Essential Utilities, Inc. (then Aqua America, Inc.) — Q1 2018 Form 10-Q
Business context and period: The filing is for the three months ended March 31, 2018, compared with Q1 2017. At the time, Aqua America operated regulated water and wastewater utilities in eight states and smaller market-based businesses. The filing predates the company’s later name change to Essential Utilities.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $194.3 million | $187.8 million | +3.5% |
| Operating income | $69.3 million | $71.1 million | −2.5% |
| Net income | $50.8 million | $49.1 million | +3.6% |
| Diluted EPS | $0.29 | $0.28 | +$0.01 |
| Operating margin | 35.7% | 37.9% | −2.2 percentage points |
| Net cash from operations | $88.4 million | $81.2 million | +$7.2 million |
| Capital expenditures | $105.1 million | $94.6 million | +$10.6 million |
Revenue growth reflected higher consumption, rate increases and infrastructure surcharges, and customer growth, partly offset by a $2.5 million reserve for expected customer refunds related to federal tax-rate reductions. Operating expenses rose 7.2%, including an 8.9% increase in operations and maintenance. Higher labor, postretirement benefits, winter-weather maintenance, depreciation, and interest costs weighed on operating income. The effective income tax rate was −4.4%, versus 5.6% a year earlier, helping net income rise despite lower operating income.
Cash, debt and liquidity
- Cash and cash equivalents were $3.2 million at March 31, 2018, down from $4.2 million at year-end.
- Total debt was $2.19 billion, up from $2.14 billion at December 31, 2017. Long-term debt, net of issuance costs and excluding current maturities, was $2.06 billion; current maturities were $103.8 million.
- Current assets were $124.1 million and current liabilities $259.1 million. Management noted the company routinely has negative working capital and considered internally generated funds and borrowing facilities sufficient for at least the next 12 months.
- Of a $250 million revolving credit facility, $113.2 million was available. Short-term credit lines totaled $135.5 million, with $115.2 million available; those lines require annual renewal.
- Operating cash flow was below capital spending, so investment was funded with operating cash, debt proceeds and other financing. Dividends paid were $36.4 million; dividends declared were $0.2047 per share.
Developments, outlook and risks
- Rate increases approved in Illinois and Ohio were designed to add $8.6 million to annual revenue. Pennsylvania and North Carolina infrastructure surcharges were designed to add $9.7 million annually. Virginia interim-rate billings of $821,000 were subject to refund pending a rate case; Illinois rates could also be subject to refund if an appeal were granted.
- The company completed three small utility acquisitions adding 448 customers for $190,000. It had agreements to acquire six municipal systems for a combined $150.7 million, expected to add about 16,325 customers, subject to regulatory approvals; closings were expected by year-end 2018.
- Management gave no specific earnings or revenue guidance in this filing. It cautioned that interim results may not indicate full-year performance. Identified uncertainties include regulation, abnormal weather, capital needs and funding, acquisitions, market conditions, and integration of acquired operations.
- The Tax Cuts and Jobs Act lowered the federal corporate tax rate to 21%. The company recorded a $2.5 million first-quarter reserve for amounts expected to be refunded to utility customers. Regulatory treatment of excess deferred taxes remained subject to state processes, including in Pennsylvania and Ohio.
- Accrued loss contingencies totaled $20.2 million, with approximately $8.2 million estimated as recoverable through insurance. Management did not expect pending legal matters to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether approved and pending rate adjustments, customer refunds and state regulatory decisions affect future revenue and earnings as expected.
- Whether the six proposed acquisitions receive approval, close on schedule, and are financed on acceptable terms.
- How the elevated capital program is funded and whether debt and interest costs continue to rise.
- Whether annual renewals of short-term credit lines are completed and liquidity remains adequate.
- The eventual resolution and recoverability of accrued contingencies, and the final customer-rate treatment of tax-law changes.