Essential Utilities, Inc. (then Aqua America, Inc.) — 2013 Q3 Form 10-Q
The filing is for the quarter and nine months ended September 30, 2013. The registrant named in the filing is Aqua America, Inc., a regulated water and wastewater utility serving nearly three million people. Unless otherwise stated, financial amounts below are in millions of dollars; the filing reports them in thousands.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $204.3 | $214.6 | $580.0 | $570.3 |
| Operating income | $87.4 | $100.5 | $235.6 | $249.4 |
| Operating margin | 42.7% | 46.9% | 40.6% | 43.7% |
| Income from continuing operations | $63.5 | $50.3 | $158.3 | $119.0 |
| Net income attributable to common shareholders | $63.6 | $50.7 | $163.8 | $130.0 |
| Diluted earnings per share | $0.36 | $0.29 | $0.93 | $0.74 |
- Revenue fell 4.8% in Q3 but rose 1.7% for the first nine months. Management attributed the quarterly decline mainly to lower water use associated with unfavorable weather and conservation.
- Operating income declined 13.1% in Q3 and 5.5% year to date; operating margins also narrowed. Higher depreciation and other operating costs contributed to the pressure.
- Income from continuing operations increased despite lower operating income, primarily because the effective tax rate fell to 7.6% in Q3 and 10.9% year to date, from 39.3% and 39.4%, respectively. Pennsylvania’s tax accounting “Repair Change” and related regulatory flow-through treatment were key drivers.
- Discontinued operations contributed $0.1 million in Q3 and $5.5 million year to date, versus $0.4 million and $11.1 million in the comparable 2012 periods. The year-to-date comparison includes prior-year gains on the Maine sale and 2013 gains on Florida divestitures.
- Operating cash flow was $279.6 million for the first nine months, versus $266.2 million. Property, plant and equipment additions were $216.1 million, versus $262.8 million. Cash at period-end was $6.4 million.
- At September 30, total assets were $5.07 billion and equity was $1.50 billion. Long-term debt including its current portion was $1.52 billion; loans payable were $109.8 million. These debt amounts total approximately $1.63 billion, down from approximately $1.67 billion at year-end 2012.
- Current assets of $211.6 million were below current liabilities of $318.3 million, a working-capital deficit of $106.7 million. Management said internally generated funds and existing and anticipated financing would cover working-capital and financing needs for at least 12 months.
Material changes and management commentary
- Nine-month revenue growth reflected $25.1 million from higher rates and $15.2 million from customer growth, offset by lower consumption and a $10.8 million decline in infrastructure surcharges. Q3 rate increases and customer growth were insufficient to offset lower consumption.
- Operations and maintenance expense rose 5.8% year to date, partly from acquired systems and growth ventures. Depreciation rose 7.5%, reflecting plant placed in service and the Ohio acquisition; taxes other than income taxes rose 16.2%.
- Capital spending was funded with operating cash, debt, asset-sale proceeds and equity issuance. The company issued $188.3 million of long-term debt and repaid $258.3 million of debt and other loan obligations during the first nine months.
- The company completed sales of several Florida systems, receiving total net proceeds of $52.3 million and recording a $5.5 million gain. It expected the remaining Sarasota sale, for $36.8 million subject to adjustments, to close by year-end 2013 or Q1 2014, subject to conditions.
- Rate increases and infrastructure surcharges approved in several states were designed to add $12.4 million in annual revenue. A North Carolina rate application sought an additional $8.6 million annually, or 19.2%; management anticipated a final order by April 2014.
- The board approved an approximately 9% increase in the quarterly cash dividend, effective with the September 1, 2013 payment, and a five-for-four stock split was distributed September 1. In October, the board renewed authorization to repurchase up to 685,348 shares.
Outlook, risks and contingencies
- No earnings or revenue guidance is provided in the supplied filing text. Management cautioned that interim results may not indicate full-year results.
- Credit facilities and short-term lines were subject to renewal; management expected renewal but gave no assurance. It warned that unavailable or unacceptable financing could require lower capital spending and constrain acquisitions. At September 30, $120.0 million was available under the $150 million revolving facility and $50.7 million under short-term lines.
- A proposed Fort Wayne transaction covering Northern and Southern utility assets would provide $50.1 million in additional payment, on top of the $16.9 million received in 2008, and resolve related valuation litigation. It remained conditional on approvals and definitive agreements; closing was not expected before Q3 2014. The outcome could require a refund or yield additional proceeds.
- Accrued loss contingencies totaled $12.3 million, with an estimated $1.4 million probable insurance recovery. Management did not expect the resolution of the matters to materially affect financial position, results or cash flows, but noted outcomes cannot be predicted with certainty.
- A South Haven sewer system consent-decree modification imposed a $254,250 civil penalty and one year of specified compliance and maintenance requirements. The company also cited regulation, weather, capital availability, acquisitions and capital-market conditions as risks.
Important facts for investors to verify
- How much of the reported earnings increase is attributable to the lower tax rate and Repair Change, and how sustainable those benefits are under future rate orders.
- Whether the Sarasota divestiture and Fort Wayne transaction closed on the anticipated terms and timing, including required regulatory and other approvals.
- Whether lower water consumption, acquisition-related costs and higher depreciation continue to pressure revenue and operating margins.
- Renewal terms and availability of short-term credit facilities, planned capital spending, and the trajectory of total debt and liquidity.
- Developments in the North Carolina rate case, Fort Wayne litigation and other legal or regulatory contingencies.