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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 4/15/21 Essential Utilities, Inc. 8-K:8,9 4/15/21 14:879K 2ENGAGE/FA |
Document/Exhibit Description Pages Size 1: 8-K Current Report HTML 37K 2: EX-23.1 Consent of Expert or Counsel HTML 7K 3: EX-99.1 Miscellaneous Exhibit HTML 285K 4: EX-99.2 Miscellaneous Exhibit HTML 62K 10: R1 Cover HTML 52K 12: XML IDEA XML File -- Filing Summary XML 13K 9: XML XBRL Instance -- e21220_wtrg-8k_htm XML 20K 11: EXCEL IDEA Workbook of Financial Reports XLSX 6K 6: EX-101.DEF XBRL Definitions -- wtrg-20210415_def XML 76K 7: EX-101.LAB XBRL Labels -- wtrg-20210415_lab XML 104K 8: EX-101.PRE XBRL Presentations -- wtrg-20210415_pre XML 73K 5: EX-101.SCH XBRL Schema -- wtrg-20210415 XSD 14K 13: JSON XBRL Instance as JSON Data -- MetaLinks 27± 35K 14: ZIP XBRL Zipped Folder -- 0001552781-21-000205-xbrl Zip 63K
Exhibit 99.2
UNAUDITED PRO FORMA CONSOLIDATED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma consolidated combined financial statements (the “pro forma financial statements”) have been derived from the annual historical consolidated financial statements of Essential Utilities, Inc. (the “Company” or “Essential”) and LDC Funding LLC (“LDC”), including the consolidated statements of net income for the year ended December 31, 2020. LDC is the parent of Peoples Natural Gas Company LLC, Peoples Gas Company LLC, Peoples Gas WV LLC, Peoples Gas KY LLC, and Delta Natural Gas Company Inc., as well as other subsidiaries (collectively with LDC, “Peoples”).
The unaudited pro forma consolidated combined statement of net income for the year ended December 31, 2020 gives effect to the acquisition by the Company of all of the issued and outstanding limited liability company membership interests of Peoples (the “Acquisition”) and certain financing transactions (as described in Note 5 of the accompanying notes) as if they were completed on January 1, 2020. The unaudited pro forma consolidated combined balance sheet as of December 31, 2020 is not presented herein as Peoples is reflected in the Company’s historical consolidated balance sheet as of December 31, 2020.
The unaudited pro forma consolidated combined statement of net income for the year ended December 31, 2020 combines the historical consolidated statement of operations for the year ended December 31, 2020 of Essential and the pre-acquisition historical results of Peoples for the period January 1, 2020 to March 15, 2020 derived from Peoples books and records.
The unaudited pro forma consolidated combined statement of net income was prepared in accordance with Article 11 of SEC Regulation S-X, prior to adoption of the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” Accordingly, the historical consolidated financial information has been adjusted in the pro forma financial statements to give effect to pro forma events that are: (1) directly attributable to the Acquisition and the related transactions described herein; (2) factually supportable; and (3) expected to have continuing impact on the combined results of the Company and Peoples. As such, the impacts of non-recurring Acquisition-related expenses are not included in the unaudited pro forma statement of net income. Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma consolidated combined statement of net income.
The unaudited pro forma consolidated combined statement of net income was based on, and should be read in conjunction with the separate historical audited consolidated financial statements of the Company as of and for the year ended December 31, 2020 and the related notes, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2021.
The unaudited pro forma consolidated combined financial information has been prepared using the acquisition method of accounting in accordance with the business combination accounting guidance as provided in Accounting Standards Codification (“ASC”) 805, Business Combinations. The applicable guidance also requires that one party to an acquisition be identified as the acquirer. In accordance with such principles, the Acquisition will be accounted for as an acquisition of Peoples by the Company.
The assets and liabilities of Peoples have been measured based on various preliminary estimates using assumptions that the Company believes are reasonable based on information that is currently available. Differences between these preliminary estimates and the final acquisition accounting could have a material impact on the accompanying pro forma financial statements and the combined company’s future results of operations and financial position. The pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma combined financial statements prepared in accordance with the rules and regulations of the SEC. The Company intends to finalize the acquisition accounting in connection with its filing of the first quarter 2021 Form 10-Q.
The pro forma financial statement has been presented for informational purposes only and does not purport to represent the actual results of operations that the Company and Peoples would have achieved had the companies been combined during the periods presented in the pro forma financial statement and is not intended to project the future results of operations that the combined company may achieve after the Acquisition. The pro forma financial statements do not reflect any cost savings that may be realized as a result of the Acquisition and also does not reflect any restructuring or integration-related costs to achieve those potential cost savings.
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Unaudited Pro Forma Consolidated Combined Statement of Net Income
for the Year Ended December 31, 2020
| Historical Results | Pro Forma Adjustments | |||||||||||||||||||||||
| Essential | Peoples | |||||||||||||||||||||||
| (in thousands, except per share amounts) | Year Ended December 31, 2020 | For the period January 1, 2020 to March 15, 2020 | Reclassification Adjustments (Note 2) | Acquisition- related Adjustments (Note 3) | Financing- related Adjustments (Note 4) | Pro Forma Combined | ||||||||||||||||||
| Operating revenues | $ | 1,462,698 | $ | 281,068 | $ | — | $ | — | $ | — | $ | 1,743,766 | ||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Operations and maintenance | 528,611 | 48,888 | 4,318 | 2(a) | (26,441 | )3(a), 3(b) | — | 555,376 | ||||||||||||||||
| Purchased gas | 165,745 | 103,575 | — | — | — | 269,320 | ||||||||||||||||||
| Depreciation | 251,443 | 21,171 | (480 | )2(b) | — | — | 272,134 | |||||||||||||||||
| Amortization | 5,616 | — | 480 | 2(b) | (141 | )3(c) | — | 5,955 | ||||||||||||||||
| Taxes other than income taxes | 76,597 | 3,781 | — | — | — | 80,378 | ||||||||||||||||||
| Total operating expenses | 1,028,012 | 177,415 | 4,318 | (26,582 | ) | — | 1,183,163 | |||||||||||||||||
| Operating income | 434,686 | 103,653 | (4,318 | ) | 26,582 | — | 560,603 | |||||||||||||||||
| Other expense (income): | ||||||||||||||||||||||||
| Interest expense | 188,435 | 6,797 | 161 | 2(c) | (4,690 | )3(d) | 11,023 | 4(a) | 201,726 | |||||||||||||||
| Interest income | (5,363 | ) | — | 98 | 2(d) | — | 4,999 | 4(b) | (266 | ) | ||||||||||||||
| Allowance for funds used during construction | (12,687 | ) | — | (161 | )2(c) | — | — | (12,848 | ) | |||||||||||||||
| Gain on sale of other assets | (661 | ) | — | — | — | — | (661 | ) | ||||||||||||||||
| Equity earnings in joint venture | 3,374 | — | — | — | — | 3,374 | ||||||||||||||||||
| Other expense (income) | (3,383 | ) | 3,966 | (4,416 | )2(a), 2(d) | — | — | (3,833 | ) | |||||||||||||||
| Income before income taxes | 264,971 | 92,890 | — | 31,272 | (16,022 | ) | 373,111 | |||||||||||||||||
| Provision for income taxes (benefit) | (19,878 | ) | 20,641 | — | 8,756 | 3(e) | (4,486 | )4(c) | 5,033 | |||||||||||||||
| Net income | $ | 284,849 | $ | 72,249 | $ | — | $ | 22,516 | $ | (11,536 | ) | $ | 368,078 | |||||||||||
| Net income per share: | ||||||||||||||||||||||||
| Basic net income per share (See Note 5) | $ | 1.14 | $ | 1.45 | ||||||||||||||||||||
| Diluted net income per share (See Note 5) | $ | 1.12 | $ | 1.45 | ||||||||||||||||||||
| Weighted-average number of shares (in thousands): | ||||||||||||||||||||||||
| Basic (See Note 5) | 249,768 | 254,206 | ||||||||||||||||||||||
| Diluted (See Note 5) | 254,629 | 254,629 | ||||||||||||||||||||||
See the accompanying notes to the unaudited pro forma combined financial statements, which are an integral part of these statements.
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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED COMBINED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Unless otherwise indicated, all amounts presented in these notes to unaudited pro forma consolidated combined financial statements are in thousands, except for per share amounts.
On March 16, 2020, pursuant to the terms of a purchase agreement, dated October 22, 2018 (the “Peoples purchase agreement”), the Company completed the Acquisition of Peoples for cash consideration of $3,465,344, which was the base cash purchase price as adjusted pursuant to the terms of the Peoples purchase agreement by $43,935 for the estimated change in working capital, by $247,500 for certain estimated capital expenditures, and by $1,101,091 for indebtedness of Peoples outstanding as of the closing date. The cash consideration is subject to further adjustment upon completion of a closing balance sheet and the finalization of other adjustments. The acquisition of Peoples and related transactions, including the related costs, were financed through the following financing transactions that were completed in connection with the Acquisition:
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· Issuance of $749,907 of the Company’s common stock, par value $0.50 per share (“Common Stock”), pursuant to a Stock Purchase Agreement with Canada Pension Plan Investment Board (“CPPIB”) (the “Private Placement”) at a per share price of $34.62. The Private Placement was completed on March 16, 2020; · Borrowings of $150,000 under a credit agreement the Company entered into with PNC Bank, National Association on March 13, 2020 (the “PNC Credit Agreement”); · Borrowings of approximately $800,000, including approximately $22,000 designated for letter of credit usage, aggregate principal amount of long-term debt under the Company’s five-year unsecured revolving credit agreement (the “Revolving Credit Agreement”); · Issuance of $1,293,750 of Common Stock and $690,000 of the Company’s 6.00% tangible equity units (“TEUs”) in public offerings, which were completed on April 23, 2019; and · Issuance of $900,000 aggregate principal amount of senior notes in a public offering that was completed on April 26, 2019. A portion of the proceeds from the senior notes were used to redeem $313,500 of the Company’s outstanding debt (the “Company Debt Refinancing”), and remaining proceeds were used prior to December 31, 2019 to temporarily repay borrowings under the Revolving Credit Agreement. On the Acquisition closing date, the Company borrowed under the Revolving Credit Agreement to complete the Acquisition as described above. |
Since the pro forma financial statements have been prepared based upon preliminary estimates, the final amounts recorded at the closing date of the Acquisition may differ materially from the information presented herein. These preliminary estimates are subject to change pending further review of the assets acquired and the liabilities assumed.
Management has completed the review of Peoples’ other accounting policies and based on its analysis to date has determined that no other significant adjustments are necessary to conform Peoples’ financial statements to the accounting policies used by the Company in the preparation of the pro forma financial statements.
Certain reclassifications have been made to the historical presentation of Peoples’ financial statements in order to conform to the financial statement presentation of the Company. These reclassifications are discussed further at Note 2.
The pro forma financial statements have been prepared using the acquisition method of accounting. In accordance with the acquisition method, Peoples’ assets acquired and liabilities assumed have been measured at their estimated fair value. For purposes of measuring the estimated fair value of assets acquired and liabilities assumed, the Company utilizes estimates based on key assumptions of the Acquisition, including historical and current market information. The pro forma adjustments included herein are preliminary and will be revised at the time the Company has finalized its fair value valuations and analyses.
Costs related to the Acquisition recorded by both Peoples and the Company in each of the respective historical financial statements have been excluded from the unaudited pro forma statement of net income for the year ended December 31, 2020 as they reflect non-recurring charges directly related to the transaction.
Following the closing of the Acquisition, we granted stock-based awards under a long-term incentive plan to employees of Peoples. However, the impact of these awards was immaterial and therefore is not reflected within the unaudited pro forma statement of net income.
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Note 2. Reclassification Adjustments
Certain historical consolidated financial statement balances of Peoples have been reclassified in the unaudited pro forma financial statements to conform to the historical consolidated financial statement presentation of the Company.
Adjustments to the Unaudited Pro Forma Statement of Net Income for the Year Ended December 31, 2020
| (a) | Donations, Penalties and Other Expenses. Represents the reclassification of Peoples’ donations, penalties and other miscellaneous expenses to the Company’s “Operations and maintenance” line item in order to conform to the Company’s statement of net income presentation. | |
| (b) | Amortization. Represents the reclassification of certain expenses from Peoples’ “Depreciation and amortization” into the Company’s “Amortization” line item in order to conform to the Company’s statement of net income presentation. | |
| (c) | Allowance for Funds Used in Construction. Represents the reclassification of allowance for funds used in construction within Peoples’ “Interest expense” to the Company’s “Allowance for funds used during construction” line item in order to conform to the Company’s statement of net income presentation. | |
| (d) | Interest and Other Income. Represents the reclassification of certain interest income recorded by Peoples within “Other” to the Company’s “Interest income” line item in order to conform to the Company’s statement of net income presentation. |
Note 3. Acquisition-related Adjustments
Adjustments to the Unaudited Pro Forma Statement of Net Income for the Year Ended December 31, 2020
| (a) | Management Fee. Reflects the elimination of Peoples’ management fee charged by its former parent, SteelRiver Infrastructure Partners, of approximately $1,245 for the period from January 1, 2020 to March 15, 2020. The management fee has been eliminated in the unaudited pro forma financial statements as the management fee agreements were terminated in connection with the Acquisition. | |
| (b) | Transaction Costs. Reflects the elimination of Acquisition-related expenses recorded by both the Company and Peoples of $25,196, excluding approximately $376 of integration-related costs for which the related impact on the combined results is not factually supportable for the year ended December 31, 2020. The Acquisition-related expenses consisted principally of legal and advisory fees, including underwriter structuring and opinion letter fees, and have been eliminated as they were directly related to the Acquisition and were nonrecurring in nature. Transaction-related expenses recorded by the Company also included change in control severance and retention bonus payments to its employees for a total amount of $9,000. As the cost was nonrecurring in nature, it has been eliminated for the year ended December 31, 2020. | |
| (c) | Amortization expense. All amortization adjustments relate to identified intangible assets as a result of the acquisition for non-regulated businesses and are recorded to Amortization. The estimated amortization expense was computed using the straight-line method based on an estimated useful life of the identifiable definite-lived intangible assets. |
| (in thousands) | Estimated Useful Life | Estimated Fair Value | For the period January 1, 2020 to March 15, 2020 Amortization Estimates | |||||||||
| Customer List | 15 | $ | 4,400 | $ | 60 | |||||||
| Trade Name | 15 | 390 | 5 | |||||||||
| Total | $ | 4,790 | 65 | |||||||||
| Historical amortization expense | 206 | |||||||||||
| Pro forma adjustment | $ | (141 | ) | |||||||||
| (d) | Interest Expense. Reflects the elimination of interest expense of $5,344 for the year ended December 31, 2020 related to Peoples’ debt outstanding as of December 31, 2019 that was not assumed by Essential upon the consummation of the Acquisition, including interest expenses related to certain loans with the parent company of Peoples, offset by additional estimated interest expense of $654 related to assumed short-term borrowings of $181,000 that were incurred by Peoples in February 2020 which bear interest at LIBOR plus 0.875% for the year ended December 31, 2020. |
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| (e) | Income Tax Expense. Reflects the income tax effects of the pro forma adjustments calculated using an estimated statutory income tax rate of 28% for the year ended December 31, 2020. The statutory rate may differ materially from the Company’s effective tax rate following the Acquisition and does not consider any historical or future tax events that may impact the combined company. |
Note 4. Financing-related Adjustments
The Company has reflected the following additional financing transactions that were completed in March 2020 to fund the Acquisition and related transactions, including the related costs, in the unaudited pro forma statement of net income as if the transactions were completed as of January 1, 2020.
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· Private Placement. On March 29, 2019, the Company entered into a Stock Purchase Agreement with CPPIB pursuant to which CPPIB purchased 21,661 newly issued shares of Common Stock from the Company on March 16, 2020 at $34.62 per share. The total net proceeds for the Private Placement was $730,239, which is net of issuance costs of $19,668. · PNC Credit Agreement. On March 13, 2020, the Company borrowed $150,000 under the PNC Credit Agreement, which the Company entered into on March 13, 2020. The PNC Credit Agreement will mature on March 12, 2021 and the loan bears interest at LIBOR plus 0.875%, in respect of LIBOR borrowings, and the alternate base rate plus 0.775%, in respect of alternate base rate borrowings. The debt issuance costs were not material and therefore are not reflected in the pro forma financial statements.
· Revolving Credit Agreement Borrowings. The Company drew approximately $800,000, including approximately $22,000 designated for letter of credit usage, aggregate principal amount of long-term debt under the Revolving Credit Agreement. The Revolving Credit Agreement was amended on March 13, 2020 and provided the Company with an additional $450,000 of borrowing capacity upon closing of the Acquisition on March 16, 2020. The total net proceeds of $799,325 are net of issuance costs of $675. |
Adjustments to the Unaudited Pro Forma Statement of Net Income for the Year Ended December 31, 2020
| (a) | Interest Expense. Reflects the following: |
| In thousands | For the period January 1, 2020 to March 15, 2020 | |||
| Incremental interest expense related to the amortization of borrowings under the PNC Credit Agreement | $ | 484 | ||
| Incremental interest expense related to the amortization of borrowings under the Revolving Credit Agreement | 2,553 | |||
| Subtotal | $ | 3,037 | ||
| Plus: Elimination of settlement gain on termination of Peoples’ interest rate swaps settled in connection with the Acquisition | 7,986 | |||
| Total | $ | 11,023 | ||
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A 1/8 percent change in the interest assumed above would result in an aggregate increase or decrease to interest expense of approximately $234 for the year ended December 31, 2020. | ||
| (b) | Interest Income. Reflects the removal of the interest income earned on cash on hand for the period January 1, 2020 to March 15, 2020. | |
| (c) | Income Tax Expense. Reflects the income tax effects of the pro forma adjustments calculated using an estimated statutory income tax rate of 28% for the year ended December 31, 2020. The statutory rate may differ materially from the Company’s effective tax rate following the Acquisition and does not consider any historical or future tax events that may impact the combined company. |
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Note 5. Pro Forma Earnings Per Share
The earnings per share calculation reflects the shares issuable upon settlement of the stock purchase contracts portion of the TEUs and the shares issued in the Private Placement and the Common Stock Offering. As the Private Placement was not completed until March 16, 2020, for the year ended December 31, 2020 EPS calculation, the company made a pro forma adjustment to reflect the issuance of common shares in the Private Placement assuming it occurred on January 1, 2020. As the shares issued in connection with the Private Placement were only reflected in the historical basic weighted average share counts for a portion of the year ended December 31, 2020, the Company made a pro forma adjustment to the year ended EPS calculation to reflect the impact on weighted average common shares outstanding from assuming the Private Placement occurred on January 1, 2020.
| In thousands | For the Year Ended December 31, 2020 | |||
| Pro forma net income | $ | 368,078 | ||
| Basic weighted average common shares outstanding | ||||
| Basic average common shares outstanding | 249,768 | |||
| Additional weighted average impact of common shares in the Private Placement | 4,438 | |||
| Basic weighted average common shares outstanding used in pro forma net earnings per share | 254,206 | |||
| Pro forma net earnings per common share, basic | $ | 1.45 | ||
| Diluted weighted average common shares outstanding | ||||
| Diluted average common shares outstanding | 254,629 | |||
| Diluted weighted average common shares outstanding used in pro forma net earnings per share | 254,629 | |||
| Pro forma net earnings per common share, diluted | $ | 1.45 | ||
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| This ‘8-K’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| Filed on / For Period end: | 4/15/21 | 424B5, 8-K, FWP, S-3ASR | ||
| 3/12/21 | ||||
| 3/1/21 | 10-K, S-3ASR | |||
| 12/31/20 | 10-K, 11-K, 4 | |||
| 3/16/20 | 3, 4, 8-K, PRE 14A | |||
| 3/15/20 | ||||
| 3/13/20 | 8-K, 8-K/A | |||
| 1/1/20 | ||||
| 12/31/19 | 10-K, 11-K, 4 | |||
| 4/26/19 | 8-K | |||
| 4/23/19 | 8-A12B, 8-K | |||
| 3/29/19 | 4, 8-K | |||
| 10/22/18 | 8-K, 8-K/A | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 1/05/24 Essential Utilities, Inc. 424B5 2:546K 2ENGAGE/FA 1/04/24 Essential Utilities, Inc. 424B5 1:528K 2ENGAGE/FA 10/17/22 Essential Utilities, Inc. 424B5 10/14/22 2:483K 2ENGAGE/FA 5/19/22 Essential Utilities, Inc. 424B5 2:543K 2ENGAGE/FA 5/18/22 Essential Utilities, Inc. 424B5 1:530K 2ENGAGE/FA 6/21/21 Essential Utilities, Inc. S-3ASR 6/21/21 4:238K 2ENGAGE/FA 4/16/21 Essential Utilities, Inc. 424B5 1:582K 2ENGAGE/FA 4/15/21 Essential Utilities, Inc. 424B5 1:574K 2ENGAGE/FA 4/15/21 Essential Utilities, Inc. S-3ASR 4/15/21 8:1.6M 2ENGAGE/FA |