Business context and reporting period
The supplied filing identifies the registrant as Aqua America, Inc. (the request metadata names Essential Utilities). This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, compared with the same 2016 periods. Aqua America provided regulated water and wastewater services to nearly 3 million people across eight states, alongside smaller market-based activities.
Financial performance and condition
Amounts below are in millions of dollars unless stated otherwise.
- Second quarter: Revenue was $203.4, down 0.2% year over year; operating income was $84.6, up 1.3%; net income was $61.0, up 2.3%. Diluted EPS was $0.34 versus $0.33. Operating and net margins were approximately 41.6% and 30.0%, respectively.
- First half: Revenue was $391.2, down 1.3%; operating income was $154.5, down 0.8%; net income was $110.0, down 1.2%. Diluted EPS was $0.62 versus $0.63. Operating and net margins were approximately 39.5% and 28.1%.
- Cash flow and investment: First-half operating cash flow was $157.3, versus $177.7 a year earlier. Capital expenditures were $208.5, versus $168.6, making operating cash flow less capital expenditures negative $51.2, compared with positive $9.1. The company paid $67.9 in dividends.
- Debt and liquidity: At June 30, total long-term debt was $1,987.9, including current maturities; short-term loans payable were $67.5. Cash was $7.8. Current assets of $138.1 were below current liabilities of $332.5, consistent with management’s description of a historically negative working-capital position. The company reported $97.5 available under its $250 million revolving facility and $68.0 available under short-term credit lines.
- Other measures: Total assets were $6,383.7 and stockholders’ equity was $1,896.5. The declared dividend was $0.1913 per share for the quarter, versus $0.178 in 2016.
Material changes versus the prior comparable period
- Revenue was pressured by sales of market-based business units: these reduced revenue by $4.4 in the quarter and $9.5 in the first half. Regulated growth partly offset the declines; management cited higher consumption, rates, infrastructure surcharges, and organic customer growth.
- Lower operating and maintenance expense—partly reflecting the divested businesses—supported quarterly operating income. First-half depreciation and interest expense increased, primarily with utility plant placed in service and higher average borrowings.
- Capital expenditures increased by $39.9 in the first half. Long-term debt rose from $1,910.6 at year-end 2016 to $1,987.9 at June 30, 2017, while short-term loans payable increased from $6.5 to $67.5.
- During the first half, the company completed three utility acquisitions, adding 1,002 customers. Rate increases and infrastructure surcharges approved during the period were designed to add $7.4 and $3.7 of annual revenue, respectively.
Outlook, commentary, risks, and unusual items
- Management gave no quantified earnings or revenue guidance in the supplied filing. It said internally generated funds, credit facilities, and long-term debt proceeds should meet working-capital and financing needs for at least the next 12 months.
- Management cautioned that short-term credit lines require annual renewal and that renewal and terms are not assured. In July 2017, after quarter-end, the company issued $180 million of long-term debt to reduce revolving-credit borrowings.
- The company accrued $15.3 for loss contingencies and estimated $3.4 of related insurance recoveries. Management did not expect the matters to materially adversely affect financial position, results, or cash flows; it also reported a $1.8 reserve for employee medical claims.
- Management reported no material change in disclosed risk factors or market-risk exposure. Forward-looking results remain subject to regulation, weather, capital requirements and funding, capital markets, and acquisition integration risks.
- The company adopted updated share-based-payment accounting in January 2017, recording a $1.0 windfall tax benefit to retained earnings. First-half pension contributions of $15.4 completed its 2017 cash contributions.
Important facts for investors to verify
- Whether regulated rate increases, surcharges, consumption, and customer growth continue to offset the revenue decline from divestitures.
- How the elevated capital-spending program will be funded and its effect on debt, interest expense, and cash flow.
- Availability and renewal terms of short-term credit lines, and the use of July’s $180 million debt issuance.
- Progress on acquisitions, asset sales, and realization of approved rate mechanisms.
- Developments in legal contingencies, regulatory matters, and the adoption of forthcoming accounting standards.