Two states down, Pennsylvania to go.

Aqua America (NYSE:WTRG) spent the first four months of 2019 securing more than $2.8 billion in funding to afford the pending acquisition of natural gas utility Peoples. With West Virginia and Kentucky on board and negotiations with Pennsylvania progressing, the water utility remains on track to close the growth-driving acquisition by the middle of this year.

Aside from activities related to that transaction, Aqua America reported the same slow-and-steady march higher that investors have come to expect, as revenue grew year over year from customer acquisitions and higher rates. Here are the major takeaways from the company's Q1 report.

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Image source: Getty Images.

By the numbers

Aqua America delivered relatively minor revenue growth, even by its slow-growing standard, but management remains confident that rate base compound annual growth rate (CAGR) will equal 7% through 2021. The water utility earns rate base increases from state regulators every so many years by investing to maintain and upgrade water distribution infrastructure -- and it expects a record year of capital investments in 2019.

The business is gearing up to spend approximately $550 million in infrastructure investments this year and $1.4 billion total through 2021. That only includes existing operations, so the expected 2% to 3% customer growth this year has the potential to increase the purse.

Investors won't be surprised to see the ho-hum top-line growth, but further down the income statement, there are some surprising reductions in earnings at first glance. However, the sharp year-over-year declines in profits can be explained by an increase in acquisition-related operating expenses stemming from the pending Peoples merger and a $34.8 million charge related to the change in fair value of rate swap agreements. Settling the swaps (read: paying them off) stung in Q1, but Aqua America actually saved $11.1 million from the last calculated cost of the financial instruments, which will help in the long run.


Q1 2019

Q1 2018

Change (YOY)


$201.1 million

$194.3 million


Operating expenses

$133.7 million

$125.0 million


Operating income

$67.4 million

$69.3 million


Net income

$16.9 million

$50.8 million


Earnings per share (EPS)




Adjusted EPS




Data source: Press release.

Aqua America also reported raising $2.8 billion in capital to help ready the balance sheet for the pending Peoples acquisition. That included $900 million in debt, some of which was used to replace older debt (and settle the rate swaps), and $1.9 billion in equity sales. The latter included a $750 million investment from the Canada Pension Plan Investment Board and the remainder from a public stock offering.

While Wall Street has been fretting over the dilution -- which has arguably been priced into shares by now -- the natural gas utility is expected to catalyze growth.

For example, the $2.2 billion rate base (the value of regulated assets) serves 743,000 customers and is expected to generate $289 million in EBITDA this year. That's equivalent to 13.1% of the rate base. By comparison, Aqua America's water infrastructure rate base generated 9.8% of its value in EBITDA last year. The natural gas utility's rate base growth is also expected to grow at a CAGR of 8% to 10% through 2021, higher than the water rate base. Therefore, closing the deal is paramount.

A strong start to 2019, but the Peoples deal must close

Aqua America is positioned to grow with or without the Peoples acquisition, but after the company has dragged Wall Street analysts kicking and screaming this far, failing to secure the blessing of regulators in Pennsylvania would be an awful turn of events. Management will likely be eager to settle with the state, but that could prove costly, too, especially if the company has to promise not to get involved with the city of Pittsburgh's beleaguered water utility. For now, all investors can do is wait for the next update.

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