Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2004, for Aqua America, Inc. (formerly Philadelphia Suburban Corporation). The company is the largest U.S.-based publicly-traded water utility by number of people served, providing water and wastewater services to over 2.5 million people across 13 states. The financial statements are unaudited but reflect all normal recurring accruals.
Key Financial Metrics
Revenue and Profit (Nine Months Ended Sept 30, 2004):
- Operating Revenues: $326,597,000 (up 22.8% from $266,021,000 in 2003).
- Net Income: $57,533,000 (up 10.3% from $52,187,000 in 2003).
- Diluted Earnings Per Share (EPS): $0.61 (up from $0.59 in 2003).
- Operating Income: $127,914,000.
- Effective Tax Rate: 39.6%.
Cash Flow (Nine Months Ended Sept 30, 2004):
- Net Cash from Operating Activities: $112,491,000.
- Net Cash Used in Investing Activities: $(173,040,000), driven by $125,825,000 in capital expenditures and $53,586,000 in net acquisitions.
- Net Cash from Financing Activities: $68,432,000, including $98,288,000 in proceeds from long-term debt.
- Cash and Cash Equivalents: $18,640,000 at period end (up from $10,757,000 at year-end 2003).
Debt and Liquidity:
- Total Long-Term Debt (excluding current portion): $772,225,000.
- Current Liabilities: $285,788,000.
- Stockholders' Equity: $681,206,000.
- Available Credit: $117,642,000 available under $259,000,000 in short-term lines of credit.
Material Changes vs. Prior Period
The significant increase in revenue and expenses is primarily attributable to strategic acquisitions and rate increases:
- Acquisitions: The company completed the acquisition of Heater Utilities, Inc. (June 1, 2004) for $48 million cash plus debt assumption, and Florida Water Services Corporation assets (June 30, 2004) for $13.82 million. These, along with the prior year's AquaSource acquisition, added approximately $48.1 million in annualized revenue.
- Rate Increases: Regulatory approvals in Pennsylvania, Texas, Illinois, New Jersey, and other states contributed approximately $6.8 million in additional revenue for the nine-month period.
- Expense Growth: Operations and maintenance expenses rose 34.9% to $132.8 million, driven by acquired operations, higher pension costs, and increased water production expenses.
- Debt Issuance: In May 2004, the company issued $70 million in unsecured notes and $87 million in long-term debt to fund acquisitions and refinance existing obligations.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Dividends: The Board increased the quarterly cash dividend on common stock from $0.12 to $0.13 per share, effective December 1, 2004.
- Capital Requirements: Management believes internally generated funds, existing credit facilities, and debt/equity issuances will be adequate to meet financing needs.
- Rate Filings: A Texas rate application seeking $11.92 million in annual revenue increases is pending, with a final ruling anticipated by May 2005. Additional filings in North Carolina and Illinois are in process.
Risks and Contingencies:
- Regulatory Approval: The Florida Water Services acquisition remains subject to regulatory approval, which may take up to a year and could result in purchase price adjustments.
- Goodwill Recovery: The Heater acquisition generated $18.8 million in goodwill. While a mechanism exists to recover up to two-thirds via customer rates, there is no assurance of recovery.
- Environmental/Litigation: A settlement regarding MtBE contamination in a production well was reached in September 2004, covering replacement costs. No other material legal proceedings are pending.
- Accounting Changes: Adoption of FSP 106-2 regarding Medicare prescription drug benefits had no material impact on results.
Investor Verification Checklist
- Verify the final regulatory approval status and potential price adjustments for the Florida Water Services acquisition.
- Monitor the outcome of the Texas rate case pending a May 2005 ruling, as billed revenues are subject to refund.
- Assess the company's ability to recover goodwill from the Heater acquisition through future rate filings in North Carolina.
- Review the impact of the dividend increase on future cash flow and payout ratios.
- Confirm the integration progress and cost synergies of the Heater and Florida acquisitions.