Essential Utilities, Inc. - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC  20549

FORM 10-Q

(Mark One) 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. 

For the quarterly period ended September 30, 2014 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 

For the transition period from_______________ to _______________

Commission File Number 1-6659 

AQUA AMERICA, INC. 

(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 ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12(b)-2 of the Exchange Act.:   

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of  

October 24,  2014:  176,633,848

  

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TABLE OF CONTENTS

 

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CONSOLIDATED BALANCE SHEETS 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)

 

 

  

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CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)

 

 

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CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)

 

 

 

 

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(In thousands of dollars) 

(UNAUDITED)

 

  

 

 

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CONSOLIDATED STATEMENTS OF CAPITALIZATION 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)

 

 

  

 

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CONSOLIDATED STATEMENT OF EQUITY 

(In thousands of dollars)

(UNAUDITED)

 

 

  

 

 

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CONSOLIDATED STATEMENTS OF CASH FLOW 

(In thousands of dollars) 

(UNAUDITED)

 

 

 

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Note 1 – Basis of Presentation 

 

The accompanying consolidated balance sheets and statements of capitalization of Aqua America, Inc. and subsidiaries (the “Company”) at September 30, 2014, the consolidated statements of net income and comprehensive income for the three and nine months ended September 30, 2014 and 2013, the consolidated statements of cash flow for the nine months ended September 30, 2014 and 2013, and the consolidated statement of equity for the nine months ended September 30, 2014 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in equity, the consolidated results of operations, and the consolidated cash flow for the periods presented.  Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  The results of operations for interim periods may not be indicative of the results that may be expected for the entire year.  The December 31, 2013 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2013 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.  Certain prior period amounts have been reclassified to conform to the reporting of discontinued operations (see Note 4).

 

Note 2 – Goodwill 

 

The following table summarizes the changes in the Company’s goodwill, by business segment:

 

 

 

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The reclassification of goodwill to utility plant acquisition adjustment in the table above results from a mechanism approved by the applicable public utility commission.  The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with certain acquisitions upon achieving certain objectives. 

 

The Company tested the goodwill attributable for each of our reporting units for impairment as of July 31, 2014, in conjunction with the timing of our annual strategic business plan, and concluded that the estimated fair value of each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount, indicating that none of the Company’s goodwill was impaired. 

 

 

 

  

Note 3 – Acquisitions 

 

In September 2014, the Company acquired the water and wastewater utility system assets of Texas H2O, Inc. located in Mansfield, Texas serving approximately 1,100 customers.  The total purchase price consisted of $2,796 in cash.

 

In September 2014, the Company acquired the water utility system assets of Lake Caroline Water Co. located in Caroline County, Virginia serving approximately 1,040 customers.  The total purchase price consisted of $1,377 in cash.

 

In August 2014, the Company acquired Tri-State Grouting, which is a non-regulated business that specializes in the inspection, cleaning and repair of storm and sanitary sewer lines.  The total purchase price consisted of $3,010, of which a total of $810 is contingent upon satisfying certain annual performance targets over a three-year period.      

 

In May 2014, the Company entered into an asset purchase agreement for the acquisition of the water and wastewater utility system assets of North Maine Utilities owned by the Village of Glenview, Illinois serving approximately 7,200 customers, for cash at closing of up to $22,000, subject to final adjustment pursuant to the purchase agreement.  Closing of this acquisition is anticipated to occur in mid-2015.

 

In March 2014, the Company acquired the wastewater utility system assets of Penn Township located in Chester County, Pennsylvania serving approximately 800 customers.  The total purchase price consisted of $3,668 in cash.

 

In March 2013, the Company acquired the water and wastewater utility system assets of Total Environmental Solutions, Inc. located in Clearfield County, Pennsylvania serving approximately 4,200 customers.  The total purchase price consisted of $10,350 in cash.      

 

Note 4 –  Discontinued Operations 

 

Discontinued Operations – In September 2012, the Company began to market for sale its water and wastewater operations in Florida, which served approximately 38,000 customers, and the Company’s wastewater treatment facility in Georgia.  In March, April, and December 2013, through five separate sales transactions, the Company completed the sale of its water and wastewater utility systems in Florida, which

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concluded its regulated operations in Florida.  The Company received total net proceeds from these sales of $88,934 and recognized a gain on sale of $21,178 ($13,766 after-tax).  On March 12, 2014, the Company completed the sale of its wastewater treatment facility in Georgia.     

 

The City of Fort Wayne, Indiana (the “City”) authorized the acquisition by eminent domain of the northern portion of the utility system of one of the Company’s operating subsidiaries in Indiana (the “Northern Assets”).  In January 2008, the Company reached a settlement with the City to transition the Northern Assets in February 2008 upon receipt of the City’s initial valuation payment of $16,911.  The settlement agreement specifically stated that the final valuation of the Northern Assets will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation.  On February 12, 2008, the Company turned over the Northern Assets to the City upon receipt of the initial valuation payment.  The proceeds received by the Company are in excess of the book value of the assets relinquished.  No gain has been recognized due to the contingency over the final valuation of the assets.  The net book value of the Northern Assets has been removed from the consolidated balance sheet and the difference between the net book value and the initial payment received has been deferred and is recorded in other accrued liabilities on the Company’s consolidated balance sheet.  Once the contingency is resolved and the asset valuation is finalized, through the finalization of the litigation between the Company and the City, the amounts deferred will be recognized in the Company’s consolidated statement of net income.  The Northern Assets relinquished represent approximately 0.4% of the Company’s total assets. 

 

In addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public convenience and necessity” to acquire certain of the Company's water utility system assets located in the southwest section of the City and in Allen County (the “Southern Assets”), and if negotiations with Fort Wayne officials were to fail, to condemn the Southern Assets.  The first public hearing on the ordinance was held on January 22, 2013 and a subsequent hearing scheduled for February 5, 2013 was not held due to ongoing settlement discussions between the parties. As part of such settlement discussions, the parties negotiated an acquisition agreement that was approved by the City on May 13, 2014.  The acquisition agreement will settle both the acquisition of the Southern Assets and the dispute concerning the Northern Assets.  The acquisition agreement establishes an aggregate purchase price of $67,011 for the Southern and Northern Assets.  The City has already paid Aqua Indiana $16,911 for the Northern Assets.  On October 22, 2014, the Indiana Utility Regulatory Commission approved the transaction.  Upon completion of this transaction, the Company will expand its sewer customer base by accepting new wastewater from the City.  The transaction is expected to close in the fourth quarter of 2014.  The planned sale of these operations is accounted for as discontinued operations held for sale beginning in the first quarter of 2014. 

 

The operating results, cash flows, and financial position of the Company’s operations named above, during the periods owned, have been presented in the Company’s consolidated statements of net income, consolidated statements of cash flow, and consolidated balance sheets as discontinued operations.  These operations were included in the Company’s “Regulated” segment.     

 

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A summary of discontinued operations presented in the consolidated statements of net income include the following:

 

 

 

 

 

The assets and liabilities of discontinued operations presented in the consolidated balance sheets include the following:

 

 

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Note 5 – Capitalization 

 

In September 2014, one of the Company’s operating subsidiaries, Aqua Pennsylvania, Inc., entered into a $50,000 three year unsecured loan at an interest rate of 1.92%.  The proceeds from this loan were used to repay existing indebtedness and for general working capital purposes including financing acquisitions.

 

In August 2014, the Company increased its five-year $150,000 unsecured revolving credit facility to $200,000.  The funds borrowed under this facility are used to provide working capital as well as support for letters of credit for insurance policies and other financing agreements.      

 

In accordance with a resolution approved in October 2013 by the Board of Directors of the Company, in the third quarter of 2014, the Company repurchased 490,000 shares of its common stock in the open market for $11,624.     

 

Note 6 – Fair Value of Financial Instruments 

 

The Company follows the Financial Accounting Standards Board’s (“FASB”) accounting guidance for fair value measurements and disclosures, which defines fair value and establishes a framework for using fair value to measure assets and liabilities.  That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are as follows: 

 

 

 

 

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  There have been no changes in the valuation techniques used to measure fair value or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended September 30, 2014. 

 

Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented.  The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments. 

 

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The fair value of funds restricted for construction activity and loans payable are determined based on their carrying amount and utilizing Level 1 methods and assumptions.  As of both September 30, 2014 and December 31, 2013, the carrying amount of the Company’s funds restricted for construction activity was $47, which equates to their estimated fair value.  As of September 30, 2014 and December 31, 2013, the carrying amount of the Company’s loans payable was $6,997 and $36,740, respectively, which equates to their estimated fair value.  The fair value of cash and cash equivalents, which is comprised of a money market fund, is determined based on the net asset value per unit utilizing Level 2 methods and assumptions.  As of September 30, 2014 and December 31, 2013, the carrying amounts of the Company's cash and cash equivalents was $4,843 and $5,058, respectively, which equates to their fair value.   

 

The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:

 

 

The fair value of long-term debt has been determined by discounting the future cash flows using current market interest rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions.  The Company’s customers’ advances for construction have a carrying value of $77,215 as of September 30, 2014, and $73,892 as of December 31, 2013.  Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rate increases.  Portions of these non-interest bearing instruments are payable annually through 2029 and amounts not paid by the respective contract expiration dates become non-refundable.  The fair value of these amounts would, however, be less than their carrying value due to the non-interest bearing feature.

 

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Note 7 – Net Income per Common Share 

 

Basic net income per common share is based on the weighted average number of common shares outstanding.  Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares.  The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share.  The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.  The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share: 

 

 

For the three and nine months ended September 30, 2014 and 2013, all of the Company’s employee stock options were included in the calculations of diluted net income per share as the calculated cost to exercise the stock options was less than the average market price of the Company’s common stock during these periods.  

 

 

 

 

 

 

Note 8 – Stock-based Compensation 

 

Under the Company’s 2009 Omnibus Equity Compensation Plan, as amended as of February 27, 2014, (the “2009 Plan”), as approved by the Company’s shareholders to replace the 2004 Equity Compensation Plan (the “2004 Plan”), stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors.  The 2009 Plan authorizes 6,250,000 shares for issuance under the plan.  A maximum of 3,125,000 shares under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the 2009 Plan.  During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the 2009 Plan.  Awards under the 2009 Plan are made by a committee of the Board of Directors of the Company, or in the case of awards to non-employee directors, by the Board of Directors of the Company.  At September 30, 2014, 4,421,302 shares underlying stock-based compensation awards were still available for grants under the 2009 Plan.  No further grants may be made under the 2004 Plan.     

 

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Performance Share Units – A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the three year performance period specified in the grant, subject to certain exceptions through the respective vesting period, generally three years.  Each grantee is granted a target award of PSUs, and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals.  The following table provides compensation costs for stock-based compensation related to performance share units: 

 

The following table summarizes nonvested PSU transactions for the nine months ended September 30, 2014:   

 

 

 

 

A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions associated with the PSUs using the Monte Carlo valuation method.  The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied.  The per unit weighted-average fair value at the date of grant for PSUs granted during the nine months ended September 30, 2014 and 2013 was $25.31 and $26.88, respectively.  The fair value of each PSU grant is amortized monthly into compensation expense on a straight-line basis over their respective vesting periods, generally 36 months.  The accrual of compensation costs is based on our estimate of the final expected value of the award, and is adjusted as required for the portion based on the performance-based condition.  The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.  As the payout of the PSUs includes dividend equivalents, no dividend yield assumption is required in calculating the fair value of the PSUs.  The recording of compensation expense for PSUs has no impact on net cash flows.   

 

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Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock.  RSUs are eligible to be earned at the end of a specified restricted period, generally three years, beginning on the date of grant.  In some cases the right to receive the shares is subject to certain performance goals established at the time the grant is made.  The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.  The following table provides compensation costs for stock-based compensation related to restricted stock units:

 

 

The following table summarizes nonvested RSU transactions for the nine months ended September 30, 2014: 

 

 

 

The per unit weighted-average fair value at the date of grant for RSUs granted during the nine months ended September 30, 2014 and 2013 was $24.80 and $23.28, respectively.   

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Stock Options – The fair value of stock options is estimated at the grant date using the Black-Scholes option-pricing model.  The following table provides compensation costs for stock-based compensation related to stock options granted in prior periods:

There were no stock options granted during the nine months ended September 30, 2014 or 2013. 

 

The following table summarizes stock option transactions for the nine months ended September 30, 2014:

 

 

Restricted Stock – The following table provides compensation costs for stock-based compensation related to restricted stock:

 

 

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The following table summarizes nonvested restricted stock transactions for the nine months ended September 30, 2014:

The per unit weighted-average fair value at the date of grant for restricted stock granted during the nine months ended September 30, 2104 and 2013 was $25.19 and $25.09, respectively.

 

  

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Note 9 – Pension Plans and Other Postretirement Benefits  

 

The Company maintains a qualified defined benefit pension plan (the “Pension Plan”), a nonqualified pension plan and other postretirement benefit plans for certain of its employees.  The net periodic benefit cost is based on estimated values and an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover, and medical costs.  The following tables provide the components of net periodic benefit cost:

 

The Company made cash contributions of $17,875 to its Pension Plan during the first six months of 2014, which completed the Company’s 2014 cash contributions.  In addition, the Company expects to make cash contributions of $2,009, to the extent allowable for a tax deduction, for the funding of its other postretirement benefit plans during the remainder of 2014.

 

In August 2014, the Company announced changes to the way it will provide future retirement benefits to employees acquired through certain acquisitions.  Effective January 1, 2015, the Company will provide future retirement benefits for these employees through its defined contribution plan.  As a result, no further service will be considered in future accruals in the Pension Plan after December 31, 2014.  As a result of this change, the Company recognized a curtailment loss of $84 in the third quarter of 2014.    

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In the first quarter of 2014 the Company offered a one-time voluntary lump sum window to certain eligible terminated vested participants in an effort to reduce its long-term obligations and plan volatility for its Pension Plan.  In May 2014, the Pension Plan paid $11,471 to participants who elected to receive a lump sum distribution, which was funded from the existing Pension Plan assets.  

 

Note 10 – Water and Wastewater Rates 

 

During the first nine months of 2014, the Company’s operating divisions in Ohio, North Carolina, Texas, New Jersey, Virginia, and Indiana were granted base rate increases designed to increase total operating revenues on an annual basis by $10,153.  Further, during the first nine months of 2014, the Company’s operating divisions in Illinois and New Jersey received approval to bill infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $1,558.

 

Note 11 – Taxes Other than Income Taxes 

 

The following table provides the components of taxes other than income taxes:

 

 

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Note 12 – Segment Information 

 

The Company has identified ten operating segments and has one reportable segment named the “Regulated” segment.  The reportable segment is comprised of eight operating segments for the Company’s water and wastewater regulated utility companies which are organized by the states where we provide these services.  In addition, two segments are not quantitatively significant to be reportable and are comprised of the Company’s non-regulated subsidiaries:  Aqua Resources, Inc. and Aqua Infrastructure, LLC.  Aqua Resources, Inc. provides water and wastewater services through operating and maintenance contracts with municipal authorities and other parties in close proximity to our utility companies’ service territories as well as offers, through a third party, water and sewer line repair service and protection solutions to households, inspects, cleans and repairs storm and sanitary sewer lines, liquid waste hauling and disposal, backflow prevention, construction, and other non-regulated water and wastewater services.  Aqua Infrastructure, LLC provides non-utility raw water supply services for firms in the natural gas drilling industry.  These two segments are included as a component of “Other” in the tables below.  Also included in “Other” are corporate costs that have not been allocated to the Regulated segment and intersegment eliminations.  Corporate costs include general and administrative expense, and interest expense. 

 

The following table presents information about the Company’s reportable segment:

 

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Note 13 – Commitments and Contingencies 

 

The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business.  The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved.  As of September 30, 2014, the aggregate amount of $12,491 is accrued for loss contingencies and is reported in the Company’s consolidated balance sheet as other accrued liabilities and other liabilities.  These accruals represent management’s best estimate of probable loss (as defined in the accounting guidance) for loss contingencies or the low end of a range of losses if no single probable loss can be estimated.  For some loss contingencies, the Company is unable to estimate the amount of the probable loss or range of probable losses.  While the final outcome of these loss contingencies cannot be predicted with certainty, and unfavorable outcomes could negatively impact the Company, at this time in the opinion of management, the final resolution of these matters are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.  Further, the Company has insurance coverage for certain of these loss contingencies, and as of September 30, 2014, estimates that approximately $2,385 of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported in the Company’s consolidated balance sheet as deferred charges and other assets, net.

 

In addition to the aforementioned loss contingencies, the Company self-insures its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims.  The Company’s reserve for these claims totaled $1,468 at September 30, 2014 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.  

 

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Note 14 – Income Taxes 

 

During the nine months ended September 30, 2014, the Company utilized $77,199 of its Federal net operating loss carryforward (“NOL”).  In addition, during the nine months ended September 30, 2014, the Company utilized $2,962 of its state NOL carryforward.  As of September 30, 2014, the balance of the Company’s Federal NOL was $180,895.  The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires no valuation allowance.  As of September 30, 2014, the balance of the Company’s gross state NOL was $546,256, a portion of which was offset by a net valuation allowance of $5,232 because the Company does not believe the NOLs are more likely than not to be realized.  The Company’s Federal and state NOL carryforwards begin to expire in 2031 and 2023, respectively.   The Company has unrecognized tax positions that result in the associated tax benefit being unrecognized.  The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of $65,973 and $85,619, respectively, which results from the Company’s adoption in the third quarter of 2013 of the FASB’s accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were $246,868 and $631,875, respectively.  The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability. 

 

In December 2012, the Company changed its tax method of accounting for qualifying utility system repairs in Aqua Pennsylvania, Inc. (“Aqua Pennsylvania”) effective with the tax year ended December 31, 2012 and for prior tax years.  The tax accounting method was changed to permit the expensing of qualifying utility asset improvement costs that were previously being capitalized and depreciated for book and tax purposes (the “Repair Change”).  As a result of the adoption of the Repair Change prior to the receipt of Aqua Pennsylvania’s next rate order, the Repair Change results in a substantial reduction in income tax expense and greater net income and cash flows.  The Company’s effective income tax rate for the third quarter of 2014 and 2013, for its continuing operations, was 11.6% and 6.9%, respectively, and for the first nine months of 2014 and 2013, for its continuing operations, was 10.8% and 10.4%, respectively. 

 

In September 2013, the Department of Treasury and the Internal Revenue Service issued “Guidance Regarding and Capitalization of Expenditures Related to Tangible Property” which contains standards for determining whether and when a taxpayer must capitalize costs incurred in acquiring, maintaining or improving tangible property.  These regulations are effective for the Company’s 2014 fiscal year.  The Company has reviewed the regulations and concluded that the regulations will not have a material impact on the Company’s consolidated results of operations or consolidated financial position.

 

As of September 30, 2014, the total gross unrecognized tax benefit was $30,204, of which $12,999, if recognized, would affect the Company’s effective tax rate as a result of the regulatory treatment afforded the Repair Change in Pennsylvania.  At December 31, 2013, the Company had unrecognized tax benefits of $28,690.  There was an unrecognized tax benefit of $29,510 at September 30, 2013.

 

Accounting rules for uncertain tax positions specify that tax positions for which the timing of resolution is uncertain should be classified as long-term liabilities.  Judgment is required in evaluating the

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Company’s uncertain tax positions and determining the provision for income taxes.  Management believes that an adequate provision has been made for any adjustments that may result from tax examinations.  Although the timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, the Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.

 

Note 15 – Recent Accounting Pronouncements   

 

In May 2014, the FASB issued updated accounting guidance on recognizing revenue from contracts with customers, which outlines a single comprehensive model that an entity will apply to determine the measurement of revenue and timing of when it is recognized.  The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.  The updated guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract.  The updated guidance is effective retrospectively for reporting periods beginning after December 15, 2016.  The Company is currently evaluating the requirements of the updated guidance to determine the impact of adoption.     

 

In April 2014, the FASB issued updated accounting guidance which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements.  The updated guidance is effective prospectively for reporting periods beginning after December 15, 2014, with early adoption available.  The Company will adopt the provisions of the updated accounting guidance for its quarterly reporting period beginning January 1, 2015, and the Company does not expect the adoption of the revised guidance to have an impact on the Company’s consolidated results of operations or consolidated financial position.