Essential Utilities, Inc. (then Aqua America, Inc.) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The filing is under the name Aqua America, Inc. (ticker WTR), not Essential Utilities, Inc.; verify the issuer and filing identity when matching this report to the requested company.
Business context
Aqua America operated regulated water and wastewater utilities serving almost three million people in eight states, alongside smaller market-based businesses. Its major strategic focus was the pending acquisition of Peoples, a natural gas utility serving approximately 740,000 customers in Pennsylvania, West Virginia, and Kentucky.
Financial performance and condition
| Metric | Three months ended June 30, 2019 | Prior-year quarter | Six months ended June 30, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $218.9 million | $211.9 million | $420.0 million | $406.2 million |
| Operating income | $80.9 million | $86.8 million | $148.4 million | $156.1 million |
| Net income | $54.9 million | $66.6 million | $71.8 million | $117.4 million |
| Diluted EPS | $0.25 | $0.37 | $0.36 | $0.66 |
| Operating margin | 37.0% | 41.0% | 35.3% | 38.4% |
- Quarterly revenue increased 3.3%; six-month revenue increased 3.4%. Rate increases, infrastructure surcharges, customer growth, and acquisitions contributed, partly offset by lower consumption and an Illinois do-not-consume advisory.
- Quarterly net income fell 17.6%; six-month net income fell 38.8%. Results included acquisition transaction costs, a debt-extinguishment charge, and interest-rate-swap fair-value movements. Six-month income tax benefits partly offset these effects.
- Six-month operating cash flow was $87.5 million, versus $169.7 million in 2018. Capital expenditures were $269.2 million, versus $216.6 million. The resulting operating cash flow less capital expenditures was negative $181.6 million, calculated from reported figures.
- At June 30, cash and equivalents were $1.974 billion, compared with $3.6 million at year-end; $1.968 billion was proceeds held for the planned Peoples acquisition. Current assets were $2.118 billion and current liabilities $398.9 million, largely reflecting those proceeds.
- Long-term debt, including current maturities and before debt issuance costs, was $3.000 billion, versus $2.564 billion at December 31, 2018. Total stockholders’ equity rose to $3.825 billion from $2.009 billion, mainly reflecting equity financing for the planned acquisition.
- Available borrowing was $531.3 million under a $550 million revolving facility and $129.4 million under $135.5 million of short-term lines. Management said available funding and internally generated cash were expected to meet working-capital and financing needs for at least 12 months.
Material changes and unusual items
- Peoples acquisition financing included April issuances of $1.294 billion of common stock, $690 million of tangible equity units, and $900 million of senior notes. A separate $750 million private placement was expected to close with the acquisition. The company expected to pay $4.275 billion in cash, subject to adjustments, and assume approximately $1.370 billion of Peoples debt.
- The acquisition was expected to close in fall 2019, subject to remaining approvals and closing conditions. Pennsylvania regulatory approval remained pending; the company had filed a settlement agreement. A $120 million reverse termination fee could apply in specified circumstances.
- The company redeemed $313.5 million of existing notes. A $25.2 million make-whole payment included $18.9 million expensed as a debt-extinguishment loss and $6.3 million deferred for expected rate recovery.
- Interest-rate swaps were settled in April for a cash payment of $83.5 million. They were not designated for hedge accounting: a $23.7 million fair-value expense was reported for the first half, including a $11.0 million fair-value gain in the second quarter.
- New Pennsylvania rates effective May 24 were designed to increase annual revenue by $47.0 million; New Jersey rates effective June 1 were designed to add $5.0 million annually. Other rate awards and infrastructure surcharges also took effect.
- An Illinois do-not-consume advisory reduced revenue by $0.8 million and caused $1.0 million of remediation expense in the first half. Management expected revenue effects and remediation costs to continue into the third quarter.
- Lease accounting adoption on January 1, 2019 added a $14.0 million right-of-use asset and lease liability; there was no opening retained-earnings adjustment.
Outlook, commentary, and risks
Management provided no numeric earnings guidance. It expected the Peoples acquisition to close in fall 2019 and stated that capital markets financing, credit facilities, and internally generated funds should support operations and financing requirements. Forward-looking statements were subject to regulatory, financing, acquisition-completion, weather, and integration uncertainties.
- Management identified increased debt and debt-service obligations from the planned acquisition as risks to financial flexibility, future borrowing costs, capital spending, and dividends. It anticipated assuming approximately $1.370 billion of Peoples debt, but noted that Peoples would not guarantee Aqua’s debt or be required to provide cash for Aqua’s needs.
- Water contamination, including emerging contaminants such as PFAS, could cause service interruptions, unrecoverable treatment costs, lost revenue, claims, and reputational harm. Recovery of related costs through customer rates was not assured.
- Other risks included potential dilution from the equity offerings and tangible equity units, regulatory rate-case timing, and the possibility that earnings growth could lag rate-base growth.
- Accrued loss contingencies were $17.9 million; management did not expect their resolution to materially adversely affect financial position, results, or cash flows. The filing reported no material pending legal proceedings.
Key facts for investors to verify
- Confirm issuer identity: this 2019 filing names Aqua America, Inc.; verify its relationship to the requested Essential Utilities, Inc. filing record.
- Check whether the Peoples acquisition closed on the anticipated terms and timing, and whether the remaining regulatory approvals and closing conditions were satisfied.
- Assess post-acquisition leverage, debt service, liquidity, and the use of the $1.968 billion held for the acquisition; distinguish those restricted-purpose proceeds from operating cash needs.
- Review underlying operating trends excluding acquisition expenses, debt-extinguishment costs, swap valuation effects, and one-time rate-order amortization benefits.
- Monitor the Illinois advisory’s continuing revenue and remediation impacts, and the extent to which contamination-related costs can be recovered through rates.