Business context and reporting period
The filing is Aqua America, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. This does not match the requested company name, Essential Utilities, Inc.; verify the issuer before relying on this summary. Aqua America operated regulated water and wastewater utilities serving about 3 million people across 12 states. Unless noted, amounts below are in USD millions, converted from the filing’s thousands.
Financial performance and position
- Nine months: continuing-operations revenue was $539.3, up 4.7% year over year; operating income was $221.4 versus $197.5; income from continuing operations was $112.8 versus $90.7. Net income attributable to common shareholders was $109.1 versus $95.1. Diluted EPS was $0.79 versus $0.69; continuing-operations diluted EPS was $0.81 versus $0.66.
- Third quarter: revenue was $197.3, up 2.0%; operating income was $87.8 versus $83.3, and continuing-operations income was $45.5 versus $40.3. Net income was $41.1 versus $43.8, and diluted EPS was $0.30 versus $0.32.
- Margins: operating margin was approximately 41.0% for the nine months versus 38.4% in 2010, and 44.5% for Q3 versus 43.1% in Q3 2010, based on continuing-operations revenue.
- Cash flow and investment: operating cash flow was $247.1 versus $188.6; capital expenditures were $226.1. Investing cash outflow was $184.1 and financing cash outflow was $60.9. Cash was $8.0 at September 30, up from $5.9 at year-end.
- Debt and liquidity: disclosed long-term debt carrying value was $1,538.5, including $95.4 current, compared with $1,560.4 at year-end. Loans payable were $103.0. The $95 million revolving facility had $30.4 available, and short-term credit lines totaling $164.5 had $61.5 available. Management said working capital is historically negative but expected available funding and internally generated cash to meet needs for at least 12 months.
- Dividends: declared dividends were $0.63 per share for the nine months, versus $0.59; $0.32 was declared in Q3, versus $0.30.
Material changes versus comparable periods
- Nine-month revenue growth primarily reflected rate increases ($27.7) and acquired customers ($2.6), partly offset by lower consumption associated with unfavorable weather and conservation.
- Nine-month continuing-operations income included an $11.2 state tax benefit related to 100% bonus depreciation. Excluding it, management’s non-GAAP diluted EPS was $0.73 versus $0.66 in 2010. Q3 adjusted diluted EPS was $0.30 versus $0.29.
- Q3 total net income declined despite stronger continuing operations, mainly because discontinued operations recorded $7.4 of additional tax expense related to the planned sales of Maine and New York operations. Discontinued operations reported a $4.4 loss for Q3 versus $3.4 income a year earlier.
- Interest expense rose 7.4% for the nine months, principally due to borrowings for capital projects, partly offset by lower rates on long-term debt. Capital expenditures were slightly lower than in 2010 ($226.1 versus $231.5).
Outlook, risks and unusual items
- The planned Ohio acquisition (about $88 million cash plus assumed liabilities, including about $16 million debt) and sales of New York (about $42 million cash plus assumed liabilities, including about $23 million debt) and Maine (about $35.8 million cash plus assumed liabilities, including about $17.5 million debt) were expected to close in Q1 2012, subject to regulatory approvals and transaction conditions. The Ohio purchase and New York sale are interdependent. Sale proceeds were intended partly to reduce short-term debt.
- The company received a $33.6 million IRS refund on October 5, 2011, after the quarter end, and said it would use proceeds partly to pay down short-term debt.
- Interim Texas rates were subject to refund. The company had recognized $6.2 million of related revenue and, following its review of the proceeding, considered a reserve unnecessary; the final rate-case order was expected in Q4 2011.
- Management cited risks including regulatory outcomes, weather, access to capital, credit-facility renewals, acquisitions and integration. Short-term credit lines were renewable annually, with no assurance of renewal or acceptable terms.
- Loss contingencies accrued were $10.9 million; management did not expect their resolution to materially adversely affect financial position, results or cash flows. A Fort Wayne, Indiana, valuation dispute remained pending and could result in a refund or additional proceeds. Management reported no material change in risk factors or market-risk exposure.
- The filing reported no impairment of goodwill in the annual test. It also recorded a $1.3 million estimated disposition loss and $7.4 million of tax expense associated with the planned Maine and New York sales.
Important facts for investors to verify
- Confirm the filing is for the intended issuer: the document identifies Aqua America, Inc., not Essential Utilities, Inc.
- Check regulatory approvals, closing conditions and final consideration for the Ohio, New York and Maine transactions, including debt assumed and use of proceeds.
- Track renewal terms and availability of revolving and short-term credit facilities, alongside the company’s negative working-capital position.
- Assess whether the Texas interim-rate revenue is ultimately retained or refunded, and distinguish recurring earnings from the $11.2 million tax benefit and discontinued-operation tax charges.
- Monitor the Fort Wayne valuation appeal and other contingencies, as well as water consumption, weather and rate-case outcomes.