Essential Utilities - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

 

(Former Name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ   Accelerated Filer o   Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 23, 2007.

   133,249,378   .

 

AQUA AMERICA, INC. AND SUBSIDIARIES

Part 1 — Financial Information

Item 1. Financial Statement

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)

(UNAUDITED)

See notes to consolidated financial statements beginning on page 8 of this report.

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)

(UNAUDITED)

See notes to consolidated financial statements beginning on page 8 of this report.

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)

(UNAUDITED)

See notes to consolidated financial statements beginning on page 8 of this report.

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)

(UNAUDITED)

See notes to consolidated financial statements beginning on page 8 of this report.

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS’ EQUITY
(In thousands of dollars)

(UNAUDITED)

See notes to consolidated financial statements beginning on page 8 of this report.

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)

(UNAUDITED)

See notes to consolidated financial statements beginning on page 8 of this report.

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)

 

Nature of Operations - Aqua America, Inc. (“we” or “us”), a Pennsylvania corporation, is the holding company for regulated utilities providing water or wastewater services to what we estimate to be approximately 3 million people in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, New York, Florida, Indiana, Virginia, Maine, Missouri, and South Carolina. Our largest operating subsidiary, Aqua Pennsylvania, Inc., provides water or wastewater services to approximately one-half of the total number of people we serve, which are located in the suburban areas north and west of the City of Philadelphia and in 23 other counties in Pennsylvania. Our other subsidiaries provide similar services in 12 other states. In addition, we provide water and wastewater service through operating and maintenance contracts with municipal authorities and other parties, and septage hauling services, close to our utility companies’ service territories.

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

 

During the first nine months of 2007, we had $175,783 of capital expenditures, acquired water and wastewater systems for $41,815, repaid $3,245 of customer advances for construction and repaid debt and made sinking fund contributions and other loan repayments of $35,172. The capital expenditures were related to improvements to treatment plants, new and rehabilitated water mains, tanks, hydrants, and service lines, well and booster improvements, and other.

At September 30, 2007, we had $15,582 of cash and cash equivalents compared to $44,039 at December 31, 2006. During the first nine months of 2007, we used the proceeds from the issuance of long-term debt, the proceeds from the issuance of common stock, internally generated funds and available working capital to fund the cash requirements discussed above and to pay dividends. In January 2007, our Pennsylvania operating subsidiary, Aqua Pennsylvania, Inc., issued $50,000 of tax-exempt bonds secured by a supplement to its first mortgage indenture with a weighted-average maturity of 33.5 years and with a weighted-average interest rate of 4.435%. The proceeds are restricted to funding certain capital projects during the period 2007 through 2009 and resulted in an increase in the funds restricted for construction activity during the first nine months of 2007. In March 2007, the Company issued $30,000 of unsecured notes with a weighted-average maturity of 22.5 years and a weighted-average interest rate of 5.73%. We used the proceeds from the sales of these notes to repay short-term borrowings. During the first nine months of 2007, our operating subsidiaries issued notes payable in aggregate of $11,888 at rates ranging from 1.0% to 5.5% due from 2017 to 2035. At September 30, 2007, we had short-term lines of credit of $249,000, of which $53,468 was available. Effective with the September 1, 2007 payment, we increased the quarterly cash dividend on our common stock from $0.115 per share to $0.125 per share.

Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt and common stock will be adequate to meet our financing requirements for the balance of the year and beyond.

Revenues for the first nine months increased $56,768 or 14.3% primarily due to additional revenues of $26,109 associated with acquisitions, additional revenues of $25,442 resulting from increased water and wastewater rates implemented in various operating subsidiaries, increased water consumption of $2,245, and $998 of additional sewer revenues. Acquisitions provided additional operating revenues in the Regulated segment of $21,344, primarily from the New York Water Service acquisition, and $4,765 of additional revenues in Other as provided by the acquisition of several septage businesses during 2006. The increased water consumption reflected a return to a more normal water consumption level in many of our operating subsidiaries as compared to the same period of 2006, offset partially by lower water consumption in our Texas operating subsidiaries which was associated with unfavorable wet weather conditions experienced during 2007. Heavy rainfall in Texas unfavorably impacted water revenues by approximately $2,519 as compared to the first nine months of 2006.

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

 

Operations and maintenance expenses increased by $24,822 or 15.0% primarily due to additional expenses associated with acquisitions of $12,418, additional expenses resulting from the preparation and administration of rate filings of $2,322, increased water production costs of $1,991, additional bad debt expense of $1,445, the receipt in the first quarter of 2006 of $1,500 relating to a waiver of certain contractual rights without a corresponding amount in the current year, and normal increases in other operating costs, offset partially by lower insurance expenses of $1,091 due to reduced claims. Of the total acquisition expenses, $8,062 was associated with the New York Water Service acquisition that was completed on January 1, 2007 and the remainder was associated with other acquisitions in the Regulated segment. The additional rate filing expenses of $2,073 during the third quarter of 2007 resulted from the complete write-off of previously deferred expenses related to the withdrawal of a rate filing in Florida. No further write-offs from this rate filing are expected. The receipt of the $1,500 was a one-time payment recognized in the first quarter of 2006 as a reduction to operations and maintenance expense. The increased water production costs, principally purchased power and chemicals, were associated with vendor price increases.

Depreciation expense increased $9,238 or 17.6% reflecting the utility plant placed in service since September 30, 2006, including the assets acquired through system acquisitions.

Amortization increased $475 or 15.2% due to the amortization of the costs associated with, and other costs being recovered in, various rate filings.

Taxes other than income taxes increased by $8,605 or 34.4% due to additional property taxes associated with the acquired operations of New York Water Service of $5,193, and additional state and local taxes incurred in the first nine months of 2007.

Interest expense increased by $6,425 or 14.7% primarily due to additional borrowings to finance capital projects and increased interest rates on short-term borrowings.

Allowance for funds used during construction (“AFUDC”) decreased by $783 primarily due to a decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied; offset partially by an increase in the AFUDC rate which is based on short-term interest rates.

Gain on sale of other assets totaled $648 in the first nine months of 2007 and $834 in the first nine months of 2006. The decrease of $186 is due to the timing of sales of land.

Our effective income tax rate was 39.8% in the first nine months of 2007 and 39.9% in the first nine months of 2006. The effective income tax rate can vary over time due to changes in our expenses that are not tax-deductible.

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

 

Net income for the first nine months increased by $3,822 or 5.8%, in comparison to the same period in 2006 primarily as a result of the factors described above. On a diluted per share basis, earnings increased $0.03 or 6.0% reflecting the change in net income and a 1.7% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through the employee stock and incentive plan, dividend reinvestment plan and the 2,250,000 additional shares issued by us in public offerings in June and August 2006.

Revenues for the quarter increased $18,541 or 12.6% primarily due to additional revenues of $4,959 resulting from increased water and wastewater rates implemented in various operating subsidiaries, additional revenues of $10,662 associated with acquisitions, and $2,617 of additional water revenues resulting from increased consumption. Acquisitions provided additional operating revenues in the Regulated segment of $9,994, primarily from the New York Water Service acquisition, and $668 of additional revenues in Other as provided by the acquisition of several septage businesses during 2006. The increased water consumption reflected a return to a more normal water consumption level in many of our operating subsidiaries as compared to the same period of 2006, offset partially by lower water consumption in our Texas operating subsidiaries which was associated with unfavorable wet weather conditions experienced during 2007. Heavy rainfall in Texas unfavorably impacted water revenues by approximately $2,011 as compared to the third quarter of 2006.

Operations and maintenance expenses increased by $7,942 or 13.4% primarily due to additional expenses associated with acquisitions of $4,346, additional expenses resulting from the preparation and administration of rate filings of $2,073, additional bad debt expense of $580 and normal increases in other operating costs, offset partially by reduced insurance expenses of $970 due to a reduction in the required insurance claims reserve. Of the total acquisition expenses, $3,724 were associated with the New York Water Service acquisition that was completed on January 1, 2007 and the remainder was associated with other acquisitions in the Regulated segment. The additional rate filing expenses of $2,073 during the third quarter of 2007 resulted from the complete write-off of previously deferred expenses related to the withdrawal of a rate filing in Florida. No further write-offs from this rate filing are expected.

Depreciation expense increased $2,731 or 14.9% reflecting the utility plant placed in service since September 30, 2006, including the assets acquired through system acquisitions.

Amortization increased $35 or 3.1% due to the amortization of the costs associated with, and other costs being recovered in, various rate filings.

Taxes other than income taxes increased by $2,009 or 22.7% due to additional property taxes associated with the acquired operations of New York Water Service of $1,731, and additional state and local taxes incurred in the third quarter of 2007.

Interest expense increased by $2.351 or 15.9% primarily due to additional borrowings to finance capital projects.

Allowance for funds used during construction (“AFUDC”) decreased by $48 primarily due to a decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied; offset partially by an increase in the AFUDC rate which is based on short-term interest rates.

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

 

Gain on sale of other assets totaled $260 in the third quarter of 2007 and $91 in the third quarter of 2006. The increase of $169 is due to the timing of sales of land.

Our effective income tax rate was 40.0% in the third quarter of 2007 and 2006. The effective income tax rate can vary over time due to changes in our expenses that are not tax-deductible.

Net income for the quarter increased by $2,187 or 8.0%, in comparison to the same period in 2006 primarily as a result of the factors described above. On a diluted per share basis, earnings increased $0.01 reflecting the change in net income and a 0.9% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through the employee stock and incentive plan, dividend reinvestment plan and the 500,000 additional shares issued by us in a public offering in August 2006.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109,” which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We adopted the provisions of FIN 48 as of on January 1, 2007 and have analyzed filing positions in its federal and state jurisdictions where we are required to file income tax returns, as well as for all open tax years in these jurisdictions. Our reserve for uncertain tax positions was insignificant upon adoption of FIN 48 and we did not record a cumulative effect adjustment related to the adoption of FIN 48. We believe our income tax filing positions and deductions will be sustained under audit and we believe we do not have significant uncertain tax positions that, in the event of adjustment, will result in a material effect on our results of operations or financial position. We have elected to recognize accrued interest and penalties related to uncertain tax positions as income tax expense. As of September 30, 2007, our Federal income tax returns for all years through 2003 have been closed. Tax years 2004 through 2006 remain open to examination by the major taxing jurisdictions to which we are subject, however, 2004 and 2005 Federal income tax returns have been settled through examination.

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

 

The City of Fort Wayne, Indiana has authorized the acquisition, by eminent domain or otherwise, of a portion of the utility system of one of the operating subsidiaries that the Company acquired in connection with the AquaSource acquisition in 2003. We had challenged whether the City was following the correct legal procedures in connection with the City’s attempted condemnation, but the Indiana Supreme Court, in an opinion issued in June 2007, supported the City’s position. In October 2007, the City’s Board of Public Works approved proceeding with its process to condemn the portion of our utility system at a preliminary price based on the City’s valuation. We have filed an appeal with the Allen County Circuit Court challenging the Board of Public Works’ valuation on several bases. We intend to continue to challenge the City’s valuation of this portion of our system. The portion of the system under consideration represents approximately 1% of our total customer base.

AQUA AMERICA, INC. AND SUBSIDIARIES

 

Part II. Other Information

AQUA AMERICA, INC. AND SUBSIDIARIES

 

AQUA AMERICA, INC. AND SUBSIDIARIES

 

AQUA AMERICA, INC. AND SUBSIDIARIES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be executed on its behalf by the undersigned thereunto duly authorized.

November 7, 2007