Business context and reporting period
Aqua America, Inc. (the registrant named in this filing; not “Essential Utilities, Inc.”) filed this unaudited Form 10-Q for the quarter ended June 30, 2018. It provides regulated water and wastewater services to almost three million people across eight states, alongside smaller market-based businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $211.9 | $203.4 | $406.2 | $391.2 |
| Operating income | $86.8 | $85.9 | $156.1 | $157.0 |
| Net income | $66.6 | $61.0 | $117.4 | $110.0 |
| Diluted EPS | $0.37 | $0.34 | $0.66 | $0.62 |
| Operating margin | 41.0% | 42.2% | 38.4% | 40.1% |
| Net margin | 31.4% | 30.0% | 28.9% | 28.1% |
For the first half, operating cash flow was $169.7 versus $157.3; capital expenditures were $216.6 versus $208.5, leaving cash flow after capital expenditures of negative $46.9 versus negative $51.2. Cash and cash equivalents were $52.9 at June 30, up from $4.2 at year-end 2017.
Total debt was $2,320.9 at June 30, versus $2,143.1 at December 31, 2017; stockholders’ equity was $2,004.4. Current assets of $189.4 were below current liabilities of $254.0, consistent with management’s description of a historically negative working-capital position. The amended $500 million revolving credit facility had $323.2 available, and $135.5 of short-term lines of credit was available.
Material changes versus prior comparable periods
- Q2 revenue rose 4.2% and net income rose 9.2%; first-half revenue rose 3.8% and net income rose 6.7%. First-half operating income declined 0.6% despite revenue growth.
- Rate increases and infrastructure surcharges were major revenue drivers. These were partly offset by reserves for customer refunds following the federal corporate tax-rate reduction.
- Operating and maintenance expense rose 5.6% in Q2 and 7.2% in the first half; depreciation increased 9.6% and 7.9%, respectively, mainly reflecting utility plant placed in service. Interest expense increased 10.9% in Q2 and 10.5% in the first half as average borrowings rose.
- Net income benefited from lower income-tax expense: the effective tax rate was negative 0.6% in Q2 and negative 2.2% in the first half, versus 8.4% and 7.2%, respectively, in 2017.
- Declared dividends were $0.2047 per share for Q2 and $0.4094 for the first half, up from $0.1913 and $0.3826.
Outlook, risks and unusual items
- No earnings or revenue guidance is provided. Management said internally generated funds, existing credit facilities and long-term debt proceeds should meet working-capital and financing needs for at least the next 12 months; short-term credit lines require annual renewal.
- The company completed three small utility acquisitions in the first half. Subsequent to quarter-end, it closed acquisitions in Manteno, Illinois, and Limerick, Pennsylvania, for $25.0 million and $75.1 million, respectively. Other announced municipal utility acquisitions, including a proposed Cheltenham Township purchase, remained subject to regulatory approval and closing adjustments.
- In June, the revolving facility was increased from $250 million to $500 million and extended to June 2023. Aqua Pennsylvania issued $100 million of first mortgage bonds. In July, it redeemed $49.7 million of tax-exempt bonds.
- Tax reform and utility ratemaking create refund and rate uncertainty. Approved annual revenue changes included $8.6 million of base-rate increases and $19.3 million of infrastructure surcharges, partly offset by estimated annualized rate reductions or bill credits of $8.0 million. Pennsylvania rates were temporary and subject to refund pending regulatory review; management said no reserve was needed for revenue recognized to date.
- Accrued loss contingencies were $18.6 million, with approximately $6.5 million estimated recoverable through insurance. Management did not expect pending legal matters to materially affect financial position, results or cash flows. The filing reports no material change in previously disclosed risk factors.
- Interim results may not indicate full-year performance. Forward-looking outcomes remain exposed to regulation, weather, capital needs and funding, acquisitions, capital-market conditions, and integration of acquired operations.
Investor verification points
- Confirm the issuer identity: this filing is for Aqua America, Inc., despite the request metadata naming Essential Utilities, Inc.
- Assess whether rate increases and customer growth can offset rising operating costs, depreciation and interest expense.
- Review the sustainability of earnings growth given the unusually low or negative effective tax rate and possible customer refunds or rate adjustments.
- Track debt-funded capital investment and acquisitions, available credit, and renewal terms for short-term facilities.
- Check regulatory approval, closing terms and financing for pending acquisitions, and developments in Pennsylvania tax-reform ratemaking.