Essential Utilities, Inc. quarterly report, Q2 FY2012

Business context and reporting period

This is the unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The filing identifies the registrant as Aqua America, Inc.; the request metadata names Essential Utilities, Inc., so the entity/name mapping should be verified. Aqua America operated regulated water and wastewater utilities serving an estimated 3 million people across ten states, alongside smaller nonregulated businesses.

Financial performance and position

Amounts below are in millions of dollars except per-share data. The filing reports both continuing and discontinued operations; comparisons are year over year unless stated otherwise.

Q2 revenue rose 11.2% and operating income increased 21.7%; six-month revenue rose 7.8% and operating income increased 13.4%. Operating margin was approximately 44.6% in Q2 versus 40.7% a year earlier, and 41.1% for the first half versus 39.1%. Six-month total net income benefited materially from a gain on the Maine sale; it is not a clean measure of recurring performance.

• Cash flow and investment: Six-month cash from continuing operations was $159.2 million, against property, plant and equipment additions of $171.4 million, a $12.3 million shortfall before acquisitions and other investing. Total operating cash flow, including discontinued operations, was $145.3 million. Cash ended at $5.0 million, down from $8.2 million at year-end.
• Debt and liquidity: Long-term debt including its current portion was $1.614 billion at June 30, compared with $1.517 billion at year-end; loans payable were $59.7 million. The $150 million revolving facility had $22.8 million available, and short-term lines totaling $160.5 million had $100.8 million available. Management cited historically negative working capital and said expected operating funds, credit facilities, and debt/equity issuance should meet needs for at least 12 months, while noting renewal and refinancing uncertainty.
• Capital returns: Dividends declared were $0.165 per share for Q2 and $0.33 for the first half, up from $0.155 and $0.31, respectively, in 2011.

Material changes, outlook, and risks

• Management attributed revenue growth mainly to rate increases, the larger customer base from acquisitions, and increased customer water consumption in Q2. First-half growth also included nonregulated services. Rate increases contributed $9.1 million to Q2 revenue and $16.3 million to first-half revenue.
• The Ohio regulated utility acquisition closed May 1 for $101.1 million cash plus assumed liabilities, including approximately $14.3 million of debt. The company also completed the sale of Maine on January 1 and New York on May 1, pursuing a portfolio focus strategy. The Maine sale produced a $17.7 million pretax gain; the New York sale generated a second-quarter loss of $2.7 million pretax.
• The company issued $50 million of 3.57% senior notes due 2027 and entered a new $150 million five-year revolving credit facility. Capital expenditures were $171.4 million for the first half. The filing provides no explicit earnings or revenue guidance.
• First-half effective tax rate was 39.4%, versus 31.9% in 2011; Q2 was 39.5%, versus 33.6%. Management said the comparison reflects a $7.8 million first-half 2011 state tax benefit from 100% bonus depreciation ($3.5 million in Q2). Excluding that benefit, diluted continuing-operations EPS was $0.50 for the first half of 2012 versus $0.43 in 2011, and $0.30 in Q2 versus $0.24.
• Other unusual items include a $5.0 million pension settlement charge in the first half, partly offset by a $0.5 million curtailment credit. A Pennsylvania rate case provided for a $16.7 million annualized revenue increase; Texas interim rates were finalized without refunds. Rate increases granted in several states were designed to add $20.5 million in annualized revenue.
• Management cited regulatory outcomes, abnormal weather, capital requirements and funding, acquisitions and integration, and capital-market conditions as forward-looking risks. A Fort Wayne, Indiana, valuation dispute remains pending; the company could owe a refund or receive additional proceeds. Approximately $11.4 million was accrued for loss contingencies, with management not expecting their resolution to materially adversely affect results, position, or cash flows. A separate Florida wastewater-related lawsuit was pending, with a trial scheduled for October 2012; management assessed potential loss as not material. No material change to previously disclosed risk factors was reported.
• Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

1. Confirm the issuer identity and the relationship between the filing’s Aqua America name and the requested Essential Utilities metadata.
2. Separate recurring regulated earnings from the Maine sale gain, New York disposal charges, and prior-year tax benefit when assessing growth.
3. Review debt maturities, borrowing availability, and renewal terms for short-term credit lines; monitor funding needs given capital spending exceeded continuing operating cash flow.
4. Track regulatory rate recovery, Ohio acquisition integration, and the pending Fort Wayne valuation and Florida litigation outcomes.
5. Compare cash generation, capital expenditures, and dividends over subsequent periods, and consult the full filing and annual report for detailed risk and contingency disclosures.