Business context and reporting period
The supplied filing is Aqua America, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2016, filed August 3, 2016. It is not filed under the name Essential Utilities, Inc.; investors should verify the intended issuer. Aqua America operated regulated water and wastewater utilities in eight states and market-based water-related businesses.
Financial performance and position
Amounts below are in millions of dollars, except per-share data. Comparisons are with 2015.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $203.9 | $205.8 | $396.5 | $396.1 |
| Operating income | $83.5 | $80.2 | $155.8 | $151.4 |
| Operating margin | 41.0% | 39.0% | 39.3% | 38.2% |
| Net income | $59.6 | $57.4 | $111.4 | $105.9 |
| Diluted EPS | $0.33 | $0.32 | $0.63 | $0.60 |
- Net margin was approximately 29.3% in Q2 and 28.1% for the first half, compared with 27.9% and 26.7%, respectively, in 2015.
- First-half operating cash flow was $177.7 million, versus $157.0 million. Capital expenditures were $168.6 million, leaving approximately $9.1 million of operating cash flow after capital expenditures, before acquisitions, dividends, and financing.
- At June 30, cash was $4.9 million and current assets were $132.4 million versus current liabilities of $179.2 million. Management said the company historically has negative working capital and expected internal funds, credit facilities, and long-term debt issuance to cover needs for at least 12 months.
- Total long-term debt, including current maturities, was $1.836 billion, up from $1.779 billion at year-end 2015. The company had $26.2 million of loans payable. Its amended $250 million revolving facility had $93.7 million available; short-term lines totaling $135.5 million had $109.3 million available and were subject to annual renewal.
- Declared dividends were $0.178 per share for Q2 and $0.356 for the first half, up from $0.165 and $0.330, respectively, in 2015.
Changes versus the prior comparable period
- Q2 revenue fell 0.9%, while first-half revenue increased 0.1%. Utility acquisitions, rate increases, and infrastructure surcharges supported regulated revenue; lower water consumption and reduced market-based activity offset those gains.
- Net income rose 3.9% in Q2 and 5.1% for the first half. Lower operations and maintenance expense contributed to higher operating income; interest expense rose 6.4% in both comparisons as average borrowings increased.
- First-half capital expenditures increased to $168.6 million from $150.3 million. Net cash from financing was a use of $8.1 million, compared with a source of $20.6 million in 2015; dividends paid rose to $63.1 million from $58.4 million.
Outlook, commentary, and notable items
- No quantified earnings or revenue guidance is provided. Management identified regulation, abnormal weather, capital needs and funding, acquisitions and integration, and capital-market changes among risks that could cause actual results to differ from forward-looking statements.
- During the first half, rate increases and infrastructure surcharges approved in several states were designed to add annual revenue of $3.2 million and $1.4 million, respectively.
- The company acquired Superior Water Company for $16.8 million, including 439,943 shares and $3.9 million cash, and completed nine other small utility-system acquisitions. It sold a liquid-waste business unit for $3.4 million cash, recognizing a $0.5 million gain, and decided to market additional Aqua Resources businesses for sale.
- First-half pension expense included a $3.0 million settlement charge and a $0.3 million special termination benefit charge. The effective tax rate was 7.1% for the first half, versus 8.2% in 2015; management attributed the reduction largely to tax deductions for qualifying Pennsylvania infrastructure improvements.
- Accrued loss contingencies totaled $12.3 million; management did not expect their resolution to materially adversely affect financial position, results, or cash flows. The filing reports no material change in risk factors or market-risk exposure.
Important facts for investors to verify
- Confirm whether the intended filing is Aqua America’s 2016 Q2 report, given the mismatch with the requested company name Essential Utilities.
- Assess whether regulated rate increases, surcharges, and customer additions can offset lower consumption and ongoing weakness in market-based activities.
- Review planned infrastructure spending, debt issuance and interest costs, and the availability and renewal terms of short-term credit lines.
- Check the status and financial effects of the business units classified as held for sale, and the resolution of legal, regulatory, pension, and tax contingencies.
- Consider the filing’s warning that interim results may not indicate full-year results; it provides no specific full-year guidance.