Essential Utilities / Aqua America, Inc. — Q1 2019 Form 10-Q
Entity and period: The supplied filing is Aqua America, Inc.’s unaudited 10-Q for the three months ended March 31, 2019, filed May 3, 2019. It describes regulated water and wastewater utilities serving nearly three million people across eight states, plus smaller market-based businesses. The filing does not identify the registrant as Essential Utilities; investors should verify the company and filing identity.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Operating revenue | $201.1 | $194.3; up 3.5% |
| Operating income | $67.4 | $69.3; down 2.7% |
| Operating margin | 33.5% | 35.7% |
| Net income | $16.9 | $50.8; down 66.7% |
| Diluted earnings per share | $0.09 | $0.29 |
| Operating cash flow | $79.3 | $88.4 |
| Capital expenditures | $133.8 | $105.1 |
| Cash and cash equivalents at period end | $4.1 | $3.6 at December 31, 2018 |
| Long-term debt, gross, including current portion | $2,639.6 | $2,563.7 at December 31, 2018 |
- Revenue growth reflected $5.2 million from rate increases and infrastructure surcharges, and $3.6 million from customer growth and acquisitions, partly offset by lower water consumption.
- Operations and maintenance costs rose 7.3% to $79.3 million, including $6.6 million of expenses related to the planned Peoples gas acquisition. Depreciation increased 8.6% to $39.1 million, principally as utility plant entered service.
- Net income included a $34.8 million non-cash mark-to-market loss on interest-rate swaps, which did not qualify for hedge accounting. The company settled the swaps in April 2019 for a cash payment of $83.5 million. The reported income-tax benefit was $8.2 million; the effective tax rate was negative 93.3%.
- Operating cash flow less capital expenditures was negative $54.5 million, compared with negative $16.8 million in Q1 2018. Cash flow from financing activities was $54.7 million, including debt proceeds and $39.0 million of common dividends paid.
- At March 31, available borrowing was $83.3 million under the $550 million revolving facility and $102.9 million under short-term lines of credit. Cash was $4.1 million. Management noted that current liabilities routinely exceed current assets and said internal cash generation and available financing were expected to meet working-capital and financing needs for at least 12 months.
Material changes and outlook
- Planned Peoples gas acquisition: The company expected to acquire a natural-gas utility serving approximately 740,000 customers for a stated $4.275 billion cash purchase price, subject to adjustments, and expected to assume approximately $1.37 billion of Peoples’ debt. Closing was expected in mid-2019, subject to remaining approvals and other conditions. Pennsylvania regulatory approval remained outstanding in this filing; approvals from federal regulators, Kentucky and West Virginia had been obtained. Certain breaches by the company could trigger a $120 million reverse termination fee.
- To fund the acquisition and refinance debt, the company reported post-quarter issuances of $1.294 billion of common stock, $690 million of tangible equity units and $900 million of senior notes. The notes include $400 million due 2029 at 3.566% and $500 million due 2049 at 4.276%. A $750 million bridge commitment remained available after terminations of commitments. The company also expected to redeem $313.5 million of existing notes, with an estimated $25 million make-whole payment.
- Management said acquisition financing, internally generated funds and existing credit facilities were expected to provide adequate liquidity. This expectation depended on estimates and assumptions; the filing highlighted risks from added debt service, refinancing and interest-rate costs, credit-rating changes, equity dilution, integration, regulatory approvals and the possibility the acquisition would not close. The filing provided no quantified full-year earnings or revenue guidance.
- Rate developments included Ohio base-rate increases designed to add $1.0 million of annual revenue and Ohio/Pennsylvania infrastructure surcharges designed to add $2.3 million annually. A Pennsylvania rate-case settlement of approximately $47 million in expected annual revenue was awaiting a final commission order; a New Jersey rate case proposing $7.2 million in annual revenue was under review.
- Capital expenditures were $133.8 million, up from $105.1 million. Management described spending on water mains, treatment plants, tanks, hydrants, service lines and other infrastructure. It cautioned that earnings growth may differ from rate-base growth, including because of rate-case timing, costs and investments not yet included in rates.
Contingencies and other notable items
- The company accrued $18.1 million for loss contingencies and estimated $6.6 million of probable insurance recoveries. Management did not expect resolution of the matters to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Adoption of the new lease standard on January 1, 2019 added $14.0 million of right-of-use assets and lease liabilities at adoption, with no cumulative retained-earnings adjustment.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Confirm the filing’s registrant: the supplied 10-Q is for Aqua America, Inc., although the request identifies Essential Utilities, Inc.
- Check whether the Peoples acquisition closed, its final purchase price and assumed debt, regulatory approvals, and actual financing and refinancing costs.
- Assess the effect of the $83.5 million swap settlement and the Q1 mark-to-market loss on reported earnings and cash flows.
- Review debt levels, credit-facility availability, refinancing needs and dividend capacity after the acquisition and planned debt redemption.
- Verify final Pennsylvania and New Jersey rate-case outcomes and the pace of capital spending relative to regulatory recovery.