Business context and reporting period
This filing is Aqua America, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed February 26, 2019. The company primarily operated regulated water and wastewater utilities across eight states, serving about 3 million people and 1,005,590 utility customers. Pennsylvania generated 52.9% of operating revenue. The filing does not report results for Essential Utilities under that name.
Financial performance and position
Unless otherwise noted, amounts below are in millions of dollars; per-share figures are in dollars.
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $838.1 | $809.5 | +3.5% |
| Operating income | $323.2 | $333.9 | -3.2% |
| Net income | $192.0 | $239.7 | -19.9% |
| Diluted EPS | $1.08 | $1.35 | -20.0% |
| Operating cash flow | $368.5 | $381.3 | -3.4% |
| Capital expenditures | $495.7 | $478.1 | +3.7% |
| Total debt, excluding issuance costs | $2,579.1 | $2,146.8 | +20.1% |
- Operating margin was 38.6%, versus 41.2% in 2017; net margin was 22.9%, versus 29.6%.
- Cash and cash equivalents were $3.6 million at year-end. Current assets were $147.2 million and current liabilities $399.0 million; management noted the company historically operates with negative working capital and expected available funding to cover normal needs for at least 12 months.
- Net cash used in investing activities was $639.8 million, primarily for capital spending and acquisitions. Operating cash flow did not cover capital expenditures alone.
- Long-term debt was 56.1% of capitalization, compared with 52.3% in 2017. The weighted average cost of long-term debt was 4.23%. The company reported compliance with debt covenants.
- The 2018 effective income tax rate was negative 7.7%, compared with 6.6% in 2017. Dividends paid were $0.8474 per share; dividends represented 78.5% of net income.
Material changes versus the prior comparable period
- Revenue growth reflected rate increases, customer additions and higher wastewater flows, partly offset by a $5.1 million reduction in regulated revenue to pass Tax Cuts and Jobs Act savings to customers. Customer count rose 2.3%.
- Operating and maintenance expense increased 9.3% to $308.5 million. This included $14.2 million of Peoples acquisition costs, as well as higher labor and benefits expense.
- Interest expense increased to $98.9 million from $88.3 million, reflecting higher average borrowings and interest rates.
- Results included a $59.8 million pretax mark-to-market loss on interest-rate swaps entered into for planned acquisition financing. The swaps did not qualify for hedge accounting. Excluding this and acquisition expenses, management said net income was comparable with 2017 after the swap’s tax effect; the filing does not provide a single adjusted net income figure in the supplied text.
- Fourth-quarter revenue increased to $205.7 million from $203.3 million, but the quarter reported a net loss of $3.7 million versus net income of $53.5 million in fourth-quarter 2017, substantially reflecting the swap loss and acquisition-related and other expenses.
Outlook, risks and contingencies
- The company expected 2019 capital expenditures of approximately $550 million, excluding Peoples-related spending, and estimated approximately $883 million of capital spending for 2020–2021. Management expected to fund the program through operating cash flow, credit facilities and long-term debt.
- Aqua Pennsylvania filed a base-rate case in August 2018. In February 2019, it filed a settlement proposing approximately $47 million of annualized rates, expected to take effect in May 2019, subject to regulatory approval.
- The planned Peoples natural gas utility acquisition was announced at a $4.275 billion cash price, subject to adjustments; the company expected to assume approximately $1.3 billion of Peoples debt. The transaction, serving about 740,000 gas customers, was subject to regulatory approvals and expected to close in mid-2019. A $5.1 billion bridge commitment backstopped financing; the company expected a mix of common equity, equity-linked securities and debt. Certain breaches leading to termination could trigger a $120 million fee.
- Principal risks include regulatory delay or denial of rate recovery, acquisition financing and integration, rising borrowing costs, water quality and emerging contaminants, aging infrastructure and environmental compliance, drought and weather-related demand changes, cyber incidents, and labor matters. Environmental compliance projects were estimated at $74.2 million, about 3.4% of planned five-year capital spending.
- Accrued loss contingencies were $17.7 million; management did not expect their resolution to materially affect financial position, results or cash flows. The company disclosed no material pending legal proceedings.
- Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2018.
Important facts for investors to verify
- Confirm the Peoples transaction’s final regulatory approvals, purchase-price adjustments, financing mix, assumed debt and resulting leverage or dilution.
- Check approval and timing of the Pennsylvania rate settlement and the recovery of infrastructure investment in other jurisdictions.
- Reconcile reported earnings with the $59.8 million swap loss and $14.2 million of acquisition expenses; assess the effects of non-hedge accounting volatility.
- Track whether operating cash flow, rate recovery and external financing are sufficient to fund the capital program, debt maturities and dividends.
- Review the latest disclosures on water-quality requirements, environmental commitments, dam improvements and regulatory recoverability.