expenses:
Operations and maintenance expense 226,194 198,383 27,811
Purchased gas 313,390 154,103
159,287
Depreciation and amortization 113,238 84,201
29,037
Taxes other than income taxes 20,801 13,307 7,494 Operating income 186,279 56,570 129,709 Other expense, net 78,099 25,252 52,847 Income before income taxes 108,180 31,318 76,862 Income tax benefit (40,013) (25,133) (14,880) Net income$ 148,193 $ 56,451 $ 91,742
(a) Includes operating results since the completion of the Peoples Gas
Acquisition on
(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
Operating revenues - Operating revenues from theRegulated Natural Gas segment increased by$353,338 or 69.8% due to: ?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; ?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 approval of the Peoples Gas Acquisition; ?and rate variance of$3,346 ; 52
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(In thousands of dollars, except per share amounts)
?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 .
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 :
Years ended December 31,
2021 2020
Operating revenues (GAAP)
313,390 154,103
Gross margin (non-GAAP)
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. 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. Other expense increased by$6,313 due to the non-service cost component of our net benefit cost for pension and post-retirement benefits. 53
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(In thousands of dollars, except per share amounts)
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 338,523 188,512 550,273 59,687
2020 508,024 232,571 835,642 3,501,835
2021 644,679 258,650 1,020,519 36,326
$ 1,491,226 $ 679,733 $ 2,406,434 $ 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.
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(In thousands of dollars, except per share amounts)
Our primary sources of liquidity are cash flows from operations (including the
allowed deferral of Federal income tax payments), borrowings under various
short-term lines of credit and other credit facilities, and customer advances
and contributions in aid of construction. Our cash flow from operations, or
internally-generated funds, is impacted by the timing of rate relief, 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.
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 .
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(In thousands of dollars, except per share amounts)
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 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.
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(In thousands of dollars, except per share amounts)
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.
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(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 More than 5
Total 1 year 1 - 3 years 3 - 5 years years
Long-term debt $ 5,947,357 $ 132,146 $ 576,580 $ 173,328 $ 5,065,303
Interest on fixed-rate, long-term
debt (1) 194,374 3,880 15,968 8,302 166,224
Operating leases (2) 71,243 9,730 18,301 15,692 27,520
Unconditional purchase
obligations (3) 16,914 4,535 7,497 4,551 331
Gas purchase obligations (4) 3,045,125 271,168 508,699 505,417 1,759,841
Other purchase obligations (5) 113,299 113,299 - - -
Pension plan obligations (6) 20,390 20,390 - - -
Other obligations (7) 19,837 5,317 6,384 4,550 3,586
Total $ 9,428,539 $ 560,465 $ 1,133,429 $ 711,840 $ 7,022,805
(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.
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(In thousands of dollars, except per share amounts)
?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, 2021 2020
Long-term debt (1) 53.4% 54.6%
100.0% 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.
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(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.
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(In thousands of dollars, except per share amounts)
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.
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(In thousands of dollars, except per share amounts)
Our discount rate assumption, which is used to calculate the present value of
the projected benefit payments of our post-retirement benefits, was determined
by selecting a hypothetical portfolio of high quality corporate bonds
appropriate to match the projected benefit payments of the plans. The selected
bond portfolio was derived from a universe of Aa-graded corporate bonds. The
discount rate was then developed as the rate that equates the market value of
the bonds purchased to the discounted value of the projected benefit payments of
the plans. A decrease in the discount rate would generally increase our
post-retirement benefits expense and benefit obligation. After reviewing the
hypothetical portfolio of bonds, we selected a discount rate of 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 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.
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IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTSWe describe the impact of recent accounting pronouncements in Note 1 - Summary of Significant Accounting Policies in this Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks in the normal course of business, including changes in interest rates, gas commodity prices and equity prices. Volatile equity market conditions arising from the COVID-19 pandemic may result in our pension and other post-retirement plans' assets market values suffering a decline, which could increase our required cash contributions to the plans and expense in subsequent years. The exposure to changes in interest rates is a result of financings through the issuance of fixed rate long-term debt. Such exposure is typically related to financings between utility rate increases, since generally our rate increases include a revenue level to allow recovery of our current cost of capital. Interest rate risk is managed through the use of a combination of long-term debt, which is at fixed interest rates; short-term debt, which is at floating interest rates; and at times in the past interest rate swap agreements. As ofDecember 31, 2021 , the debt maturities by period, in thousands of dollars, and the weighted average interest rate for long-term debt are as follows: 2022 2023 2024 2025 2026 Thereafter Total Fair Value Long-term debt: Fixed rate$ 132,146 $ 207,262 $ 69,318 $ 151,848 $ 21,480 5,065,303$ 5,647,357 $ 6,182,499 Variable rate - 300,000 - - - - 300,000 300,000 Total$ 132,146 $ 507,262 $ 69,318 $ 151,848 $ 21,480 $ 5,065,303 $ 5,947,357 $ 6,482,499 Weighted average interest rate 3.03% 2.45% 4.05% 5.05% 7.38% 3.36% 3.49% From time to time, we make investments in marketable equity securities. As a result, we are exposed to the risk of changes in equity prices for the marketable equity securities. As ofDecember 31, 2021 , we have assets of, in thousands of dollars,$28,576 to fund our deferred compensation and non-qualified pension plan liabilities. The market risk of the deferred compensation plan assets are borne by the participants in the deferred compensation plan. InOctober 2018 , the Company entered into interest rate swap agreements to mitigate interest rate risk associated with our debt issuances to fund a portion of the Peoples Gas Acquisition. The interest rate swaps were settled inApril 2019 upon issuance of the debt used to finance a portion of the purchase price of this acquisition. The interest rate swap agreements did not qualify for hedge accounting and any changes in the fair value of the swaps was included in our earnings. The interest rate swap agreements were classified as financial derivatives used for non-trading activities. Our natural gas commodity price risk, driven mainly by price fluctuations of natural gas, is mitigated by our purchased-gas cost adjustment mechanisms. We also use derivative instruments to economically hedge the cost of anticipated natural gas purchases during the winter heating months that seeks to offset the risk to our customers from upward market price volatility. These instruments include requirements contracts and spot purchase contracts to meet our regulated customers' natural gas requirements and these instruments 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 not recorded at fair value in the Company's consolidated financial statements. We also manage gas commodity price risk and supply risk by injecting natural gas into storage during the summer months and withdrawing the natural gas during the winter heating season. ? 63
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