Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, for Aqua America, Inc. (Note: The input metadata listed "Essential Utilities, Inc.", but the filing text explicitly identifies the registrant as Aqua America, Inc.). Aqua America is the largest U.S.-based publicly-traded water and wastewater utility, serving over 2.5 million people across 13 states. The company operates primarily through regulated subsidiaries, with its largest being Aqua Pennsylvania, Inc.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2005 |
|---|---|---|
| Operating Revenues | $396,648,000 | $373,871,000 |
| Operating Income | $150,234,000 | $150,455,000 |
| Net Income | $66,281,000 | $69,006,000 |
| Diluted EPS | $0.50 | $0.53 |
| Operating Cash Flow | $101,701,000 | $127,544,000 |
| Capital Expenditures | $183,608,000 | $156,649,000 |
| Total Debt (Long-term + Current) | $947,712,000 | $903,083,000 |
| Cash and Equivalents | $14,085,000 | $11,872,000 |
Liquidity: As of September 30, 2006, the company had short-term lines of credit of $228,000,000, with $106,850,000 available. Management believes internally generated funds and existing credit facilities are adequate to meet financing requirements.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 6.1% ($22.8 million) year-over-year. This was driven by rate increases ($18.1 million), acquisitions ($5.1 million), and additional sewer revenues ($1.5 million), partially offset by lower water consumption due to unfavorable weather.
- Expense Increases: Operations and maintenance expenses rose 9.9% ($15.0 million). Key drivers included acquisition-related costs ($3.2 million), higher water production costs ($3.1 million), increased insurance claims ($2.7 million), and the adoption of SFAS 123R stock-based compensation ($2.1 million).
- Net Income Decline: Net income decreased 3.9% ($2.7 million) to $66.3 million. Diluted earnings per share fell 5.7% to $0.50, reflecting both the decrease in net income and a 1.3% increase in the average number of shares outstanding due to public offerings.
- Debt and Equity: Long-term debt increased by approximately $44.6 million. The company issued $48.1 million in unsecured notes in 2006 to repay short-term borrowings. Equity increased due to the issuance of 2.25 million shares in public offerings in June and August 2006, raising net proceeds of $48.1 million.
Guidance, Outlook, and Risks
- Dividends: The quarterly cash dividend was increased from $0.1069 to $0.115 per share, effective September 1, 2006.
- Acquisitions: The company entered into an agreement to acquire New York Water Service Corporation (approx. 44,500 customers) for $28 million cash plus assumption of $23 million debt, pending regulatory approval. It also completed smaller acquisitions of septic services for $7.6 million.
- Forward Equity Sale: In August 2006, the company entered a forward equity sale agreement for 3,525,000 shares. Proceeds will be received upon settlement (no later than August 1, 2008) and are intended to fund capital expenditures and acquisitions. This agreement introduces risks regarding potential dilution or cash settlement obligations if the stock price falls below the forward price.
- Regulatory Matters: A pending Texas rate case filed in 2004 seeks an $11.9 million increase. The company has billed these rates and deferred expenses, but a final ruling is expected in late 2006 or early 2007, with potential refunds if the request is denied. Additionally, a local sanitary district in Illinois is considering acquiring a wastewater division (2,200 customers) via eminent domain.
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) in 2006, which reduced net income by $1.9 million for the nine-month period. Adoption of SFAS 158 (Pension Accounting) is required by December 31, 2006, which may increase total liabilities and assets by approximately $40 million if a regulatory asset is established.
Investor Verification Checklist
- Rate Case Outcomes: Monitor the final ruling on the Texas rate case and the potential impact of the Illinois eminent domain proceeding on asset base and revenue.
- Forward Equity Settlement: Track the settlement terms of the forward equity sale agreement and its impact on share count and cash proceeds.
- Capital Expenditure Funding: Verify the company's ability to fund the $183.6 million in capital expenditures and future growth initiatives through debt and equity markets.
- Weather Sensitivity: Assess the impact of weather patterns on water consumption and revenue stability in key operating states (PA, IL, OH, NJ).
- Insurance Costs: Review trends in insurance claims and premiums, which contributed significantly to the increase in operating expenses.