Business context and reporting period
The supplied filing is Aqua America, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2013, filed August 7, 2013. The company operated regulated water and wastewater utilities across multiple states, serving almost three million people, alongside smaller non-regulated businesses. The filing identifies the registrant as Aqua America, Inc.; this differs from the “Essential Utilities, Inc.” name in the request metadata.
Financial results and condition
Amounts are in millions of dollars, except per-share data. Six-month comparisons are with the six months ended June 30, 2012.
| Metric | Six months 2013 | Six months 2012 |
|---|---|---|
| Revenue | $375.7 | $355.7 |
| Operating income | $148.2 | $148.9 |
| Continuing-operations income | $94.8 | $68.7 |
| Net income attributable to common shareholders | $100.2 | $79.3 |
| Diluted earnings per share | $0.71 | $0.57 |
| Cash from operating activities | $159.4 | $145.3 |
| Property, plant and equipment additions | $134.9 | $169.3 |
Revenue grew 5.6%, while operating income was nearly flat; operating margin was approximately 39.5%, down from 41.9%. Net income rose 26.2%, with the increase substantially aided by a lower effective tax rate: 13.0% versus 39.4%. Cash from operations less capital additions was approximately $24.5 million, compared with negative $24.0 million in 2012; this is a simple calculation, not a company-defined cash-flow measure.
For the second quarter, revenue was $195.7 million versus $191.7 million, operating income was $80.7 million versus $87.0 million, and net income was $53.6 million versus $41.4 million. Continuing-operations income per diluted share was $0.38 versus $0.30.
At June 30, total assets were $4.96 billion and equity was $1.43 billion. Long-term debt carrying value was $1.54 billion, including $46.5 million current; loans payable were $112.1 million. Cash was $4.3 million. Current assets of $221.6 million were below current liabilities of $306.7 million. The company reported $125.0 million available under its $150 million revolving facility and $48.4 million available under $160.5 million in short-term credit lines.
Material changes versus prior period
- Six-month revenue increased by $20.0 million, mainly from higher rates and acquired customers; unfavorable weather reduced consumption, and lower infrastructure surcharges partly offset growth.
- Operating costs increased: operations and maintenance rose 8.4%, depreciation 7.9%, and taxes other than income taxes 24.5%. The Ohio acquisition and growth-related costs contributed to increases.
- Income from continuing operations increased 38.0%, primarily reflecting the Pennsylvania “Repair Change” tax treatment, which reduced tax expense. This makes reported earnings growth less indicative of underlying operating-income growth.
- Discontinued-operations income fell to $5.4 million from $10.7 million for the six-month period, reflecting prior-period disposition gains and 2013 Florida system sales. The company received $52.3 million net proceeds from Florida sales and recorded a $5.5 million pretax gain.
- Capital additions declined to $134.9 million from $169.3 million. Long-term debt carrying value fell from $1.59 billion to $1.54 billion, while loans payable rose from $80.4 million to $112.1 million.
Outlook, commentary, risks and unusual items
- Management said internally generated funds, existing credit facilities, and prospective debt and equity issuance should meet working-capital and financing needs for at least 12 months. It cautioned that short-term credit lines require annual renewal and renewal is not assured.
- Management cited approximately $9.3 million in annualized base-rate increases granted in Texas, Ohio, and Virginia during the first half, plus $1.0 million in annualized infrastructure surcharges in Illinois and Ohio. A further New Jersey surcharge was approved in July. No earnings guidance was provided.
- The Repair Change is expected to reduce income tax expense and increase net income and cash flow before Aqua Pennsylvania’s next rate order; it also allowed suspension of its distribution-system improvement charge in 2013.
- The board approved an approximately 9% quarterly dividend increase, effective with the September 2013 payment, and a five-for-four stock split effective September 1, 2013.
- The planned Sarasota, Florida sale for $36.8 million was subject to contingencies and a legal challenge received in July; management still expected completion in late 2013 or early 2014. The Fort Wayne letter of intent contemplated $50.1 million additional payment, on top of $16.9 million previously paid, subject to approvals, definitive agreements, and regulatory requirements; closing was not expected before 2014.
- Fort Wayne valuation litigation could result in a refund or additional proceeds. The company accrued $12.9 million for loss contingencies and estimated $1.9 million of related insurance recoveries. A modified EPA consent decree for a subsidiary included a $254,250 civil penalty and compliance requirements.
- Management cited regulatory changes, abnormal weather, capital needs and funding, acquisition integration, and capital-market conditions as risks. It reported no material changes to the risk factors in its 2012 Form 10-K and no significant change in market-risk exposure.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing names Aqua America, Inc., whereas the request metadata names Essential Utilities, Inc.
- Assess how much of the earnings increase came from the Pennsylvania tax-method change versus recurring operating performance.
- Track the Sarasota divestiture and Fort Wayne transaction, including approvals, timing, final proceeds, and any effect on continuing operations.
- Review refinancing and renewal needs for short-term credit lines, given low cash balances and current liabilities exceeding current assets.
- Compare rate increases and acquired-customer contributions with weather-related consumption, operating-cost growth, and capital spending.
The company cautioned that interim results may not indicate full-year results.