Aqua America, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. The filing is by Aqua America, Inc. (the company later known as Essential Utilities), not under the Essential Utilities name.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Operating revenue | $187.8 million | $192.6 million; down 2.5% |
| Operating income | $69.9 million | $72.3 million; operating margin 37.2% vs. 37.6% |
| Net income | $49.1 million | $51.7 million; down 5.2% |
| Diluted EPS | $0.28 | $0.29 |
| Operating cash flow | $81.2 million | $94.8 million |
| Capital expenditures | $94.6 million | $73.0 million |
| Cash and cash equivalents | $4.4 million | $3.8 million at December 31, 2016 |
| Total long-term debt, including current portion | $1.939 billion | $1.911 billion at December 31, 2016 |
Net margin was approximately 26.1%, compared with 26.9% a year earlier. Cash flow from operations plus financing activities did not fully cover investing outflows; the company funded capital spending, debt repayments and dividends with internally generated funds and borrowing. Current assets were $122.5 million versus current liabilities of $277.6 million. Management noted that negative working capital is historically typical for the company.
Changes and management commentary
- Revenue declined mainly because market-based business-unit dispositions reduced revenue by $5.2 million and customer water consumption fell. Organic growth added $0.8 million and rate increases added $0.4 million.
- Operations and maintenance expense fell 6.0%, largely reflecting the disposed businesses, partly offset by the prior-year $1.2 million gain on a utility-system sale. Depreciation rose 5.3% as additional utility plant entered service; interest expense rose 7.4% due to higher average borrowings.
- Rate approvals in Indiana and Ohio were designed to increase annual revenue by $7.4 million; infrastructure surcharges approved in Illinois and North Carolina were designed to add $2.0 million annually.
- Capital expenditures were directed to water mains, treatment plants, tanks, hydrants, service lines, wells and other system improvements. The company issued $50 million of Aqua Pennsylvania first-mortgage bonds in January, principally for refinancing and general corporate purposes.
Outlook, liquidity, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said internally generated funds, existing credit facilities and long-term debt issuance should provide adequate working capital and financing for at least the next 12 months.
- At quarter-end, $179.4 million remained available under the $250 million revolving facility due in 2021, and $107.8 million was available under $135.5 million of short-term lines. Short-term facilities renew annually; renewal and terms are not assured.
- Cash contributions to the pension plan were $7.7 million in Q1; the company intended to contribute an additional $7.7 million during the remainder of 2017.
- Accrued loss contingencies were $15.2 million, with an estimated $1.7 million probable insurance recovery. Management did not expect the resolution of these matters to materially adversely affect financial position, results or cash flows. The company also reserved $1.8 million for self-insured employee medical claims.
- Forward-looking risks include regulation, abnormal weather, capital requirements and funding, acquisitions and capital-market changes. The company reported no material change in risk factors or market-risk exposure from its 2016 annual report, and no pending legal proceeding it considered material.
- Adoption of share-based payment guidance on January 1, 2017 produced a $1.0 million windfall tax benefit recorded in retained earnings. The effective tax rate remained low at 5.6%, versus 5.5%, partly reflecting Pennsylvania tax treatment of qualifying infrastructure improvements.
Important facts for investors to verify
- Whether weaker water consumption persists and how it affects regulated revenue.
- Progress on the capital program, funding needs, debt levels and availability or renewal of credit facilities.
- Actual timing and realized revenue impact of rate increases and infrastructure surcharges.
- Effects of business-unit dispositions and assets still held for sale on comparable revenue and profitability.
- Developments in loss contingencies, pension funding and the company’s low effective tax rate.