Essential Utilities (then Aqua America, Inc.) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The filing is by Aqua America, Inc., the company’s name at the time. It operated regulated water and wastewater utilities across eight states, serving nearly three million people, alongside smaller non-regulated businesses. Financial amounts below are in U.S. dollars; figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date | Change |
|---|---|---|---|
| Operating revenue | $190.3 | $182.7 | +4.2% |
| Operating income | $71.2 | $66.8 | +6.6% |
| Operating margin | 37.4% | 36.6% | +0.8 percentage points |
| Income from continuing operations | $48.5 | $42.4 | +14.5% |
| Net income attributable to common shareholders | $48.5 | $42.9 | +13.3% |
| Diluted earnings per share | $0.27 | $0.24 | +$0.03 |
| Cash flow from operations | $90.0 | $89.9 | Essentially flat |
| Capital expenditures | $70.3 | $59.8 | +17.5% |
Operating expenses were $119.2 million, up 2.8%; taxes other than income taxes rose 20.8%, principally reflecting a prior-year Ohio property-tax reduction. Interest expense was $18.7 million, down 3.3%. The effective income tax rate declined to 8.6% from 10.9%, largely due to tax deductions for qualifying Pennsylvania infrastructure improvements.
At March 31, cash was $9.3 million, current assets were $164.2 million, and current liabilities were $205.1 million. Long-term debt, including its current portion, totaled $1.642 billion; loans payable were a further $33.1 million. Total equity was $1.676 billion. Cash increased $5.1 million during the quarter. The declared dividend was $0.165 per share, versus $0.152 a year earlier.
Changes and notable developments
- Revenue growth reflected $4.8 million of additional non-regulated revenue associated with acquisitions, $2.9 million from rate increases, and $0.9 million from acquired customer growth. Lower consumption and a $0.9 million decrease in infrastructure rehabilitation surcharges partly offset those gains.
- Operations and maintenance expense increased 2.1%; acquisition-related operating costs and higher water production costs were partly offset by lower pension, weather-related, and employee medical costs.
- Capital spending increased to $70.3 million, primarily for treatment plants, mains, tanks, hydrants, service lines, wells, and related improvements.
- Quarter-end borrowing availability included $65.4 million under the $200 million revolving credit facility and $127.4 million under short-term credit lines. The company noted that short-term facilities require annual renewal.
- After quarter-end, the Illinois Commerce Commission approved the North Maine Utilities acquisition on April 1; the company completed it on April 30, 2015. The purchase price was $22 million, and purchase accounting was incomplete when the filing was issued.
Outlook, risks, and contingencies
Management said internally generated funds, existing credit facilities, and long-term debt proceeds should be sufficient for working capital and financing needs for at least the next 12 months. No specific earnings or revenue guidance was provided. Management cautioned that interim results may not indicate full-year results.
Risks identified include regulation, abnormal weather, capital requirements and funding, acquisitions and integration, and capital-market conditions. The company reported no material change in its previously disclosed risk factors or market-risk exposure. It accrued $12.0 million for loss contingencies and estimated $1.3 million of related insurance recoveries; management did not expect the matters to have a material adverse effect. It also reported a $1.5 million reserve for self-insured employee medical claims. Management stated that no pending legal proceeding was expected to have a material adverse effect.
Important facts for investors to verify
- Whether reported revenue and earnings growth persists after separating rate increases and acquisitions from consumption and surcharge trends.
- How elevated capital expenditures will be funded and their effect on borrowing, cash flow, and future rate recovery.
- Renewal terms for short-term credit lines and the company’s liquidity position given current liabilities exceeding current assets.
- The completed North Maine Utilities acquisition’s final purchase accounting, integration costs, and contribution to results.
- Developments in regulatory rate cases, tax benefits, and the accrued legal and medical contingencies.