# Essential Utilities, Inc.: Form 10-Q for the period ended Sep 30, 2024

- Company: [Essential Utilities, Inc.](/companies/wtrg.md) (CIK 78128)
- Form: 10-Q
- Filed: 2024-11-06
- Accepted by EDGAR: Nov 6, 2024, 14:49 ET
- Period: 2024-09-30
- Accession: 0001562762-24-000258
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/78128/000156276224000258/wtrg-20240930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/78128/000156276224000258/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-07-01 to 2024-09-30 | $435.3m | us-gaap:Revenues |
| Revenue | 9 months, 2024-01-01 to 2024-09-30 | $1.48bn | us-gaap:Revenues |
| Operating income | 3 months, 2024-07-01 to 2024-09-30 | $155.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2024-01-01 to 2024-09-30 | $531.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-07-01 to 2024-09-30 | $76.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2024-01-01 to 2024-09-30 | $223.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $15.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $7.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $69.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $410.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.25 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.50 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.25 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.50 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 274,543,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 274,127,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $622.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $257.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2024-01-01 to 2024-09-30 | $2.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-09-30 | $8.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-09-30 | $373.9m | us-gaap:AssetsCurrent |
| Total assets | at 2024-09-30 | $17.56bn | us-gaap:Assets |
| Current liabilities | at 2024-09-30 | $683.1m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2024-09-30 | $7.23bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2024-09-30 | $29.2m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-09-30 | $6.18bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,834 characters.

Forward-looking Statements

*This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: the expected timing of closing of our acquisitions; the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “estimates,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among others, the effects of regulation, abnormal weather, geopolitical forces, the impact of inflation and supply chain pressures, the threat of cyber-attacks and data breaches, changes in capital requirements and funding, our ability to close acquisitions, changes to the capital markets, impact of public health threats, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such reports. As a result, readers are cautioned not to place undue reliance on any forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.*

General Information

Essential Utilities, Inc. (“we”, “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or natural gas services to an estimated 5.5 million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, and Kentucky under the Aqua and Peoples brands. One of our largest operating subsidiaries, Aqua Pennsylvania, Inc. (“Aqua Pennsylvania”), provides water or wastewater services to approximately one-half of the total number of water or wastewater customers we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 27 other counties in Pennsylvania. Our other regulated water or wastewater utility subsidiaries provide similar services in seven additional states. Our Peoples subsidiaries provide natural gas distribution services to customers in western Pennsylvania and Kentucky. Approximately 95% of the total number of natural gas utility customers we serve are in western Pennsylvania. The Company also operates market-based businesses, conducted through its non-regulated subsidiaries, that provide utility service line protection solutions and repair services to households and gas marketing and production activities. Currently, the Company seeks to acquire businesses in the U.S. regulated sector, focusing on water and wastewater utilities and to opportunistically pursue growth ventures in select market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated water utility businesses.

(In thousands of dollars, except per share amounts)

On October 1, 2023, the Company sold its regulated natural gas utility assets in West Virginia, which represented approximately two percent of the Company’s regulated natural gas customers. Initially the sale closed for an estimated purchase price of $39,965, subject to working capital and other adjustments. In March 2024, the Company received an additional $1,213 from the buyer. The additional proceeds were based on finalizing closing working capital and other adjustments, resulting in a final purchase price of $41,178 and a loss of an inconsequential amount. In October 2023, the Company entered into an agreement to sell its interest in three non-utility local microgrid and distributed energy projects for $165,000. The sale was completed in January 2024, and the Company recognized a gain of $91,236 in the first quarter of 2024. These transactions are consistent with the Company’s long-term strategy of focusing on its core business and will allow the Company to prioritize the growth of its utilities in states where it has scale. The Company used the proceeds from these transactions to finance its capital expenditures and water and wastewater acquisitions, in place of external funding from equity and debt issuances.

*The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes.*

Recent Developments

#### Macroeconomic Factors

Since 2020, our industry has been significantly impacted by inflation, volatility in interest rates, and other macroeconomic factors. Interest rates remain elevated to curb inflation. In 2024, we experienced moderate macroeconomic pressures, which we expect to continue through the remainder of 2024. We continue to pursue enhancements to our regulatory practices to facilitate the efficient recovery of the increased cost of providing services and infrastructure improvements in our rates and mitigate the inherent regulatory lag associated with traditional rate making processes.

#### Environmental Compliance

#### Water Quality Standards

On April 10, 2024, the U.S. Environmental Protection Agency (“EPA”) announced the final National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”). The NPDWR established the maximum contaminant levels (MCLs) in drinking water and allows for a five-year window to comply. The Company performed its analysis of the NPDWR and estimated an investment of at least $450,000 of capital expenditures to install additional treatment facilities over the Compliance Period in order to comply (i.e. 2029 pending no delays due to lawsuits). This figure could increase as plans for construction execution are refined or if additional sites require treatment in the future. Additionally, the Company estimated annual operating expenses of approximately five percent of the installed capital expenditures, in today’s dollars, related to testing, treatment, and disposal. These were preliminary estimates and actual capital expenditures and expenses may differ based upon a variety of factors, including supply chain issues and site-by-site requirements.

(In thousands of dollars, except per share amounts)

On October 8, 2024, the EPA issued a prepublication version of the final Lead and Copper Rule Improvements (“LCRI”) which requires water systems to identify and replace lead pipes by 2037, lowers the lead action level threshold, and requires more proactive communications about lead pipes and plans for replacements, among other items. The LCRI builds upon the Lead and Copper Rule Revisions (“LCRR”) issued in 2021 and the Lead and Copper Rule (“LCR”) issued in 1992. The Company has been replacing lead service lines as part of its ongoing water main replacement and service line renewal programs, and in accordance with applicable state regulations. Pursuant to the LCRR, the Company completed the submission of its initial lead service line inventories on October 14, 2024. The Company estimates that approximately 6% of its regulated water service systems contain some lead or galvanized service lines requiring replacement. The Company currently has budgeted approximately $210,000 of capital expenditures over the next five years for lead and galvanized services line replacement. Management is still reviewing the final LCRI and its impact to the Company.

Capital expenditures and operating costs required as a result of water quality standards have traditionally been recognized by state utility commissions as appropriate for inclusion in establishing rates. Various federal and state funding programs are also available to help reduce costs for rate payers. The Company has been actively applying for grants and low interest loans, whenever possible, to reduce the overall cost to customers.

#### Comprehensive Environmental Response, Compensation, and Liability Act

On April 19, 2024, the U.S. Environmental Protection Agency (“EPA”) announced a final rule that designated two PFAS chemicals, perfluorooctanoic acid (“PFOA”) and perfluorooctanesulfonic acid (“PFOS”), as hazardous substances under the under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), also known as Superfund. This final action will address PFOA and PFOS contamination by enabling investigation and cleanup of these harmful chemicals and ensuring that leaks, spills, and other releases are reported. In addition to the final rule, EPA issued a separate CERCLA enforcement discretion policy that makes it clear that EPA will focus enforcement on parties who significantly contributed to the release of PFAS chemicals into the environment, including parties that have manufactured PFAS or used PFAS in the manufacturing process, federal facilities, and other industrial parties. The policy identifies examples for operators of public water systems and wastewater systems or entities performing a public service role in providing safe drinking water, handling municipal solid waste, treating or managing stormwater and wastewater, disposing of pollution control residuals, or ensuring beneficial application of wastewater products as a fertilizer substitute. The potential liabilities to the Company, if any, resulting from this rule are currently being evaluated. Multiple lawsuits were filed by various companies and industry groups against the EPA's PFAS rule and are awaiting court action.

The Company continues to advocate for actions to hold polluters accountable and is part of the Multi-District Litigation and other legal actions against multiple PFAS manufacturers and polluters to attempt to ensure that the ultimate responsibility for the cleanup of these contaminants is attributed to the polluters and is seeking damages and other costs to address the contamination of its public water supply systems by PFAS. The Company is also monitoring ongoing litigation and settlement activity with manufacturers of PFAS in these proceedings. For more information, see Part I - Item I - Note 14 to the Company’s condensed consolidated financial statements.

(In thousands of dollars, except per share amounts)

Liquidity and Capital Resources

Our regulated water and gas business is capital intensive and requires a significant level of capital spending. The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. The Company’s condensed consolidated balance sheet historically has had a negative working capital position whereby our current liabilities routinely exceed our current assets. Management believes that internally generated funds along with existing credit facilities, and the proceeds from the issuance of long-term debt and equity will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.

Our operating cash flow can be significantly affected by changes in operating working capital, especially during periods with significant changes in natural gas commodity prices and also the timing of our natural gas inventory purchases. Cash flow from operations was $622,510 for the first nine months of 2024, compared to $804,569 for the first nine months of 2023. The net change in working capital and other assets and liabilities resulted in an increase in cash from operations of $17,611 and $221,419 for the first nine months of 2024 and 2023, respectively. The change in working capital in 2024 as compared to 2023 was primarily driven by the year over year decrease in accounts receivable, unbilled revenues and deferred purchased gas cost balances, and most significantly in gas inventory. In 2023, there was a larger decline in natural gas commodity prices as compared to in 2024.

During the first nine months of 2024, we incurred $932,498 of capital expenditures, issued $1,394,411 of long-term debt, received $167,274 from the sale of assets, repaid short-term debt, and made sinking fund contributions and other long-term debt repayments in aggregate of $1,041,828. The capital expenditures were related to new and replacement water, wastewater, and natural gas mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, information technology improvements, and other enhancements and improvements. The proceeds from the issuance of long-term debt, including borrowings from our revolving credit facility, and proceeds from the sale of the non-utility energy projects were used for capital expenditures, repayment of existing indebtedness, and general corporate purposes. Cash flows from financing activities were higher during the first nine months of 2024 as compared to 2023, principally as a result of the decrease in the amount of the paydown of loans payable associated with the financing of inventory.

On August 15, 2024, the Company issued $500,000 of senior notes, less expenses of $3,015, due in 2027, with an interest rate of 4.80%. On January 8, 2024, the Company issued $500,000 of senior notes, less expenses of $4,610, due in 2034, with an interest rate of 5.375%. In August 2023, the Company’s subsidiary, Aqua Pennsylvania, issued $225,000 in aggregate principal amount of first mortgage bonds. The bonds consisted of $175,000 of 5.48% first mortgage bonds due in 2053; and $50,000 of 5.56% first mortgage bonds due in 2061. In January 2023, Aqua Pennsylvania issued $75,000 of first mortgage bonds, due in 2043, and with an interest rate of 5.60%. The proceeds from these borrowings were used to repay existing indebtedness and for general corporate purposes.

(In thousands of dollars, except per share amounts)

In March 2024, the Company filed a new universal shelf registration with the Securities and Exchange Commission (SEC) to allow for the potential future offer and sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities, and other securities specified therein at indeterminate prices. This registration statement is effective for three years and replaces a similar filing that expired in the second quarter of 2024.

On August 13, 2024, the Company filed a prospectus supplement under the 2024 universal shelf registration statement relating to a new at-the-market equity sales program (“ATM”), under which we may issue and sell shares of our common stock up to an aggregate offering price of $1,000,000 (“2024 ATM”). This 2024 ATM replaced our previous ATM filed on October 14, 2022 (“2022 ATM”). During the three and nine months ended September 30, 2024, the Company issued 823,595 shares of common stock for net proceeds of approximately $32,000 under the 2024 ATM. As of September 30, 2024, the 2024 ATM had approximately $968,000 of equity available for issuance. As of December 31, 2023, the Company had issued 10,260,833 shares of common stock for net proceeds of $386,023 under the 2022 ATM. There were no common stock sales under the 2022 ATM in 2024. The Company used the net proceeds from the sales of shares through the 2022 and 2024 ATMs for working capital, capital expenditures, water and wastewater utility acquisitions, and repaying a portion of outstanding indebtedness.

At September 30, 2024, we had $8,436 of cash and cash equivalents compared to $4,612 at December 31, 2023. During the first nine months of 2024, we used the proceeds from long-term debt, the proceeds from issuance of common stock, and proceeds from the sale of the non-utility energy projects, as well as internally generated funds, to fund the cash requirements discussed above and to pay dividends.

At September 30, 2024 our $1,000,000 unsecured revolving credit facility, which expires in December 2027, had $824,226 available for borrowing. Additionally, at September 30, 2024, we had short-term lines of credit of $400,000, primarily used for working capital, of which $256,983 was available for borrowing. On June 12, 2024, Aqua Pennsylvania and Peoples Natural Gas Companies amended the terms of its respective $100,000 and $300,000 364-day revolving credit agreements by extending the maturity dates to June 10, 2025 and revised the interest rate index from the Bloomberg Short-Term Bank Yield Index (BSBY) to the Secured Overnight Financing Rate (SOFR). Our short-term lines of credit of $400,000 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.

As of September 30, 2024, our credit ratings remained at investment grade levels. On March 19, 2024, S&P lowered its credit rating for the Company, Aqua Pennsylvania, and Peoples Natural Gas Companies from A to A-, citing weakening financial measures as a result of inflationary pressures and our significant capital spending; and revised its outlook from negative to stable for the companies. However, as can be noted in their report, S&P continues to assess our business risk profile as excellent, considering our low-risk and rate-regulated water and gas distribution operations in credit-supportive regulatory environments, our geographic and regulatory diversity, our large and stable residential and commercial customer base, and our solid and reliable operations. On October 3, 2024, Moody’s Investors Service (“Moody’s”) affirmed the Company’s senior unsecured notes rating of Baa2 and changed its outlook from stable to negative; and, changed Peoples Natural Gas Companies’ senior secured notes rating from

(In thousands of dollars, except per share amounts)

Baa1 to Baa2 and maintained a negative outlook. The Company’s ability to maintain its credit rating depends, among other things, on adequate and timely rate relief, its ability to fund capital expenditures in a balanced manner using both debt and equity, and its ability to generate cash flow. A material downgrade of our credit rating may result in the imposition of additional financial and/or other covenants, impact the market prices of equity and debt securities, increase our borrowing costs, and adversely affect our liquidity, among other things. Management continues to enhance our regulatory practices to address regulatory lag and recover capital project costs and increases in operating costs efficiently and timely through various rate-making mechanisms.

Results of Operations

Consolidated Results of Operations

Consolidated financial and operational highlights for the periods ended September 30, 2024 and 2023 are presented below.

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Operating revenues | $435,255 | $411,255 | $1,481,730 | $1,574,405 |
| Operations and maintenance expense | $144,368 | $147,018 | $423,780 | $418,520 |
| Purchased gas | $19,095 | $16,590 | $182,498 | $314,838 |
| Net income | $69,402 | $80,076 | $410,559 | $362,778 |
| Operating Statistics |  |  |  |  |
| Selected operating results as a percentage of operating revenues: |  |  |  |  |
| Operations and maintenance | 33.2% | 35.7% | 28.6% | 26.6% |
| Purchased gas | 4.4% | 4.0% | 12.3% | 20.0% |
| Depreciation and amortization | 21.3% | 20.9% | 18.4% | 16.2% |
| Taxes other than income taxes | 5.5% | 5.9% | 4.8% | 4.3% |
| Interest expense, net of interest income | 17.3% | 16.4% | 14.9% | 13.2% |
| Net income | 15.9% | 19.5% | 27.7% | 23.0% |
| Effective tax rate | 18.6% | -4.9% | 1.7% | -10.9% |

#### Three months ended September 30, 2024 compared with three months ended September 30, 2023

Consolidated operating revenues increased by $24,000 or 5.8% as compared to the same period in 2023. Revenues from our Regulated Water and Regulated Natural Gas segments increased by $23,886 and $1,933, respectively. Revenues from our Other business segment decreased by $1,819. A detailed discussion of the factors contributing to the changes in segment revenue is included below under the section, Segment Results of Operations.

(In thousands of dollars, except per share amounts)

Consolidated operations and maintenance expense decreased by $2,650 or 1.8%, primarily due to:

a decrease in operations and maintenance expense of $2,064 as a result of the sale of both the regulated natural gas utility assets in West Virginia in October 2023 and the three non-utility local microgrid and distributed energy projects in January 2024;

a decrease in bad debt expense of $3,452; offset by

an increase in production costs for water and wastewater operations of $1,640;

an increase in customer assistance surcharge costs of $926 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues; and

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $259.

Purchased gas increased by $2,505 or 15.1%. Purchased gas represents the cost of gas sold by Peoples, which for the regulated gas business has a corresponding offset in revenue. The increase is the result of an increase in the average cost of gas of $3,656 and higher gas usage of $473 during the third quarter of 2024, offset by a decrease of $1,624 from the sale of Peoples West Virginia in October 2023 and our three non-utility local microgrid and distributed energy projects in January 2024.

Depreciation and amortization expense increased by $6,566 or 7.6% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.

Interest expense, net of interest income, increased by $7,804 or 11.5%. Interest expense, net of interest income, increased by $4,227 in our Regulated Water segment and by $2,716 in our Regulated Natural Gas segment. Refer to Segment Results of Operations below for further details. Interest expense, net of interest income, in Other relates to our corporate operations, and this increased by $861 during the third quarter of 2024.

Other, net was an expense of $227 and income of $1,438 for the three months ended September 30, 2024 and 2023, respectively. The change is primarily due to the increase in the pension and post-retirement benefit non-service cost component of net periodic benefit expense in our Regulated Water segment.

Our effective income tax rate was an expense of 18.6% and a benefit of 4.9% in the third quarter of 2024 and 2023, respectively. The change in the effective income tax rate is primarily the result of a decrease in income tax benefit associated with the repairs tax deduction for qualifying infrastructure investment.

#### Nine months ended September 30, 2024 compared with nine months ended September 30, 2023

Consolidated operating revenues decreased by $92,675 or 5.9% for the nine months ended September 30, 2024, as compared to the same period in 2023. Revenues from our Regulated Water segment increased by $45,287. Revenues from our Regulated Natural Gas and Other business segments decreased by $125,826 and $12,136, respectively. A detailed discussion of the factors contributing to the changes in segment net revenue is included below under the section, Segment Results of Operations. The decrease in our Other business segment revenue is due to lower revenues from our non-regulated natural gas

(In thousands of dollars, except per share amounts)

operations primarily as a result of lower average gas prices and lower gas usage in the current period as compared to the prior period.

Consolidated operations and maintenance increased by $5,260 or 1.3%, primarily due to:

an increase in production costs for water and wastewater operations of $4,424, primarily due to increased purchased water, wastewater, and power costs;

an increase in employee related costs of $2,964 primarily resulting from higher salary costs, healthcare costs, and contributions to the Company’s defined contribution plan, offset by lower pension cost;

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $2,672;

an increase in material and supplies expense of $2,348 in our Regulated Natural Gas segment;

an increase in customer assistance surcharge costs of $692 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues; offset by

a decrease in operation and maintenance expense of $6,198 as a result of the sale of both the regulated natural gas utility assets in West Virginia in October 2023 and the three non-utility local microgrid and distributed energy projects in January 2024; and

a decrease in bad debt expense of $1,203.

Purchased gas decreased by $132,340 or 42.0%. Purchased gas represents the cost of gas sold by Peoples for the Regulated Natural Gas business and has a corresponding offset in revenue. The decrease is the result of the lower average cost of gas of $103,796 during the nine month period compared to prior period, the impact of lower gas usage of $26,920 due to warmer weather conditions, and a decrease of $1,624 from the sale of Peoples West Virginia in October 2023 and our three non-utility local microgrid and distributed energy projects in January 2024.

Depreciation and amortization expense increased by $17,561 or 6.9% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.

Taxes other than income taxes increased by $3,926 or 5.8% largely due to an increase in property taxes, payroll taxes and pumping fees.

Interest expense, net of interest income, increased by $12,796 or 6.2% for the first nine months of 2024. Interest expense, net of interest income, increased by $13,231 in our Regulated Water segment and by $452 for our Regulated Natural Gas segment. Refer to Segment Results of Operations below for further details. Interest expense, net of interest income, in Other relates to our corporate operations, and this decreased by $887.

Allowance for funds used during construction (“AFUDC”) increased by $936 or by 6.4% due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied in our Regulated Natural Gas segment.

(In thousands of dollars, except per share amounts)

Gain on sale of assets was $92,067 and $184 for the nine months ended September 30, 2024 and 2023, respectively. During the first quarter of 2024, the Company completed the sale of its interest in three non-utility local microgrid and distributed energy projects and recognized a gain of $91,236.

Other, net was an expense of $486 and income of $2,001 for the nine months ended September 30, 2024 and 2023, respectively. The change is primarily due to the increase in the pension and post-retirement benefit non-service cost component of net periodic benefit expense in 2024 in our Regulated Water segment.

Our effective income tax rate was an expense of 1.7% in the first nine months of 2024 and a benefit of 10.9% in the first nine months of 2023. The decrease in the income tax benefit is primarily attributed to the gain recognized from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects in the first quarter of 2024 and a decrease in tax benefit associated with the repairs tax deduction for qualifying utility infrastructure.

Segment Results of Operations

#### Regulated Water Segment

Our Regulated Water segment is comprised of eight operating segments representing its water and wastewater regulated utility companies which are organized by the states where the Company provides water and wastewater services. The Regulated Water segment is aggregated into one reportable segment.

The following tables present selected operating results and statistics for our Regulated Water segment for the periods ended September 30, 2024 and 2023:

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Operating revenues | $334,477 | $310,591 | $916,850 | $871,563 |
| Operations and maintenance expense | $96,369 | $98,695 | $282,627 | $274,724 |
| Segment net income | $112,275 | $99,916 | $263,859 | $267,345 |
| Operating Statistics |  |  |  |  |
| Selected operating results as a percentage of operating revenues: |  |  |  |  |
| Operations and maintenance | 28.8% | 31.8% | 30.8% | 31.5% |
| Depreciation and amortization | 17.3% | 17.6% | 18.8% | 18.5% |
| Taxes other than income taxes | 5.3% | 5.5% | 5.5% | 5.4% |
| Interest expense, net of interest income | 10.5% | 9.9% | 11.4% | 10.5% |
| Segment net income | 33.6% | 32.2% | 28.8% | 30.7% |
| Effective tax rate | 14.7% | 13.9% | 17.1% | 14.6% |

38

(In thousands of dollars, except per share amounts)

#### Three months ended September 30, 2024 compared with three months ended September 30, 2023

Revenues from our Regulated Water segment increased by $23,886 or 7.7% for the third quarter of 2024 as compared to the same period in 2023, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $11,014;

an increase in volume consumption of $10,263; and

additional water and wastewater revenues of $1,528 associated with a larger customer base due to utility acquisitions and organic growth.

Operations and maintenance expense decreased by $2,326 or 2.4% primarily due to the following:

a decrease in bad debt expense of $3,709;

a decrease in employee related costs of $3,529 primarily resulting from lower pension cost during the quarter, offset by higher salary and healthcare costs;

an increase in production costs for water and wastewater operations of $1,640;

an increase in outside services of $1,319 largely due to higher water testing costs and maintenance expenses;

an increase in legal expenses of $1,067; and

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $259.

Depreciation and amortization increased by $3,182 or 5.8% primarily due to continued capital investment to expand and improve our utility facilities and our acquisitions of new utility systems.

Interest expense, net of interest income, increased by $4,227 or 13.7% for the quarter primarily due to higher push down debt borrowings and operating company debt issuances for the Regulated Water segment.

Other, net was an expense of $287 and income of $2,419 for the three months ended September 30, 2024 and 2023, respectively. The change is primarily due to the increase in the pension and post-retirement benefit non-service cost component of net periodic benefit expense in 2024. The credit arising from the expected return of plan assets assumption was lower in 2024 as compared to 2023 for our Regulated Water segment.

Our effective income tax rate for our Regulated Water Segment was an expense of 14.7% in the third quarter of 2024, compared to an expense of 13.9% in the third quarter of 2023. The increase in the effective tax rate is primarily the result of changes in the jurisdictional earnings mix.

(In thousands of dollars, except per share amounts)

#### Nine months ended September 30, 2024 compared with nine months ended September 30, 2023

Revenues increased by $45,287 or 5.2% for the first nine months of 2024 as compared to the same period in 2023, mainly due to the following:

an increase in water and wastewater rates, including infrastructure rehabilitation surcharges, of $37,474;

additional water and wastewater revenues of $7,631 associated with a larger customer base due to utility acquisitions and organic growth; and

an increase in volume consumption of $1,674; offset by

a decrease in non-utility revenue of $1,549, primarily due to higher developer fees earned during the first quarter of 2023.

Operations and maintenance expense increased by $7,903 or 2.9% primarily due to the following:

an increase in production costs for water and wastewater operations of $4,424, primarily due to increased purchased water, wastewater, and power costs;

additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $2,672; and

an increase in employee related costs of $937 primarily resulting from higher salary costs, healthcare costs, and contributions to the Company’s defined contribution plan, offset by lower pension cost.

Depreciation and amortization increased by $11,303 or 7.0% primarily due to continued capital investment to expand and improve our utility facilities and our acquisitions of new utility systems.

Taxes other than income taxes increased by $3,607 or 7.7% largely due to an increase in property taxes, payroll taxes and pumping fees.

Interest expense, net of interest income, increased by $13,231 or 14.5% primarily due to higher push down debt borrowings and operating company debt issuances for the Regulated Water segment.

Other, net was an expense of $585 and income of $2,840 for the three months ended September 30, 2024 and 2023, respectively. The change is primarily due to the increase in the pension and post-retirement benefit non-service cost component of net periodic benefit expense in 2024. The credit arising from the expected return of plan assets assumption was lower in 2024 as compared to 2023 for our Regulated Water segment.

Our effective income tax rate for our Regulated Water Segment was an expense of 17.1% in the first nine months of 2024 and an expense of 14.6% in the first nine months of 2023. The increase in the effective tax rate is primarily the result of changes in the jurisdictional earnings mix, decrease in the amortization of certain regulatory liabilities associated with deferred taxes and a decrease in the income tax benefit associated with the repairs tax deduction for qualifying infrastructure.

(In thousands of dollars, except per share amounts)

#### Regulated Natural Gas Segment

Our Regulated Natural Gas segment recognizes revenues by selling gas directly to customers at approved rates or by transporting gas through our pipelines at approved rates to customers that have purchased gas directly from other producers, brokers, or marketers. Natural gas sales to residential, commercial and industrial customers are seasonal, which results in higher demand for natural gas for heating purposes during the colder months.

The following tables present selected operating results and statistics for our Regulated Natural Gas segment, for the periods ended September 30, 2024 and 2023:

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Operating revenues | $96,731 | $94,798 | $549,250 | $675,076 |
| Operations and maintenance expense | $49,002 | $50,006 | $144,628 | $148,270 |
| Purchased gas | $17,603 | $14,408 | $175,825 | $295,929 |
| Segment net income (loss) | $(30,660) | $(9,776) | $177,563 | $127,400 |
| Operating Statistics |  |  |  |  |
| Selected operating results as a percentage of operating revenues: |  |  |  |  |
| Operations and maintenance | 50.7% | 52.8% | 26.3% | 22.0% |
| Purchased gas | 18.2% | 15.2% | 32.0% | 43.8% |
| Depreciation and amortization | 35.5% | 32.8% | 18.1% | 13.8% |
| Taxes other than income taxes | 5.7% | 6.9% | 3.3% | 2.6% |
| Interest expense, net of interest income | 22.9% | 20.5% | 12.4% | 10.1% |
| Segment net income (loss) | -31.7% | -10.3% | 32.3% | 18.9% |
| Effective tax rate | -0.7% | 63.4% | -27.9% | -137.3% |

#### Three months ended September 30, 2024 compared with three months ended September 30, 2023

Operating revenues from the Regulated Natural Gas segment increased by $1,933 or by 2.0% due to:

an increase in purchased gas costs of $3,195; refer to purchased gas costs discussion below for further information;

an increase of $159 due to higher rates and other surcharges, and

an increase in customer assistance surcharge of $926, which has an equivalent offsetting amount in operations and maintenance expense; offset by

a decrease in other utility revenues of $2,071 resulting from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects; and

impact of lower volumes of $404 due to the sale of Peoples West Virginia in 2023 and $724 primarily due to warmer weather conditions in 2024 compared to prior period.

(In thousands of dollars, except per share amounts)

Operations and maintenance expense for the three months ended September 30, 2024 decreased by $1,004 or 2.0% primarily due to the following:

a decrease in operation and maintenance expense of $2,064 as a result of the sale of both the regulated natural gas utility assets in West Virginia in October 2023 and the three non-utility local microgrid and distributed energy projects in January 2024;

a decrease in legal expenses of $1,278;

a decrease in insurance expenses of $820; offset by

an increase in labor and employee benefits of $3,206 primarily due to higher salary and healthcare costs and lower capitalization during the 3rd quarter of 2024; and,

an increase in customer assistance surcharge costs of $926, which has an equivalent offsetting amount in revenues.

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 condensed consolidated statement of operations and comprehensive income as purchased gas expenses. Fluctuations in the cost of purchased gas impact operating revenues on a dollar-for-dollar basis. Purchased gas increased by $3,195 or 22.2% due to an increase in the average cost of gas of $4,707, offset by lower gas usage of $760 during the current period compared to the prior period and $752 from the sale of Peoples West Virginia in October 2023 and our three non-utility local microgrid and distributed energy projects in January 2024.

Depreciation and amortization increased by $3,177 or 10.2% primarily due to continued capital investment.

Taxes other than income taxes decreased by $1,036 or 15.7% largely due to lower sales and use taxes during the period.

Interest expense, net of interest income, increased by $2,716 or 14.0% primarily due to higher pushdown debt and higher average revolver borrowings.

Our effective income tax rate was an expense of 0.7% in the third quarter of 2024, compared to a benefit of 63.4% in the third quarter of 2023. The decrease in the income tax benefit is primarily attributed to the decrease in income tax benefit associated with the tax deduction for continued qualifying infrastructure.

(In thousands of dollars, except per share amounts)

#### Nine months ended September 30, 2024 compared with nine months ended September 30, 2023

Operating revenues from the Regulated Natural Gas segment decreased by $125,826 or 18.6% due to:

a decrease in purchased gas costs of $120,104; refer to purchased gas costs discussion below for further information;

lower gas usage of $4,043 due to the sale of Peoples West Virginia and $3,038 due to warmer weather conditions; and

a decrease in other utility revenues of $5,213 resulting from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects; offset by

an increase of $5,906 due to higher rates and other surcharges.

The Regulated Natural Gas segment 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 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 above which no heating is required (65 degrees Fahrenheit). During the first nine months of 2024, we experienced actual HDDs of 2,642 days, which was warmer by 10.8% than the actual HDDs of 2,963 days in the first nine months of 2023 for Pittsburgh Pennsylvania, which we use as a proxy for our western Pennsylvania service territory.

Operations and maintenance expense decreased by $3,642 or 2.5% primarily due to the following:

a decrease in operation and maintenance expense of $6,198 as a result of the sale of both the regulated natural gas utility assets in West Virginia in October 2023 and the three non-utility local microgrid and distributed energy projects in January 2024;

a decrease in legal expenses of $2,735; and

a decrease in bad debt expense of $1,207; offset by

an increase in employee related costs of $3,777;

an increase in materials and supplies of $2,121; and

an increase in customer assistance surcharge costs of $692, which has an equivalent offsetting amount in revenues.

Purchased gas decreased by $120,104 or 40.6% during the first nine months of 2024 compared with the same period in 2023 as a result of a decrease in the average cost of gas of $100,646, and lower gas usage of $13,941 due to warmer weather conditions and $5,517 due to the sale of Peoples West Virginia in October 2023 and our three non-utility local microgrid and distributed energy projects in January 2024.

(In thousands of dollars, except per share amounts)

Depreciation and amortization increased by $5,904 or 6.3% primarily due to continued capital investment in pipe replacement.

AFUDC increased by $1,489 due to the increase in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Gain on sale of assets was $91,581 and $0 as of the nine months ended September 30, 2024 and 2023, respectively. During the first quarter of 2024, the Company completed the sale of its interest in three non-utility local microgrid and distributed energy projects and recognized a gain of $91,236.

Our effective income tax rate was a benefit of 27.9% in the first nine months of 2024 and a benefit of 137.3% in the first nine months of 2023. The decrease in the income tax benefit is primarily attributed to the gain recognized from the sale of the Company’s interest in three non-utility local microgrid and distributed energy projects in the first quarter of 2024 and a decrease in tax benefit associated with the repairs tax deduction for continued qualifying infrastructure.

#### Impact of Recent Accounting Pronouncements

We describe the impact of recent accounting pronouncements in Note 16, *Recent Accounting Pronouncements*, to the condensed consolidated financial statements in this report.

## Market risk

As filed, 287 characters.

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed February 29, 2024, for additional information on market risks.

## Controls and procedures

As filed, 1,218 characters.

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

(b) Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the quarter ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 145 characters.

Please review the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, under “Part 1, Item 1A – Risk Factors”.

Filed Nov 6, 2024.
Source: SEC EDGAR, the filing index for accession 0001562762-24-000258. Last ingested by Listed: Nov 6, 2026, 17:16 ET. No prices; not investment advice.