Essential Utilities, Inc. (Aqua America, Inc.) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing identifies the registrant as Aqua America, Inc. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $205.8 | $195.3 | $396.1 | $378.0 |
| Operating income | $80.2 | $79.9 | $151.4 | $146.7 |
| Income from continuing operations | $57.4 | $54.8 | $105.9 | $97.2 |
| Net income attributable to common shareholders | $57.4 | $55.6 | $105.9 | $98.4 |
| Diluted earnings per share | $0.32 | $0.31 | $0.60 | $0.55 |
| Operating margin | 39.0% | 40.9% | 38.2% | 38.8% |
| Net margin | 27.9% | 28.4% | 26.7% | 26.0% |
Six-month cash from operations was $157.0, versus $154.1 a year earlier. Capital expenditures were $150.3, compared with $132.0; acquisitions used $25.9. Cash was $4.6 at June 30, up from $4.1 at year-end 2014. Long-term debt was $1,699.0, including $38.5 current; loans payable were an additional $36.3. Equity was $1,702.9. Dividends declared were $0.165 per share in Q2 and $0.330 for the first half.
Changes and drivers
- Q2 revenue rose 5.4% and first-half revenue 4.8%. Management attributed growth to market-based activities and acquisitions, rate increases, higher water consumption, and a larger customer base; lower infrastructure rehabilitation surcharges partly offset growth.
- Continuing-operations income increased 4.7% in Q2 and 9.0% in the first half. Net income growth was 3.3% and 7.6%, respectively; the 2014 comparisons included discontinued operations, including the Indiana utility sold in December 2014.
- Q2 operating expenses increased 8.8%, faster than revenue, and operating margin declined year over year. Management cited acquired-business costs, a $1.9 reserve for water rights held for future use, $1.8 of leadership-transition expenses, legal and production costs, and a favorable regulatory-asset item in Q2 2014. Lower postretirement and employee medical costs provided offsets.
- The effective tax rate fell to 7.9% in Q2 and 8.2% for the first half, from 9.6% and 10.2%, respectively, principally due to qualifying Pennsylvania infrastructure-improvement deductions.
Liquidity, financing, outlook and risks
During the first half, the company issued $238.5 of long-term debt and repaid $158.8. Financing included $70.0 of 3.59% senior unsecured notes due 2030 and a $50.0 three-year unsecured loan at 1.975%. At June 30, $106.6 remained available on a $200.0 revolving facility expiring in March 2017; $124.2 was available across $160.5 of short-term credit lines, which are subject to annual renewal. Management said internally generated funds, credit facilities and long-term debt proceeds should meet working-capital and financing needs for at least 12 months, while noting renewal of short-term lines is not assured. The company historically operates with negative working capital.
No earnings guidance or quantified full-year outlook is provided in the supplied filing text. Rate approvals and infrastructure surcharges during the first half were designed to add $5.0 of annualized revenue. Risks identified include regulation, abnormal weather, capital requirements and funding, acquisitions and integration, and capital-market changes. Management reported no material change in previously disclosed risk factors or market-risk exposure. Disclosure controls were judged effective.
Accrued loss contingencies were $12.0; management did not expect their resolution to materially adversely affect financial position, results or cash flows. Estimated insurance recoveries were $1.3. The company also reserved $1.5 for self-insured employee medical claims. The filing reports no material pending legal proceeding.
Key facts for investors to verify
- Whether revenue growth from acquisitions, rate increases and consumption is recurring, and how acquired operations affect margins.
- The nature and potential additional cost of the $1.9 water-rights reserve and $1.8 leadership-transition expenses.
- Debt maturities, variable-rate exposure, and renewal terms for short-term credit lines.
- Capital spending and acquisition funding needs relative to operating cash flow and dividend commitments.
- Regulatory recovery of infrastructure costs, tax benefits, and accrued legal and self-insurance exposures.