Business context and reporting period
This is Aqua America, Inc.’s Form 10-K for the fiscal year ended December 31, 2017; the filing does not identify the registrant as Essential Utilities, Inc. Aqua America provided regulated water and wastewater services to approximately 3 million people across eight states. Its regulated segment generated 99.4% of consolidated revenue. Pennsylvania contributed 51.9% of revenue, and Aqua Pennsylvania accounted for approximately 74% of net income.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $809.5 | $819.9 | -1.3% |
| Operating income | $329.0 | $325.6 | +1.0% |
| Net income | $239.7 | $234.2 | +2.4% |
| Diluted EPS | $1.35 | $1.32 | +2.3% |
| Operating cash flow | $381.3 | $396.2 | -3.7% |
| Capital expenditures | $478.1 | $383.0 | +24.8% |
| Total debt, excluding issuance costs | $2,146.8 | $1,917.2 | +12.0% |
| Cash and cash equivalents | $4.2 | $3.8 | — |
- Operating margin was approximately 40.6%, up from 39.7%; net margin was 29.6%, up from 28.6%.
- Operating cash flow less capital expenditures was negative $96.8 million, compared with positive $13.2 million in 2016. Dividends paid were $140.7 million, or 58.7% of net income.
- Year-end assets were $6.33 billion, net property, plant and equipment $5.40 billion, and stockholders’ equity $1.96 billion. Debt was 52.3% of capitalization. Current assets of $131.2 million were below current liabilities of $284.5 million; management said available operating cash flow, credit facilities and long-term debt proceeds should meet working-capital needs for at least 12 months.
- Available borrowing included $170.2 million under the $250 million revolving facility and $131.9 million under short-term lines. The company reported covenant compliance at year-end.
Material changes versus comparable periods
- Revenue declined despite higher regulated-segment revenue ($804.9 million versus $800.1 million), principally because market-based revenue fell to $4.8 million from $20.1 million following business-unit sales, and water consumption was lower, mainly due to unfavorable weather.
- Operations and maintenance expense fell 5.8% to $287.2 million, reflecting disposed businesses, lower purchased-water costs after substituting company supply, and lower employee medical costs. Depreciation rose with system investment; net interest expense rose 9.6% to $88.3 million as average borrowings and interest rates increased.
- Net income and EPS rose, while return on equity decreased to 12.2% from 12.7%. Utility customers increased 1.1% to 982,849; four acquisitions added 1,003 customers.
- Capital expenditures increased to $478.1 million. The company issued long-term debt, including new subsidiary bond issues, and total debt increased by $229.6 million.
Outlook, commentary, risks and unusual items
- Management estimated 2018 capital expenditures of approximately $500 million, including $213.2 million of projects eligible for infrastructure surcharges. It estimated 2019–2020 construction spending of approximately $875 million, with about half expected to require external financing.
- Management planned five 2018 rate requests seeking approximately $80 million in aggregate annual revenue increases, subject to regulatory decisions and procedures for reflecting federal tax changes. Two rate requests seeking $13.9 million in annual revenue were pending at year-end. A Pennsylvania base-rate case was expected in 2018.
- Six municipal utility acquisitions were pending, with a stated combined cash purchase price of $150.7 million and an expected 16,325 additional customers; closings were anticipated by year-end 2018, subject to regulatory approvals and final rate-base determinations.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%. Revaluation reduced regulatory assets by $357.3 million and increased regulatory liabilities by $303.3 million, with no 2017 cash-flow effect; $3.1 million of additional tax expense was recognized where the revalued balances were not believed recoverable through rates. Future customer rate adjustments and state regulatory guidance remained uncertain. A separate tax accounting method for qualifying utility improvements reduced current tax expense by $84.8 million in 2017; the company disclosed $17.6 million of unrecognized tax benefits.
- Key risks include rate-case timing and sufficiency, regulatory lag, interest-rate and financing access, weather and conservation-driven water demand, drought restrictions in parts of northern and central Texas, water quality and lead-service-line obligations, environmental compliance, dam and infrastructure condition, cyber events, and acquisition integration. Planned environmental compliance capital was estimated at $63.2 million over five years. Illinois dam gate replacements could be significant, but the filing did not provide a clear cost estimate.
- Loss contingencies accrued were $19.0 million, of which approximately $7.1 million was estimated recoverable through insurance; management did not expect pending legal matters to have a material adverse effect. The 2015 joint-venture impairment was $33.0 million pretax ($21.4 million after tax), tied to weaker natural-gas-related water demand; the venture recorded modest equity earnings in 2017.
- The company had paid dividends for 73 consecutive years and raised its annualized dividend rate to $0.8188 per share beginning in September 2017. Future dividends remain subject to earnings, financial condition, debt restrictions, regulatory requirements and board discretion.
Most important facts for investors to verify
- Whether planned rate increases and infrastructure surcharges are approved promptly, especially given the federal tax-law changes and pending state guidance.
- Whether operating cash generation can support the elevated capital program, dividends, debt maturities and pending acquisitions without materially increasing leverage.
- Actual water-demand trends, weather impacts and conservation effects, and any resulting impact on revenue and earnings.
- Final purchase prices, fair-value rate bases, approvals and financing for the six pending acquisitions.
- Potential costs and recovery through rates for environmental work, lead service lines and dam repairs, including the unestimated Illinois dam work.
- Whether the company sustains its qualifying utility-asset tax position and how regulators ultimately pass tax-law benefits or refunds through to customers.
The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2017.