{ "docId": "019dd923-622c-750b-8b99-5499dc38e401", "docSlug": "0ce9434f48c5", "documentTitle": "Essential Utilities, Inc. (WTRG)", "authorId": "54_Spruce_Point_Capital", "authorName": "Spruce Point Capital Management", "documentKindSlug": "activist-deck", "documentKindLabel": "Activist deck", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2023-03-08 00:00:00", "orientation": "landscape", "aspectRatio": 1.3333334, "pageNumber": 53, "pageCount": 91, "prevPage": 52, "nextPage": 54, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "dense", "nDataPoints": 0, "notes": "The slide uses direct excerpts from 10-K filings to contrast the testing methodologies used in consecutive years.", "elementsJson": [ "headline_text", "paragraph", "callout_box", "footnote" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b99-5499dc38e401/53", "deckHref": "/decks/019dd923-622c-750b-8b99-5499dc38e401", "deckJsonHref": "/decks/019dd923-622c-750b-8b99-5499dc38e401.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b99-5499dc38e401#slide-53", "components": [ { "bbox": { "h": 0.09, "w": 0.96, "x": 0.02, "y": 0.16 }, "kind": "callout", "text": "Spruce Point views it as a major red flag that WTRG recently changed goodwill testing methodologies. Notice carefully that it switched from a \"quantitative\" to a \"qualitative\" approach for its Regulated Water and Aqua Resources unit. It changed from using a DCF approach to a \"market and income approach\" to evaluate the Regulated Natural Gas segment.", "attrs": null, "subkind": "primary", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "83ca280d-cc87-489e-97ab-33962e1459cd", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "callout", "text": "Spruce Point views it as a major red flag that WTRG recently changed goodwill testing methodologies.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd952-e6ed-775b-bcb8-1c60d66c02e9", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.96, "x": 0.02, "y": 0.56 }, "kind": "paragraph", "text": "2021 Goodwill Testing Discussion", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0e90237e-b224-4c73-978e-52a48b787211", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.33, "w": 0.96, "x": 0.02, "y": 0.6 }, "kind": "paragraph", "text": "Goodwill — Goodwill represents the excess cost over the fair value of net tangible and identifiable intangible assets acquired through acquisitions. Goodwill is not amortized but is tested for impairment annually, or more often, if circumstances indicate a possible impairment may exist. When testing goodwill for impairment, we may assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and entity specific events, for some or all of our reporting units to determine whether it's more likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, based on our assessment of the qualitative factors previously noted or at our discretion, we may perform a quantitative goodwill impairment test by determining the fair value of a reporting unit. If we perform a quantitative test and determine that the fair value of a reporting unit is less than its carrying amount, we would record an impairment loss for the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available, and segment management regularly reviews the operating results of that component. We assigned assets and liabilities to each reporting unit based on either specific identification or by using judgment for the remaining assets and liabilities that are not specific to a reporting unit. Goodwill was assigned to the reporting unit based on a combination of specific identification and relative fair values. The Company performed a quantitative assessment for its annual test of the goodwill attributable to its Regulated Natural Gas reporting unit as of July 31, 2021. We estimated the fair value of the reporting unit by weighting results from the market approach and the income approach. Key assumptions in the valuation methodologies for goodwill included growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry. Based on our analysis, we determined that the fair values of our Regulated Natural Gas reporting unit exceeded its carrying values, indicating none of its goodwill was impaired. The Company performed a qualitative assessment for its annual test of the goodwill attributable to its Regulated Water and Aqua Resources reporting units as of July 31, 2021, and concluded that it is more likely than not that the fair value of each reporting unit, which has goodwill recorded, exceeded its carrying amount, indicating that none of the Company's goodwill was impaired.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "aa4f3a83-38b9-44cc-a7ac-44d518ba1206", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.96, "x": 0.02, "y": 0.27 }, "kind": "paragraph", "text": "2020 Goodwill Testing Discussion", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "caa33489-31f1-49f1-8194-4d33eb066222", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.21, "w": 0.96, "x": 0.02, "y": 0.31 }, "kind": "paragraph", "text": "Goodwill — Goodwill represents the excess cost over the fair value of net tangible and identifiable intangible assets acquired through acquisitions. Goodwill is not amortized but is tested for impairment annually, or more often, if circumstances indicate a possible impairment may exist. When testing goodwill for impairment, we may assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and entity specific events, for some or all of our reporting units to determine whether it's more likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, based on our assessment of the qualitative factors previously noted, we may perform a quantitative goodwill impairment test by determining the fair value of a reporting unit based on a discounted cash flow analysis. If we perform a quantitative test and determine that the fair value of a reporting unit is less than its carrying amount, we would record an impairment loss for the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The Company performed a quantitative assessment for its annual test of the goodwill attributable to its Regulated Water and Aqua Resources reporting units for impairment and a qualitative assessment for its Regulated Natural gas business reporting unit as of July 31, 2020, and concluded that it is more likely than not that the fair value of each reporting unit, which has goodwill recorded, exceeded its carrying amount, indicating that none of the Company's goodwill was impaired.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "e7faa4ad-8c07-497a-89e4-f743409711e5", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.65, "x": 0.31, "y": 0.04 }, "kind": "title", "text": "Warning: Change In Goodwill Impairment Testing To A Less Rigorous Approach", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "258af2c5-893a-4242-85e8-4b4a3eb9639c", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "fraud-exposure", "slug": null, "matchId": "7bb68f07-2288-47b3-a977-5c5954f2ba99", "evidence": "The slide explicitly labels the change in methodology as a 'major red flag' and uses direct quotes from financial filings to expose a potential inconsistency or weakening of accounting rigor.", "confidence": 0.85 } ], "arcBeats": [], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }