Business context and reporting period
The supplied filing is Aqua America, Inc.’s Form 10-K for the fiscal year ended December 31, 2011—not a filing under the name Essential Utilities, Inc., and not a quarterly report. The filing incorporates key financial statements and management discussion from the 2011 annual report, which are not included in the supplied text.
Aqua America operated regulated water and wastewater utilities serving approximately 3 million people across 12 states, alongside smaller non-regulated activities. Pennsylvania generated 55.8% of 2011 operating revenue. The company reported that its largest subsidiary, Aqua Pennsylvania, contributed approximately 56% of revenue.
Financial and operating metrics
- Revenue: Consolidated operating revenue was $711.956 million in 2011. The regulated segment reported $699.444 million after excluding $42.726 million of discontinued operations; Other contributed $12.512 million.
- Profit, cash flow and margins: The supplied text does not provide clear values for net income, operating income, margins or cash flows. These statements are incorporated by reference but are not reproduced here.
- Debt: Long-term debt totaled $1.517 billion at year-end, including $38.212 million of variable-rate debt. The reported weighted-average interest rate was 5.17%; $40.7 million of fixed-rate debt related to discontinued operations.
- Liquidity: The supplied text does not provide clear cash, current-liability, credit-facility availability or liquidity values. Management identifies access to capital as important to funding infrastructure investment, acquisitions and dividends.
- Dividends: The company paid $0.63 per share in 2011 and raised its annualized rate to $0.66 beginning with the December 2011 payment. It reported 67 consecutive years of common dividends.
- Capital and regulation: Infrastructure-rehabilitation surcharges generated $16.103 million in 2011. The company said environmental compliance costs were budgeted; identified work included Texas well improvements estimated below $500,000 and a Pennsylvania dam project estimated at $15 million, planned for 2016–2017.
Material changes and developments
- The company completed its acquisition of American Water Works’ Texas operations in June 2011 and sold its Missouri utility operations in May 2011.
- The Maine sale closed in January 2012. A transaction to acquire Ohio operations and sell New York operations was pending at filing; Ohio regulators approved the acquisition in February 2012, and closing was expected in the first half of 2012.
- Utility customer growth from acquisitions and other growth ventures was 1.0% in 2011, the same reported rate as in 2010. The filing attributes longer-term revenue growth principally to rate increases and acquisitions.
- In 2011, a subsidiary entered a joint venture to develop a private pipeline serving natural-gas drilling operations in Pennsylvania; its initial segment was expected to become operational in the first half of 2012.
- Aqua America reported $3.613 billion of net property, plant and equipment at year-end, after excluding discontinued operations from $3.726 billion.
The supplied filing text does not give comparable 2010 financial results or a complete MD&A, so year-over-year changes in revenue, profit, cash flow, debt and margins cannot be assessed reliably from this text alone.
Outlook, risks, contingencies and unusual items
- Management’s strategy emphasized rate recovery, infrastructure investment, acquisitions and growth ventures. No specific earnings or revenue guidance is provided in the supplied text.
- Key risks include delays or insufficient approvals for rate increases; capital-market access, borrowing costs and debt-covenant compliance; weather, drought and conservation-related changes in water use; environmental requirements; acquisition integration; and infrastructure, dam, water-supply and wastewater-system failures.
- The company warned that customer consumption is weather-sensitive and that a 0.50% decrease in residential water consumption would reduce annual residential water revenue by approximately $2 million, partly offset by lower production costs.
- A Fort Wayne, Indiana, eminent-domain valuation dispute remained pending. The company had received an initial $16.911 million payment, deferred the difference from the assets’ book value, and could be required to refund part of the payment or receive additional proceeds. A petition for review was pending before the Indiana Supreme Court.
- A proposed $364,000 civil penalty related to alleged sewer-overflow violations at South Haven Sewer Works was contested; the subsidiary intended to seek indemnification from the seller.
- A separate Florida wastewater-related lawsuit involving approximately 35 additional plaintiffs remained unresolved. The company stated that any estimated potential loss was not expected to be material.
- A labor agreement covering 287 Aqua Pennsylvania employees had expired; the company implemented its final offer after bargaining reached impasse, and the union filed an unfair-labor-practice charge.
- Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting during the final quarter.
Important facts for investors to verify
- Review the incorporated 2011 annual report for full audited statements, comparable 2010 figures, margins, cash flows, liquidity, capital spending and management’s complete discussion.
- Confirm the status and financial consequences of the Ohio/New York transaction, the Maine disposition and discontinued operations.
- Assess rate-case outcomes and the timing of recovery for infrastructure spending, environmental compliance and financing costs.
- Track the Fort Wayne valuation litigation, the South Haven penalty and indemnification claim, and the remaining Florida litigation.
- Verify debt maturities, credit-facility capacity, covenant headroom and dividend sustainability against the complete financial statements and debt agreements.