Aqua America, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; filed November 6, 2018. The filing identifies the registrant as Aqua America, Inc., not Essential Utilities, Inc. Financial statements are unaudited. Unless noted otherwise, amounts below are in millions of dollars.
Business context and results
Aqua America primarily provides regulated water and wastewater services in eight states, serving nearly three million people. It also operates smaller market-based businesses. The filing describes continued growth through utility acquisitions and infrastructure investment.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $226.1 | $215.0 | $632.3 | $606.2 |
| Operating income | $104.3 | $98.7 | $260.4 | $255.7 |
| Net income | $78.2 | $76.2 | $195.6 | $186.3 |
| Diluted earnings per share | $0.44 | $0.43 | $1.10 | $1.05 |
| Operating margin | 46.1% | 45.9% | 41.2% | 42.2% |
| Net margin | 34.6% | 35.5% | 30.9% | 30.7% |
For the first nine months, operating cash flow was $290.7, capital expenditures were $343.2, and cash used for utility acquisitions was $100.0. Cash after capital expenditures was negative $52.5 before acquisitions and financing. Cash and cash equivalents were $4.3 at September 30.
Debt, liquidity, and capital
Total long-term debt, including current maturities, was $2,395.2 at September 30, compared with $2,143.1 at year-end 2017; cash was $4.3. The company had $288.2 of current liabilities and $149.3 of current assets. Management noted its customary negative working-capital position and said operating cash generation, credit facilities, and long-term debt proceeds should fund operations and requirements for at least 12 months.
The unsecured revolving credit facility was expanded from $250.0 million to $500.0 million and extended to June 2023. At quarter-end, $185.5 million was available under that facility and $113.8 million was available under short-term credit lines. The declared dividend was $0.219 per share for Q3, versus $0.2047 a year earlier.
Changes versus prior periods and management commentary
- Q3 revenue rose 5.2% and net income rose 2.6% year over year. Nine-month revenue rose 4.3% and net income rose 5.0%.
- Management attributed revenue growth mainly to rate increases and infrastructure surcharges, higher water consumption, and customer growth from acquisitions and organic growth. Higher treated wastewater volume in Indiana also aided nine-month revenue.
- Operating costs increased, including labor, water production, depreciation, and interest expense. Interest expense rose 13.2% in Q3 and 11.4% for the nine-month period, mainly due to higher average borrowings. Nine-month operating margin declined, while net income benefited from a lower effective tax rate.
- The effective tax rate was 0.7% for the first nine months of 2018, versus 6.0% in 2017, reflecting the federal corporate tax-rate reduction and deductions for qualifying Pennsylvania infrastructure improvements. The company recorded $4.7 million in the first nine months for amounts expected to be refunded to utility customers due to the tax-law change.
Outlook, transactions, and risks
- Peoples acquisition: On October 22, 2018, after quarter-end, Aqua America agreed to acquire natural-gas distributor Peoples for $4.275 billion, subject to adjustments and an estimated $1.3 billion of debt at closing. Peoples serves about 740,000 gas customers. The company expected closing in mid-2019, subject to federal and state regulatory approvals, and anticipated financing with a mix of equity and debt. A $120 million termination fee may apply if the transaction is terminated. The filing gives no earnings guidance.
- Other acquisitions: The company completed several water and wastewater utility acquisitions and had additional municipal-system purchases pending, subject to regulatory approvals and rate-base determinations.
- Rates and regulation: Approved rate increases and infrastructure surcharges were partly offset by customer bill reductions related to the federal tax change. A Pennsylvania rate case seeking $71.8 million in annual revenue increases was under review; management expected resolution in 2019. Pennsylvania rates were also subject to regulatory review of tax-related effects.
- Funding and execution risks: The company highlighted its significant capital needs and dependence on access to debt and equity markets, particularly to fund Peoples. Higher borrowing costs, unavailable or unrenewed credit, regulatory delays or denials, acquisition integration issues, and paying more for acquired assets than regulators include in rate base could affect results and growth. Management warned that insufficient capital could require reductions in capital spending or dividends.
- Contingencies: $17.8 million was accrued for loss contingencies, with an estimated $6.0 million expected to be recovered through insurance. Management did not expect pending legal matters to materially adversely affect financial position, results, or cash flows. No material legal proceeding was identified.
- Other notable items: Interest-rate swaps entered into after quarter-end fixed rates for an anticipated $850 million of future debt issuance for Peoples; they do not qualify for hedge accounting, so fair-value changes will affect future earnings. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Confirm the requested issuer: this filing is for Aqua America, Inc.; the request metadata names Essential Utilities, Inc.
- Track regulatory approvals, final purchase-price adjustments, financing terms, and closing progress for the Peoples acquisition, including the potential termination fee.
- Review the Pennsylvania rate case and the treatment of tax-related refunds or credits, including the exposure of rates to refund.
- Monitor debt levels, interest costs, available credit, capital spending, and cash generation against the company’s dividend and acquisition commitments.
- Check subsequent filings for acquisition integration costs, changes in goodwill or rate-base valuation, and gains or losses from the non-hedge-accounted swaps.