Essential Utilities (Aqua America, Inc.) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; filed November 5, 2012. The filing cover names Aqua America, Inc., not Essential Utilities. Amounts below are in millions of dollars, except per-share data, unless stated otherwise.
Business context and reporting period
Aqua America operated regulated water and wastewater utilities serving approximately 3 million people across multiple states, alongside smaller non-regulated businesses. The company completed its Ohio utility acquisition and sales of its Maine and New York operations in 2012. In September, it began marketing its Florida water and wastewater operations and a Georgia wastewater facility for sale; those businesses were classified as discontinued operations held for sale.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $214.6 | $191.1 | $570.3 | $520.5 |
| Operating income | $100.5 | $86.7 | $249.4 | $217.1 |
| Income from continuing operations | $50.3 | $44.9 | $119.0 | $110.2 |
| Net income attributable to common shareholders | $50.7 | $41.1 | $130.0 | $109.1 |
| Diluted EPS | $0.36 | $0.30 | $0.93 | $0.79 |
| Cash dividends declared per share | $0.34 | $0.32 | $0.67 | $0.63 |
- Revenue rose 12.3% in Q3 and 9.6% for the nine-month period. Management attributed the nine-month increase mainly to higher rates ($26.5 million), acquired customer bases ($18.6 million), and non-regulated services ($4.2 million).
- Operating margin was approximately 46.9% in Q3 versus 45.4% a year earlier, and 43.7% for nine months versus 41.7%. Nine-month continuing-operations income rose 8.0%; management noted the comparison was affected by a $11.2 million state tax benefit recorded in 2011. Excluding that benefit, the company reported non-GAAP diluted continuing-operations EPS of $0.85 versus $0.71 for nine months, and $0.36 versus $0.30 for Q3.
- Continuing-operations operating cash flow was $276.2 million; total operating cash flow, including discontinued operations, was $266.2 million, compared with $247.1 million a year earlier. Investing cash outflow was $268.6 million, including $262.8 million of capital expenditures and $116.1 million for acquisitions, partly offset by proceeds from discontinued operations and releases of restricted construction funds. Ending cash was $6.1 million.
- At September 30, long-term debt including current maturities was $1.561 billion; loans payable were $97.7 million. Long-term debt’s estimated fair value was $1.702 billion. Equity was $1.315 billion. Current assets of $231.0 million were below current liabilities of $315.1 million, a working-capital deficit of about $84.1 million.
- The company reported $150 million available under its revolving credit facility, with $48.8 million undrawn, and $160.5 million in short-term lines of credit, with $62.9 million available. Management said internally generated funds, credit facilities, and potential debt and equity issuance should meet working-capital and financing needs for at least 12 months.
Material changes versus the prior comparable period
- Q3 net income increased 23.2%; nine-month net income increased 19.2%. Discontinued operations contributed to both comparisons, including the after-tax $10.8 million gain on the January sale of Maine in the nine-month period.
- Operations and maintenance expense increased 7.2% in Q3 and 5.0% for nine months, including higher costs from acquired utilities and growth ventures. Depreciation and taxes other than income taxes also increased, reflecting plant placed in service and Ohio acquisition-related taxes.
- Capital expenditures increased to $262.8 million from $222.4 million in the prior-year nine-month period. Long-term debt increased from $1.517 billion at December 31, 2011, to $1.561 billion at September 30, 2012.
- In May, the company acquired American Water’s Ohio operations for $101.1 million in cash plus assumed liabilities, including debt. It issued $50 million of 3.57% senior notes due 2027 in June and entered into a $150 million revolving credit facility due 2017.
Outlook, commentary, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management was evaluating a Pennsylvania tax-accounting “Repair Election” for 2012 or 2013; if adopted, it expected a substantial reduction in income tax expense and improved net income and cash flow before the next rate order.
- Rate increases granted during the first nine months were designed to add $17.9 million to annual operating revenues. Pennsylvania’s June rate decision included a $16.7 million annualized water-rate increase and reset its distribution-system improvement charge to zero.
- Texas interim-rate billings of $3.4 million were subject to refund; the company had reserved $1.2 million. Management also disclosed $12.3 million accrued for loss contingencies and estimated $1.9 million of that amount was recoverable through insurance.
- Fort Wayne, Indiana, valuation litigation remained pending before the Indiana Supreme Court; the company could be required to refund part of an earlier $16.9 million payment or could receive additional proceeds. A separate sewer-system consent-decree matter included a proposed $364,000 civil penalty, which the subsidiary contested and intended to seek indemnification for.
- The company stated that short-term credit lines require annual renewal and that renewal or acceptable replacement financing is not assured. It cautioned that regulation, abnormal weather, capital needs, financing markets, acquisitions, and integration risks could cause actual results to differ from forward-looking statements. No material change in previously disclosed risk factors was reported.
Important facts for investors to verify
- Confirm the issuer identity: this 2012 filing is for Aqua America, Inc.; the request metadata uses the later name Essential Utilities.
- Review the classification and expected sale timing and proceeds for the Florida and Georgia operations held for sale, and the effect of ongoing portfolio disposals on future revenue and earnings.
- Assess the quality of earnings growth, separating regulated rate and customer growth from discontinued-operation gains and the prior-year tax benefit used in management’s non-GAAP comparisons.
- Check liquidity and refinancing needs, including renewal of annual short-term credit lines, available borrowing capacity, and planned capital spending.
- Monitor the Texas rate-case refund reserve, Fort Wayne litigation, and the contested proposed sewer-system penalty for potential changes in exposure.