Business context and reporting period
The filing is Aqua America, Inc.’s audited Form 10-K for the fiscal year ended December 31, 2016, with fourth-quarter results also presented. The request metadata names Essential Utilities, but the filing itself identifies the registrant as Aqua America, Inc. The company provides regulated water and wastewater services in eight states and also has smaller market-based businesses. Pennsylvania represented 51.8% of 2016 revenue; the company served 972,265 utility customers, up 1.5% from 2015.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Operating revenue | $819.9 | $814.2 | +0.7% |
| Operating income | $325.6 | $321.1 | +1.4% |
| Income from continuing operations | $234.2 | $201.8 | +16.1% |
| Diluted earnings per share | $1.32 | $1.14 | +$0.18 |
| Operating cash flow | $395.8 | $370.8 | +$25.0 |
| Capital expenditures | $383.0 | $364.7 | +$18.3 |
| Total debt, excluding issuance costs | $1,917.2 | $1,795.9 | +$121.2 |
Operating margin was approximately 39.7%; income from continuing operations was 28.6% of revenue. Net cash from operations exceeded capital expenditures by $12.8 million, before acquisitions, dividends and debt financing. Year-end cash was $3.8 million. Current assets were $128.7 million versus current liabilities of $301.5 million; management said working capital is historically negative and expected available operating funds and credit facilities to meet needs for at least 12 months.
Shareholders’ equity was $1,850.1 million. Long-term debt was 50.8% of capitalization. Debt due within one year rose to $150.7 million from $35.6 million in 2015. The $250 million revolving facility had $25 million drawn and $207.4 million available at year-end; additional short-term lines had $129.0 million available. The company reported compliance with debt covenants.
The annual dividend was $0.7386 per share, up from $0.686; dividends paid were $130.9 million, or 55.9% of net income. The board raised the quarterly dividend 7.5% beginning in September 2016. The company reported 72 consecutive years of dividend payments.
Material changes and fourth-quarter results
- Revenue growth reflected customer additions and rate increases; regulated-segment revenue rose 2.6%. Market-based revenue fell to $20.1 million from $34.9 million, primarily after Aqua Resources business dispositions.
- Income from continuing operations increased substantially in 2016, partly because 2015 included a $33.0 million pretax noncash impairment at the natural-gas-related joint venture ($21.4 million after tax). In 2016, the company recorded $1.0 million of equity earnings from the venture, versus a $35.2 million equity loss in 2015.
- Fourth-quarter revenue was $196.8 million, compared with $197.1 million. Net income was $49.6 million versus $28.4 million, largely reflecting the absence of the prior-year joint venture impairment. Fourth-quarter operating income declined to $72.0 million from $74.6 million.
- Operating cash flow increased to $395.8 million. Capital spending rose to $383.0 million; acquisitions used $9.4 million. The company issued $503.6 million of long-term debt and repaid $373.1 million during the year.
Outlook, risks and unusual items
- Management planned 2017 capital expenditures of more than $450 million, excluding developer-funded new mains. It estimated approximately $826 million of construction spending for 2018–2019 and expected less than half to require external financing. These are plans, not earnings guidance.
- Management expected qualifying utility-improvement tax deductions and the scheduled amortization of prior tax benefits to continue reducing current income tax expense, subject to qualifying conditions and regulatory lag. These benefits materially affected results: the tax accounting change reduced current tax expense by $78.5 million in 2016. The company disclosed $28.1 million of unrecognized tax benefits and identified the treatment of qualifying improvement costs as uncertain and subject to tax examination.
- Two rate requests seeking approximately $8.0 million of annual revenue increases were under review at year-end; management intended to file three more in 2017 seeking approximately $13.4 million. Aqua Pennsylvania expected an infrastructure surcharge filing in 2017 and a rate case filing in 2018, with resolution expected in 2019. Rate outcomes and timing are controlled by regulators.
- Weather, conservation and drought restrictions may affect water usage and revenue. At year-end, parts of Pennsylvania, New Jersey and Texas were under drought warnings; Pennsylvania and New Jersey were under drought watches, and parts of Texas had conservation restrictions.
- Other key risks include regulatory delay or inadequate rate recovery, environmental compliance and infrastructure costs, water contamination or service interruptions, aging facilities and dam safety, cyber incidents, financing costs, acquisition integration, labor relations, and possible municipal condemnation. The company estimated approximately $47.1 million of environmental-compliance capital spending over five years and identified a Pennsylvania dam project estimated at $13.7 million, with completion expected in 2021.
- The 49%-owned raw-water pipeline joint venture remains exposed to natural gas industry activity, gas prices and water demand. Its 2015 impairment reflected reduced sales forecasts and adverse market conditions. The company also sold two Aqua Resources businesses in 2016, recognizing a net loss of $0.5 million; another business sale closed in January 2017.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for Aqua America, Inc., not a company named Essential Utilities.
- Assess how much earnings and cash generation depend on the Pennsylvania tax accounting treatment, its remaining duration, and the outcome of the uncertain tax position.
- Track rate-case and surcharge approvals, regulatory lag, and whether planned capital investment is recovered in customer rates.
- Review near-term debt maturities, refinancing plans, credit-facility availability and the impact of higher borrowing costs.
- Monitor the 2017 capital program, cash flow after capital spending and dividends, and the natural-gas-related joint venture’s operating outlook.