Essential Utilities (Aqua America, Inc.) — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2014; filed August 6, 2014. The filing registrant was Aqua America, Inc., the company now known as Essential Utilities. Financial amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless otherwise noted.
Business context
Aqua America operated regulated water and wastewater utilities across eight states, serving almost three million people, alongside smaller non-regulated water and wastewater businesses. The company was pursuing a strategy of focusing on its core service areas through acquisitions and divestitures.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $195.3 million | $193.9 million | $378.0 million | $372.5 million |
| Operating income | $79.9 million | $79.8 million | $146.7 million | $146.7 million |
| Income from continuing operations | $54.8 million | $53.0 million | $97.2 million | $93.9 million |
| Net income attributable to common shareholders | $55.6 million | $53.6 million | $98.4 million | $100.2 million |
| Diluted earnings per share | $0.31 | $0.30 | $0.55 | $0.57 |
| Operating margin | 40.9% | 41.1% | 38.8% | 39.4% |
Operating margins are calculated as operating income divided by operating revenue. For the first half, continuing-operations income and diluted EPS increased, while total net income and EPS declined because the prior-year period included larger gains from discontinued operations.
- Cash flow: First-half operating cash flow was $154.1 million, versus $159.4 million. Capital expenditures were $132.0 million, compared with $134.7 million. Cash declined $1.2 million to $3.9 million.
- Debt and equity: Long-term debt, including its current portion, was $1.600 billion at June 30, up from $1.555 billion at year-end; loans payable were another $40.4 million. Total equity was $1.586 billion.
- Liquidity: Current assets of $201.8 million were below current liabilities of $278.0 million, a working-capital deficit of approximately $76.2 million. Management said this negative working-capital position was customary and expected available internally generated funds and financing to cover needs for at least 12 months. The company reported $48.4 million available under its $150 million revolving facility and $120.1 million available under short-term credit lines.
- Dividends: Cash dividends declared were $0.152 per share in Q2 and $0.304 for the first half; respective 2013 figures were $0.292 and $0.432.
Changes versus prior periods
- Q2 revenue increased 0.7%; first-half revenue increased 1.5%. Rate increases, infrastructure surcharges, non-regulated repair and construction activity, and customer growth from acquisitions contributed. Lower customer water consumption and the prior-year reversal of a $2.061 million Texas rate-refund reserve partly offset gains.
- First-half operating income was essentially flat as higher operating and depreciation costs offset revenue growth and lower taxes. Severe winter weather added operating costs; depreciation rose with utility plant placed in service.
- First-half income from continuing operations rose 3.6%, but net income fell 1.7% as discontinued-operations income declined from $6.3 million to $1.2 million, principally reflecting a prior-year Florida sale gain.
- Operating cash flow decreased by $5.3 million year over year. Debt issuance and repayments were both substantial: the company issued $116.1 million and repaid $70.9 million of long-term debt during the first half.
Outlook, commentary, and notable matters
- The filing gives no specific earnings or revenue guidance. Management expected working capital and financing sources to support operations and financing needs for at least the next 12 months.
- Rate increases approved in the first half were designed to add $4.5 million of annualized revenue; approved infrastructure rehabilitation surcharges were designed to add $1.6 million annually.
- Aqua America agreed to sell Fort Wayne, Indiana, Northern and Southern utility assets for an aggregate $67.011 million, including $16.911 million already paid for the Northern assets. Regulatory approvals remained outstanding; closing was expected in Q4 2014. The agreement would settle the Northern asset valuation dispute and provide for the Southern asset acquisition.
- Subsequent to quarter-end, the company acquired non-regulated sewer-services business Tri-State Grouting for $3.010 million, of which $0.810 million was contingent on performance targets. It also agreed to acquire a Glenview, Illinois-area utility system serving about 7,200 customers, with closing anticipated in mid-2015.
- Management cited sluggish natural-gas drilling activity as reducing water sales associated with its raw-water joint venture. First-half joint-venture equity loss was $1.937 million.
- Accrued loss contingencies totaled $12.207 million; management did not expect their resolution to materially adversely affect financial position, results, or cash flows. The Fort Wayne matter and other routine claims remain subject to uncertainty.
- Management identified regulation, abnormal weather, capital requirements and funding, acquisitions, capital-market changes, and integration of acquired operations among forward-looking risks. It reported no material changes to previously disclosed risk factors and no significant change in market-risk exposure.
Important facts for investors to verify
- Whether required regulatory approvals were obtained and whether the Fort Wayne transaction closed on the expected terms and timing.
- How the company funds its capital program and manages debt maturities, current liabilities, and dependence on credit facilities and renewals.
- Whether rate increases and infrastructure surcharges translate into sustained revenue and cash-flow growth, particularly amid weather and consumption variability.
- The impact of discontinued operations, prior-year divestiture gains, and the remaining disposal plans on comparisons of reported earnings.
- Exposure to litigation and contingencies, and the effect of tax deductions and the Pennsylvania repair-cost tax treatment on reported earnings and cash flow.