Business context and reporting period
This is Aqua America, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The filing describes a regulated water and wastewater utility serving an estimated 3 million people across 14 states, with a smaller nonregulated services business. The registrant named in the filing is Aqua America, Inc., not Essential Utilities, Inc.; verify the entity and filing match the requested company.
Financial results and position
Amounts below are in millions of dollars except per-share data. Six-month income and cash-flow comparisons are with the six months ended June 30, 2009; balance-sheet comparisons are with December 31, 2009.
| Metric | Six months ended June 30, 2010 | Prior period / comparison |
|---|---|---|
| Revenue | $339.0 | $321.8; up 5.3% |
| Operating income | $116.8 | $105.6; up 10.5% |
| Operating margin | 34.4% | 32.8% |
| Net income attributable to common shareholders | $51.4 | $44.2; up 16.1% |
| Diluted EPS | $0.38 | $0.33 |
| Operating cash flow | $99.8 | $106.5 |
| Capital expenditures | $140.8 | $117.1 |
| Cash and cash equivalents | $13.1 at June 30 | $21.9 at December 31, 2009 |
| Long-term debt, including current portion, plus loans payable | $1,548.3 at June 30 | $1,473.6 at December 31, 2009 |
| Dividends declared per share | $0.290 | $0.270 |
Second-quarter revenue was $178.4 million, up 6.6%; operating income was $66.1 million, up 12.3%; net income was $29.9 million, up 15.5%; and diluted EPS was $0.22 versus $0.19. Second-quarter operating margin was 37.0%, compared with 35.2%.
Cash from operations less property, plant and equipment additions was negative $41.0 million, versus negative $10.6 million in the prior-year half. Current assets were $119.2 million and current liabilities $198.6 million at June 30, a current ratio of approximately 0.60. Management noted the company historically operates with negative working capital.
Material changes and management commentary
- Management attributed revenue growth mainly to higher water and wastewater rates, infrastructure rehabilitation surcharges, increased consumption—particularly with favorable May and June weather—and customer growth from acquisitions.
- Operating costs rose more slowly than revenue overall, but depreciation, amortization, taxes other than income taxes, and interest expense increased. Interest expense rose 10.5% for the six-month period, primarily from borrowings to fund capital projects.
- Operating cash flow declined while capital spending increased. Capital expenditures were principally for treatment plants, mains, tanks, hydrants, service lines, and other system improvements.
- Aqua Pennsylvania received a rate increase designed to add $23.6 million in annualized revenue; rate increases in six other states were designed to add approximately $11.0 million annually. The Texas rate order was upheld and was no longer subject to appeal.
- The company issued $70 million of senior unsecured notes in June, with maturities from 2021 to 2028 and interest rates of 4.62% to 5.22%. Total long-term debt carrying value was $1.497 billion; its estimated fair value was $1.501 billion.
Outlook, risks, contingencies, and unusual items
- Management said internally generated funds, existing credit facilities, and anticipated long-term debt and equity issuances should be adequate for working capital and financing needs for the remainder of 2010 and the foreseeable future. No specific earnings or revenue guidance was provided.
- At June 30, $11.5 million remained available under a $95 million revolving credit facility expiring in May 2012; $85.6 million was available under $137 million of short-term lines. Short-term lines renew annually. Management believed renewal was likely but cautioned that renewal and terms were not assured; reduced credit availability could constrain capital spending or acquisitions.
- A $2.039 million first-half gain on sale of other assets, principally an investment sale, increased reported income. The Fort Wayne, Indiana, system-transfer valuation remains in litigation; the company may have to refund part of the initial payment or receive additional proceeds, and has deferred recognition of the gain pending resolution.
- An Indiana wastewater-plant dispute has a proposed $2.6 million settlement, subject to final non-appealable approval by the Indiana Utility Regulatory Commission. The company also contests a proposed $364,000 civil penalty related to sewer overflows predating its acquisition of the subsidiary and intends to seek indemnification from the seller.
- Management accrued $12.863 million for loss contingencies and estimated $1.619 million of that amount to be recoverable through insurance. It did not expect the matters, in aggregate, to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Forward-looking risks include regulation, abnormal weather, capital needs and funding, capital-market conditions, and integrating acquisitions. The filing reported no material change in risk factors from the 2009 Form 10-K and no significant change in market-risk exposure.
Important facts for investors to verify
- Confirm that the Aqua America, Inc. filing is the intended filing for Essential Utilities, Inc.
- Review the drivers and sustainability of consumption-led revenue growth, rate increases, and infrastructure surcharges.
- Assess the rising debt and capital-spending needs against operating cash flow, liquidity, and annual renewal risk for short-term credit lines.
- Track the Fort Wayne valuation litigation, Indiana settlement approval, and sewer-overflow penalty dispute, including potential indemnification or insurance recoveries.
- Consult the 2010 Form 10-K for complete risk disclosures and annual-period context; the filing cautions that interim results may not indicate full-year results.