Business context and reporting period
Aqua America, Inc. (the registrant named in this filing) reported unaudited results for the three months ended March 31, 2012, compared with the first quarter of 2011. The company provides regulated water and wastewater services and related services. The request metadata names Essential Utilities, Inc.; investors should verify the issuer identity and filing before relying on this summary.
The company completed the sale of its Maine operations on January 1, 2012. Its Ohio acquisition and sale of its New York operations both closed on May 1, 2012, after quarter-end. Results for Maine and New York are presented as discontinued operations.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenue | $170.2 | $163.6 |
| Operating income | $63.1 | $60.9 |
| Income from continuing operations | $27.7 | $30.6 |
| Net income attributable to common shareholders | $37.9 | $30.4 |
| Diluted EPS, continuing operations | $0.20 | $0.22 |
| Diluted net EPS | $0.27 | $0.22 |
| Operating cash flow | $77.9 | $74.1 |
| Capital expenditures | $80.7 | $59.6 |
| Cash and cash equivalents at period end | $5.2 | $7.3 |
- Operating margin was approximately 37.1%, versus 37.2% a year earlier.
- Continuing-operations operating expenses rose to $107.2 million from $102.7 million. Net interest expense was $19.2 million, compared with $19.4 million.
- At March 31, total long-term debt was approximately $1.476 billion, including $39.0 million current; loans payable were $112.4 million. Total capitalization was $2.711 billion, including $1.273 billion of equity.
- Current assets were $243.5 million and current liabilities $324.1 million. Management noted the company historically operates with negative working capital and stated that available funding sources should meet working-capital and financing needs for at least 12 months.
- Cash dividends declared were $0.165 per share, up from $0.155. Cash dividends paid were $22.9 million.
Changes versus the prior comparable period
- Revenue increased 4.1%, chiefly from $7.1 million of higher rates and $0.9 million from a larger customer base; lower customer water consumption partly offset the increases.
- Operating income rose 3.5%, while continuing-operations income declined 9.8%. The effective tax rate increased to 39.4% from 29.8%, in part because Q1 2011 included a $4.3 million state tax benefit associated with bonus depreciation. Excluding that prior-year benefit, the company reported non-GAAP diluted continuing-operations EPS of $0.20 in 2012 versus $0.19 in 2011.
- Net income rose 24.9%, primarily because the Maine sale generated an after-tax gain of $10.6 million. Thus, reported net income growth includes a material disposal gain while continuing-operations income declined.
- Operations and maintenance expense increased 7.1%, including the absence of a $2.5 million gain on a Texas utility-system sale recorded in Q1 2011, higher insurance and benefit costs, and acquired-operation costs. Lower water production costs partly offset these items.
- Capital expenditures increased by approximately 35% year over year. Net cash from operations exceeded reported capex by about $2.8 million; investing cash flow also included $35.2 million of net inflows from discontinued operations.
Outlook, risks, contingencies and unusual items
- No full-year earnings or revenue guidance is provided in the filing. Rate increases granted in Illinois, Florida and Ohio during Q1 were designed to add $8.1 million in annual revenue; a New Jersey increase granted April 11 was designed to add $1.75 million annually.
- The company entered a five-year, $150 million unsecured revolving credit facility in March 2012, replacing a $95 million facility. At quarter-end, $91.8 million was available under the new facility. Other short-term credit lines totaled $160.5 million, with $48.1 million available; renewal is annual and not assured. The new agreement includes a maximum leverage ratio of 65% and minimum interest coverage ratio of 1.8 to 1.
- The Ohio acquisition was funded with short-term debt. Sale proceeds from Maine and New York were intended to reduce short-term debt and support general corporate purposes.
- Texas interim-rate revenue of $8.4 million recognized to date was subject to refund pending a rate-case decision expected in Q2 2012. Management considered a reserve unnecessary as of quarter-end.
- For the Fort Wayne, Indiana, system valuation dispute, a petition seeking review by the Indiana Supreme Court was pending. The outcome could require a partial refund or result in additional proceeds; no gain had been recognized on the disputed amount.
- The company had accrued $11.4 million for loss contingencies and estimated $1.4 million of related insurance recoveries. Management did not expect the matters, in aggregate, to materially adversely affect financial position, results or cash flows, but outcomes remain uncertain.
- Forward-looking risks cited include regulation, abnormal weather, capital requirements and funding, acquisitions and integration, and capital-market conditions. Management reported no significant change in market-risk exposure and no material change in risk factors from its 2011 Form 10-K.
Most important facts for investors to verify
- Confirm the filing issuer: the supplied filing identifies Aqua America, Inc., while the request metadata identifies Essential Utilities, Inc.
- Review the Maine and New York dispositions and the May 1, 2012 Ohio acquisition, including post-closing adjustments, assumed debt and their impact on the company’s continuing earnings and leverage.
- Assess the quality and sustainability of Q1 earnings: continuing-operations income fell, while total net income benefited from the Maine sale gain and the comparison was affected by a prior-year tax benefit.
- Check liquidity, availability and renewal terms of credit facilities, and monitor leverage and interest-coverage covenant compliance as capital spending and acquisition funding continue.
- Track the Texas rate-case refund exposure, Fort Wayne valuation litigation and other accrued contingencies for subsequent developments.