Business context and reporting period
This is Aqua America, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2014—not a filing under the name Essential Utilities. Aqua America provides regulated water and wastewater services across eight states, alongside smaller non-regulated businesses. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $210.5 | $202.3 | $588.5 | $574.8 |
| Operating income | $95.1 | $86.1 | $241.8 | $232.8 |
| Income from continuing operations | $67.7 | $62.7 | $164.9 | $156.6 |
| Net income attributable to common shareholders | $68.0 | $63.6 | $166.4 | $163.8 |
| Diluted continuing-operations EPS | $0.38 | $0.35 | $0.93 | $0.89 |
| Diluted net EPS | $0.38 | $0.36 | $0.94 | $0.93 |
- Operating margin was approximately 45.1% in Q3 versus 42.6% a year earlier, and 41.1% for the first nine months versus 40.5%.
- Nine-month operating cash flow was $274.4, compared with $279.6 in 2013. Capital expenditures were $220.7, up from $215.4. Cash at September 30 was $4.8.
- Total long-term debt, including current maturities, was $1,647.0, up from $1,554.9 at year-end 2013. Loans payable were $7.0. Total equity was $1,615.4.
- Current assets of $207.5 were below current liabilities of $235.4; management noted the company historically operates with negative working capital. At quarter-end, $69.4 was available on its $200.0 revolving facility and $153.5 on short-term lines of credit.
- Dividends declared were $0.165 per share in Q3 and $0.469 per share year to date; $83.0 of dividends were paid during the first nine months.
Changes versus the prior comparable period
- Q3 revenue rose 4.1%; continuing-operations income increased 7.9%, while net income rose 6.9%. Revenue growth reflected rate increases, higher consumption, acquisitions, surcharges, and stronger non-regulated repair and construction activity.
- For the first nine months, revenue increased 2.4% and continuing-operations income rose 5.3%; net income increased 1.6%. Net income growth was slower partly because 2013 included a gain on the sale of Florida operations in discontinued operations.
- Year-to-date operating cash flow declined modestly. Debt increased as the company funded capital spending, acquisitions, and other requirements; it issued $221.1 of long-term debt and repaid $128.4.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management said internally generated funds, credit facilities, and long-term debt proceeds were expected to provide adequate working capital and financing for at least the next 12 months. Short-term credit lines require annual renewal, and renewal and terms are not assured.
- Rate approvals in six states were designed to add $10.2 of annual revenue; approved infrastructure surcharges in Illinois and New Jersey were designed to add another $1.6 annually.
- The company reported weaker water sales to natural-gas drilling customers and a $2.7 year-to-date equity loss in its joint venture, attributing the decline to sluggish well-drilling activity. Severe winter weather increased year-to-date operating costs.
- A Fort Wayne, Indiana, agreement sets an aggregate $67.0 purchase price for Northern and Southern utility assets, of which $16.9 had already been paid. Regulatory approval was received October 22, 2014, and closing was expected in Q4 2014. The transaction was treated as discontinued operations.
- Accrued loss contingencies totaled $12.5; the company estimated $2.4 of the accrual was recoverable through insurance. Management did not expect resolution of the matters to materially adversely affect financial position, results, or cash flows, though outcomes remain uncertain.
- The effective tax rate on continuing operations was 11.6% in Q3 versus 6.9% in 2013, principally because of additional tax deductions recognized in the prior-year quarter. The company reported $30.2 of gross unrecognized tax benefits and said it did not anticipate a significant change in that total over the next 12 months.
- Forward-looking results are exposed to regulation, abnormal weather, capital needs and financing conditions, acquisitions and integration, and capital-market changes. Management reported no material change in previously disclosed risk factors or market-risk exposure.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is Aqua America, Inc.’s 2014 Q3 10-Q; the metadata name Essential Utilities does not match the filing.
- Review the composition and sustainability of revenue growth, particularly rate increases, consumption, acquisitions, non-regulated services, and infrastructure surcharges.
- Assess debt growth, revolving-facility availability, short-term line renewals, and the funding needs associated with capital expenditures and dividends.
- Track the Fort Wayne transaction’s final closing, accounting treatment, and any resulting gain or operational changes.
- Evaluate the continuing tax benefit from the Pennsylvania repair-cost accounting method, along with resolution of unrecognized tax positions and legal contingencies.