Essential Utilities, Inc. quarterly report, Q1 FY2013

Business context and reporting period

The supplied filing is Aqua America, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2013, not a filing identified as Essential Utilities, Inc. Aqua America operated regulated water and wastewater utilities across multiple states and served almost three million people. Results are compared with Q1 2012; management cautions that interim results may not indicate full-year performance.

Financial performance and position

Continuing-operations revenue growth reflected $13.0 million of higher rates and $10.1 million from a larger customer base, partly offset by a $6.2 million reduction in infrastructure rehabilitation surcharges. Operations and maintenance expense increased 5.4%; taxes other than income taxes rose 42.6%, principally due to Ohio acquisition-related property taxes and a prior-year favorable tax adjustment.

Current assets were $213.0 million and current liabilities $302.0 million at March 31, a negative working-capital position of about $89.0 million. The balance sheet also reported $97.8 million of loans payable. The $150 million revolving credit facility had $70.9 million available, and short-term credit lines totaling $160.5 million had $62.7 million available. Total equity was $1.418 billion. The quarterly dividend declared was $0.175 per share.

Material changes versus the prior comparable period

• Net income increased 22.8%, while continuing-operations income rose 53.3%; the effective tax rate on continuing operations fell to 14.6% from 39.4%.
• The lower tax rate reflected Pennsylvania’s repair-change tax accounting and related regulatory flow-through treatment. Management said this reduced tax expense and increased net income and cash flow ahead of the next rate order.
• Discontinued-operations income declined because Q1 2012 included the after-tax $10.6 million gain on the Maine sale; Q1 2013 included a $4.2 million after-tax gain on Florida system sales.
• Operating cash flow increased, while capital expenditures decreased. Debt repayments and sinking-fund contributions were $78.0 million, against $35.0 million of long-term debt proceeds.

Outlook, commentary, risks and unusual items

• Aqua America expected to complete sales of its remaining Florida operations by the end of Q3 2013; the planned Florida and Georgia dispositions would end its operations in those states. In March 2013, it sold Florida systems and reported $52.3 million of net proceeds and a $6.5 million pretax gain.
• Management expected internally generated funds, credit facilities, and debt and equity issuance to provide adequate working capital and financing for at least 12 months. It cautioned that annual renewal of short-term credit lines was not assured; reduced access to capital could require lower capital spending or limit acquisitions.
• Management said the Pennsylvania tax change allowed suspension of Aqua Pennsylvania’s distribution system improvement charge in 2013 and could extend the time until its next rate case. No specific earnings or revenue guidance was provided.
• The company recorded a $656,000 equity loss in its natural-gas-related water-supply joint venture, attributed to a decline in water sales believed to be cyclical. It also had $6.0 million of Texas interim-rate billings subject to refund and a $2.1 million reserve.
• Fort Wayne, Indiana, proceedings concerning a previously transferred utility system continued; the Indiana Supreme Court granted the company a jury hearing on valuation, but the ultimate outcome could require a refund or yield additional proceeds. The city was also considering acquisition of other system assets.
• Other disclosed matters included $12.8 million accrued for loss contingencies, partly offset by an estimated $1.8 million probable insurance recovery, and a proposed EPA consent-decree modification with a $254,250 civil penalty. Management said routine contingencies were not expected to have a material adverse effect, while noting outcomes remain uncertain.
• Forward-looking risks include regulation, abnormal weather, capital requirements and funding, capital-market conditions, and integration of acquisitions. The filing reported no material change in previously disclosed risk factors and no significant change in market-risk exposure.

Important facts for investors to verify

• Confirm issuer identity: the provided text names Aqua America, Inc., whereas the request metadata names Essential Utilities, Inc.
• Assess how much of the earnings increase came from the lower effective tax rate and whether its benefit persists after future rate proceedings.
• Track completion and proceeds from the planned remaining Florida and Georgia dispositions, and distinguish recurring operating performance from disposal gains.
• Review credit-line renewals, available borrowing capacity, upcoming debt maturities, and funding needs for capital investment and dividends.
• Follow the Fort Wayne valuation and acquisition proceedings, the Texas rate-case refund exposure, and the status and costs of the EPA consent decree.