Business context and reporting period
This is Aqua America, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016, filed November 2, 2016. The filing identifies the registrant as Aqua America, Inc., not Essential Utilities, Inc.; verify that this is the intended filing. Aqua America operated regulated water and wastewater utilities in eight states, serving almost three million people, alongside smaller market-based businesses.
Financial performance and position
Unless stated otherwise, amounts are in millions of dollars.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $226.6 | $221.1 | $623.1 | $617.1 |
| Operating income | $97.8 | $95.1 | $253.6 | $246.5 |
| Net income | $73.2 | $67.4 | $184.5 | $173.4 |
| Diluted EPS | $0.41 | $0.38 | $1.04 | $0.98 |
| Operating margin | 43.2% | 43.0% | 40.7% | 39.9% |
| Net margin | 32.3% | 30.5% | 29.6% | 28.1% |
For the nine months, operating cash flow was $288.3 million; capital expenditures were $270.0 million, leaving approximately $18.2 million before acquisitions and other investing activity. Investing cash outflow was $269.1 million and financing cash outflow was $18.6 million. Cash at September 30 was $3.7 million.
At September 30, total assets were $6.04 billion and stockholders’ equity was $1.83 billion. Reported total long-term debt was $1.83 billion, including $83.8 million current and $1.75 billion long-term; loans payable were a further $48.0 million. Current assets of $141.4 million compared with current liabilities of $252.0 million (current ratio approximately 0.56). The company noted that negative working capital was customary and said available facilities, internally generated funds, and long-term debt proceeds should meet needs for at least twelve months. Its $250 million revolving facility had $72.0 million available; short-term credit lines totaling $135.5 million had $87.5 million available.
Material changes versus prior comparable period
- Q3 revenue rose 2.5% and net income rose 8.5%; nine-month revenue rose 1.0% and net income rose 6.4%.
- Regulated revenue gains from customer consumption, acquired customers, rate increases, and infrastructure surcharges were partly offset by weaker market-based activity. Nine-month market-based revenue fell $9.9 million.
- Nine-month operating and maintenance expense declined 1.8%, reflecting lower prior-year one-time costs and lower market-based expenses, partly offset by acquisition-related costs, higher postretirement and medical benefit expenses, and a $1.0 million impairment charge.
- Interest expense rose 5.9% for the first nine months, mainly because average borrowings increased; depreciation rose 4.4% as additional utility plant entered service.
- The effective tax rate fell to 8.4% from 9.9% for the nine-month period, primarily due to tax deductions for qualifying Pennsylvania infrastructure improvements.
- Capital expenditures increased to $270.0 million from $257.5 million. The company acquired Superior Water Company and nine other utility systems during 2016 and amended its revolving facility, extending its maturity to February 2021 and increasing the commitment from $200 million to $250 million.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said liquidity resources should support normal operations and financing requirements for at least twelve months, while noting short-term lines are subject to annual renewal and renewal terms are not assured.
- In October 2016, Hurricane Matthew interrupted water service for some North Carolina customers for about two days. Restoration costs and capital expenditures were still being determined; management did not expect a material fourth-quarter impact, and some costs or lost revenue might be insured.
- Management cited exposure to regulation, abnormal weather, capital requirements and funding, acquisitions and integration, and capital-market conditions. It reported no material change in previously disclosed risk factors or market-risk exposure.
- Accrued loss contingencies totaled $14.8 million; management did not expect their resolution to materially affect financial position, results, or cash flows. The company estimated $1.4 million of the accruals would be recoverable through insurance.
- The company sold a liquid-waste hauling business in Q2 for $3.4 million cash and recorded a $0.5 million gain. It classified additional Aqua Resources businesses as held for sale and recorded a $1.0 million impairment related to a planned disposition.
- Q3 joint-venture earnings included the company’s $1.8 million share of a connection fee. Nine-month pension benefit cost included a $3.0 million settlement charge; the company completed its 2016 pension-plan cash contributions of $8.1 million.
Important facts for investors to verify
- Confirm the issuer mismatch: the requested company is Essential Utilities, but the supplied filing is for Aqua America, Inc.
- Review the sources and sustainability of earnings growth, especially regulated rate and surcharge contributions, tax benefits, and the one-time joint-venture connection fee.
- Assess ongoing capital spending, borrowing needs, debt maturities, and renewal risk for short-term credit lines in light of low cash and negative working capital.
- Track held-for-sale businesses, related impairment or disposal proceeds, and the effect of continued market-based revenue declines.
- Monitor Hurricane Matthew costs and insurance recovery, as well as legal contingencies and other disclosed operating risks.