Business Context and Reporting Period
Aqua America, Inc. (the registrant in this 2016 filing; not named Essential Utilities in the filing) reported unaudited results for the quarter ended March 31, 2016, compared with the quarter ended March 31, 2015. It provides regulated water and wastewater services across eight states and also operates smaller market-based businesses.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Operating revenue | $192.6 million | $190.3 million |
| Operating income / margin | $72.3 million / 37.6% | $71.2 million / 37.4% |
| Net income / net margin | $51.7 million / 26.9% | $48.5 million / 25.5% |
| Diluted EPS | $0.29 | $0.27 |
| Operating cash flow | $94.8 million | $90.0 million |
| Capital expenditures | $73.0 million | $70.3 million |
| Gross long-term debt | $1.796 billion | $1.779 billion at December 31, 2015 |
| Cash and cash equivalents | $4.0 million | $3.2 million at December 31, 2015 |
| Current assets / current liabilities | $122.7 million / $174.3 million | $128.4 million / $193.2 million at December 31, 2015 |
Operating cash flow less capital expenditures was approximately $21.9 million, versus $19.7 million in the prior-year quarter, before acquisitions and other investing activity. The declared dividend was $0.178 per share, up from $0.165.
Material Changes Versus Prior Period
Revenue increased 1.2% and net income increased 6.6%. Regulated revenue benefited from acquisitions, rate increases and infrastructure surcharges; these gains were partly offset by lower water consumption and a $3.2 million decline in market-based revenue, including the absence of a prior-year short-term wastewater services contract. Interest expense rose 6.4%, mainly due to higher average borrowings. The effective tax rate fell to 5.5% from 8.6%, reflecting additional deductions for qualifying Pennsylvania infrastructure improvements.
Q1 capital expenditures were $73.0 million, and the company spent $4.5 million on utility acquisitions. In January, it acquired Superior Water Company for $16.75 million, partly through issuing 439,943 shares. It also amended its revolving credit facility, extending maturity to February 2021 and increasing capacity from $200 million to $250 million.
Outlook, Risks, Contingencies and Unusual Items
Management said internally generated funds, existing credit facilities and long-term debt proceeds should provide adequate working capital and financing for at least the next 12 months. At quarter-end, $141.7 million remained available under the $250 million revolving facility, and $107.5 million was available under short-term lines of credit. Short-term lines are subject to annual renewal, and renewal and terms are not assured. The company historically operates with negative working capital.
No numerical earnings or revenue guidance was provided. Management cited regulation, abnormal weather, capital needs and funding, acquisitions, capital-market conditions and integration of acquired operations as risks. A business unit providing liquid-waste hauling and disposal services was classified as held for sale, with completion expected in Q2 2016.
Pension benefit cost rose to $5.1 million from $1.0 million, including a $3.0 million settlement charge and a $0.3 million special termination benefit charge related to lump-sum elections. The company accrued $14.9 million for loss contingencies and estimated $1.5 million of that amount was recoverable through insurance; management did not expect pending matters to materially adversely affect financial position, results or cash flows. The company reported no material changes in risk factors or market-risk exposure from year-end.
Most Important Facts for Investors to Verify
- Confirm the issuer and historical corporate name: this is an Aqua America, Inc. 10-Q for Q1 2016.
- Track whether regulated rate increases and infrastructure surcharges offset lower consumption and market-based revenue.
- Assess the sustainability of earnings improvement, including the lower tax rate and the pension settlement charge.
- Monitor debt growth, available credit, annual renewal of short-term lines and funding of the capital program.
- Verify completion and proceeds from the planned sale of the liquid-waste business unit, and developments in accrued contingencies.