Essential Utilities, Inc. (then Aqua America, Inc.) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed May 8, 2014. The filing identifies the registrant as Aqua America, Inc. Amounts below are in millions of dollars unless stated otherwise.
Business context
Aqua America operated regulated water and wastewater utilities across eight states, serving almost three million people, alongside smaller non-regulated businesses. The company continued a strategy of focusing on core service territories and divesting other operations. The interim statements are unaudited; management cautions that quarterly results may not indicate full-year results.
Financial results and position
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Operating revenue | $182.7 | $178.6 | Up 2.3% |
| Operating income | $66.8 | $66.9 | Down slightly |
| Income from continuing operations | $42.4 | $40.9 | Up 3.8%; diluted EPS rose from $0.23 to $0.24 |
| Net income attributable to common shareholders | $42.9 | $46.6 | Down 8.0%; diluted EPS fell from $0.26 to $0.24 |
| Operating cash flow | $89.9 | $89.0 | Continuing-operations cash flow was $90.5 vs. $88.6 |
| Capital expenditures | $59.8 | $59.1 | Primarily utility-system improvements |
| Cash and cash equivalents | $17.5 | $5.1 at Dec. 31, 2013 | Quarter-end balance |
| Long-term debt, including current portion | $1,595.8 | $1,554.9 at Dec. 31, 2013 | Increased $40.9 |
Operating margin was approximately 36.6%, compared with 37.5% a year earlier. Continuing-operations net margin was approximately 23.2%, versus 22.9%. The $3.7 million decline in total net income primarily reflected the prior-year $6.5 million pretax gain on a Florida asset sale; discontinued-operations income fell to $0.5 million from $5.7 million. The quarterly dividend declared per share increased to $0.152 from $0.140.
At March 31, current assets were $213.6 million and current liabilities were $251.2 million, a $37.6 million working-capital deficit. Management said this negative working-capital position was historically routine and expected internally generated funds, credit facilities, and long-term debt issuance to meet operating and financing needs for at least 12 months. The $150 million revolving facility had $53.4 million available; short-term credit lines totaling $160.5 million had $132.6 million available, but were subject to annual renewal.
Material changes and management commentary
- Revenue grew mainly from rate increases, higher customer water consumption, and acquisitions. Management cited $1.4 million of increased water and wastewater rates and $0.6 million of acquisition-related revenue.
- Operations and maintenance expense rose 5.7%, including $2.2 million of added costs from severe winter weather, the absence of a favorable $0.9 million legal-settlement recognition in Q1 2013, and costs from acquired systems.
- Depreciation increased 6.7% as utility plant was placed in service. Other taxes declined 9.7%, mainly due to lower property-tax rates in Ohio.
- The effective tax rate on continuing operations declined to 10.9% from 14.2%, largely due to increased deductions under the Pennsylvania tax accounting “Repair Change,” which management said reduced tax expense and increased net income and cash flow.
- Q1 included $59.8 million of capital spending, $73.2 million of long-term debt proceeds (principally a $72 million revolving-credit borrowing), and $31.9 million of long-term debt repayments.
Outlook, transactions, and risks
- No specific earnings or revenue guidance was provided. Management expected funding sources to support operations and financing requirements for at least the next 12 months, but gave no assurance that short-term credit lines would be renewed or on what terms.
- Rate increases granted in Q1 in Ohio, Texas, New Jersey, Virginia, and Indiana were designed to add $2.7 million to annual revenue; infrastructure surcharges in Illinois and New Jersey were designed to add $1.4 million annually. A North Carolina rate increase announced in May was designed to add $2.5 million annually.
- The company’s board authorized management to negotiate a Fort Wayne transaction covering Northern and Southern Assets, with a stated total payment of approximately $67.0 million, including the $16.9 million received in 2008. Closing was subject to definitive agreements and regulatory approval and was expected in Q4 2014. The transaction would also provide for wastewater sent by the City. The filing did not establish that the transaction would close.
- The company accrued $11.8 million for loss contingencies and estimated $1.4 million as recoverable through insurance. Management did not expect the ultimate resolution of the disclosed matters to materially adversely affect financial position, results, or cash flows, while noting outcomes could not be predicted with certainty.
- One 2013 Florida sale remained subject to regulatory review; if not approved, its purchase price would be refunded and the assets would revert to the company. The company also reported ongoing Fort Wayne valuation litigation and potential refund or additional-proceeds exposure.
- In May 2014, the company agreed to acquire Illinois water and wastewater assets serving approximately 7,200 customers for up to $22 million, with closing anticipated around mid-2015. This was a subsequent event, not a Q1 acquisition.
- Management identified regulation, abnormal weather, capital needs and funding, acquisitions, capital-market conditions, and integration of acquired operations as risks. It reported no material change to the risk factors in its 2013 Form 10-K and no significant change in market-risk exposure.
Important facts for investors to verify
- Whether Fort Wayne definitive agreements and approvals were obtained, and the final economics and accounting for the proposed asset sale.
- The outcome of regulatory review of the Florida disposition and the resulting cash or asset-reversion exposure.
- Renewal terms and availability of short-term credit lines, and the effect of rising debt and continued capital spending on liquidity.
- Whether rate increases, customer consumption, and repair-related tax benefits persist, and how severe-weather operating costs evolve.
- Developments in legal contingencies, including Fort Wayne litigation and the recorded $11.8 million loss-contingency accrual.