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Essential Utilities, Inc. - Quarter Report: 2016 March (Form 10-Q)

Table of Contents

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 March 31, 2016 

 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) 





 

 

 

Pennsylvania

23-1702594

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)



 

762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania

19010 -3489

(Address of principal executive offices)

(Zip Code)



 

(610) 527-8000

(Registrant’s telephone number, including area code)



(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.:   



 

Large accelerated filer

Accelerated filer

Non-accelerated filer   (do not check if a smaller reporting company)

Smaller reporting company



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  

April 22, 2016:  177,271,652

  

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

 



TABLE OF CONTENTS



 



Page

Part I – Financial Information



 

Item 1.  Financial Statements:

 



 

Consolidated Balance Sheets (unaudited) – March 31, 2016 and December 31, 2015

2

 

 

Consolidated Statements of Net Income (unaudited)
Three Months Ended March 31, 2016 and 2015

3



 

Consolidated Statements of Comprehensive Income (unaudited) –
Three Months Ended March 31, 2016 and 2015

4



 

Consolidated Statements of Capitalization (unaudited) –
March 31, 2016 and December 31, 2015

5



 

Consolidated Statement of Equity (unaudited) –
Three Months Ended March 31, 2016

6



 

Consolidated Statements of Cash Flow (unaudited) –
Three Months Ended March 31, 2016 and 2015

7



 

Notes to Consolidated Financial Statements (unaudited)

8



 

Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations

20



 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

24



 

Item 4.  Controls and Procedures

24



Part II – Other Information



 

Item 1.  Legal Proceedings

24



 

Item 1A.  Risk Factors

24



 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

25



 

Item 6.  Exhibits

25



 

Signatures

26



 

Exhibit Index

27





 

1


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED BALANCE SHEETS 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,

Assets

 

2016

 

2015

Property, plant and equipment, at cost

 

$

6,183,513 

 

$

6,088,011 

Less:  accumulated depreciation

 

 

1,430,632 

 

 

1,399,086 

Net property, plant and equipment

 

 

4,752,881 

 

 

4,688,925 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

 

3,981 

 

 

3,229 

Accounts receivable and unbilled revenues, net

 

 

91,761 

 

 

99,146 

Inventory, materials and supplies

 

 

12,499 

 

 

12,414 

Prepayments and other current assets

 

 

12,713 

 

 

11,802 

Assets held for sale

 

 

1,779 

 

 

1,779 

Total current assets

 

 

122,733 

 

 

128,370 



 

 

 

 

 

 

Regulatory assets

 

 

859,830 

 

 

830,118 

Deferred charges and other assets, net

 

 

30,228 

 

 

28,878 

Investment in joint venture

 

 

7,467 

 

 

7,716 

Goodwill

 

 

42,304 

 

 

33,866 

Total assets

 

$

5,815,443 

 

$

5,717,873 

Liabilities and Equity

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,176,073 and 179,363,660 as of March 31, 2016 and December 31, 2015

 

$

90,088 

 

$

89,682 

Capital in excess of par value

 

 

790,749 

 

 

773,585 

Retained earnings

 

 

950,158 

 

 

930,061 

Treasury stock, at cost, 2,910,671 and 2,819,569 shares as of March 31, 2016 and December 31, 2015

 

 

(70,912)

 

 

(68,085)

Accumulated other comprehensive income

 

 

624 

 

 

687 

Total stockholders' equity

 

 

1,760,707 

 

 

1,725,930 



 

 

 

 

 

 

Long-term debt, excluding current portion

 

 

1,766,662 

 

 

1,743,612 

Less:  debt issuance costs

 

 

22,554 

 

 

23,165 

Long-term debt, excluding current portion, net of debt issuance costs

 

 

1,744,108 

 

 

1,720,447 

Commitments and contingencies (See Note 13)

 

 

 -

 

 

 -



 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

 

29,096 

 

 

35,593 

Loans payable

 

 

28,041 

 

 

16,721 

Accounts payable

 

 

33,971 

 

 

56,452 

Accrued interest

 

 

21,778 

 

 

12,651 

Accrued taxes

 

 

21,821 

 

 

21,887 

Other accrued liabilities

 

 

39,636 

 

 

49,895 

Total current liabilities

 

 

174,343 

 

 

193,199 



 

 

 

 

 

 

Deferred credits and other liabilities:

 

 

 

 

 

 

Deferred income taxes and investment tax credits

 

 

1,152,343 

 

 

1,118,923 

Customers' advances for construction

 

 

86,546 

 

 

86,934 

Regulatory liabilities

 

 

255,434 

 

 

259,507 

Other

 

 

110,509 

 

 

100,498 

Total deferred credits and other liabilities

 

 

1,604,832 

 

 

1,565,862 



 

 

 

 

 

 

Contributions in aid of construction

 

 

531,453 

 

 

512,435 

Total liabilities and equity

 

$

5,815,443 

 

$

5,717,873 



 

 

 

 

 

 

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

















  

 

2


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)







 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2016

 

2015

Operating revenues

 

$

192,607 

 

$

190,326 



 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Operations and maintenance

 

 

73,541 

 

 

73,189 

Depreciation

 

 

32,145 

 

 

30,500 

Amortization

 

 

450 

 

 

849 

Taxes other than income taxes

 

 

14,140 

 

 

14,621 

Total operating expenses

 

 

120,276 

 

 

119,159 



 

 

 

 

 

 

Operating income

 

 

72,331 

 

 

71,167 



 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

Interest expense, net

 

 

19,853 

 

 

18,665 

Allowance for funds used during construction

 

 

(2,308)

 

 

(1,182)

Gain on sale of other assets

 

 

(207)

 

 

(169)

Equity loss in joint venture

 

 

249 

 

 

714 

Income before income taxes

 

 

54,744 

 

 

53,139 

Provision for income taxes

 

 

3,007 

 

 

4,594 

Net income

 

$

51,737 

 

$

48,545 



 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.29 

 

$

0.27 

Diluted

 

$

0.29 

 

$

0.27 



 

 

 

 

 

 

Average common shares outstanding during the period:

 

 

 

 

 

 

Basic

 

 

177,104 

 

 

176,888 

Diluted

 

 

177,819 

 

 

177,792 



 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.178 

 

$

0.165 



 

 

 

 

 

 

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

 

 

 



















 

3


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(In thousands of dollars) 

(UNAUDITED)

  





 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Net income

 

$

51,737 

 

$

48,545 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

Unrealized holding (loss) gain on investments, net of tax (benefit) expense of $(4) and $41 for the three months ended March 31, 2016 and 2015, respectively

 

 

(6)

 

 

75 

 

Reclassification of gain on sale of investment to net income, net of tax of $30 for the three months ended March 31, 2016 (1)

 

 

(57)

 

 

 -

 

Comprehensive income

 

$

51,674 

 

$

48,620 

 



 

 

 

 

 

 

 

(1) Amount of pre-tax gain of $87 reclassified from accumulated other comprehensive income to gain on sale of other assets on the consolidated statements of net income for the three months ended March 31, 2016.



 

 

 

 

 

 

 

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

 

  



 

4


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CAPITALIZATION 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

March 31,

 

December 31,



 

 

2016

 

2015

Stockholders' equity:

 

 

 

 

 

 

 

    Common stock, $.50 par value

 

 

$

90,088 

 

$

89,682 

    Capital in excess of par value

 

 

 

790,749 

 

 

773,585 

    Retained earnings

 

 

 

950,158 

 

 

930,061 

    Treasury stock, at cost

 

 

 

(70,912)

 

 

(68,085)

    Accumulated other comprehensive income

 

 

624 

 

 

687 

Total stockholders' equity

 

 

 

1,760,707 

 

 

1,725,930 



 

 

 

 

 

 

 

Long-term debt of subsidiaries (substantially secured by utility plant):

 

 

 

 

 

 

Interest Rate Range

Maturity Date Range

 

 

 

 

 

 

0.00% to  0.99%

2023 to 2033

 

 

5,098 

 

 

5,148 

1.00% to  1.99%

2016 to 2035

 

 

18,487 

 

 

20,811 

2.00% to  2.99%

2024 to 2031

 

 

20,703 

 

 

19,167 

3.00% to  3.99%

2016 to 2047

 

 

296,662 

 

 

297,275 

4.00% to  4.99%

2020 to 2054

 

 

486,987 

 

 

487,093 

5.00% to  5.99%

2017 to 2043

 

 

214,817 

 

 

221,435 

6.00% to  6.99%

2017 to 2036

 

 

52,969 

 

 

52,964 

7.00% to  7.99%

2022 to 2027

 

 

33,593 

 

 

33,762 

8.00% to  8.99%

2021 to 2025

 

 

14,394 

 

 

14,502 

9.00% to  9.99%

2018 to 2026

 

 

27,100 

 

 

27,100 

10.00% to 10.99%

2018

 

 

6,000 

 

 

6,000 



 

 

 

1,176,810 

 

 

1,185,257 



 

 

 

 

 

 

 

Notes payable to bank under revolving credit agreement, variable rate, due 2021

 

 

85,000 

 

 

60,000 

Unsecured notes payable:

 

 

 

 

 

 

 

Bank notes at 1.921% and 1.975% due 2017 and 2018

 

 

 

100,000 

 

 

100,000 

Notes at 3.57% and 3.59% due 2027 and 2030

 

 

 

120,000 

 

 

120,000 

Notes ranging from 4.62% to 4.87%, due 2016 through 2024

 

 

144,400 

 

 

144,400 

Notes ranging from 5.20% to 5.95%, due 2016 through 2037

 

 

169,548 

 

 

169,548 

Total long-term debt

 

 

 

1,795,758 

 

 

1,779,205 



 

 

 

 

 

 

 

Current portion of long-term debt

 

 

 

29,096 

 

 

35,593 

Long-term debt, excluding current portion

 

 

1,766,662 

 

 

1,743,612 

Less:  debt issuance costs

 

 

 

22,554 

 

 

23,165 

Long-term debt, excluding current portion, net of debt issuance costs

 

 

1,744,108 

 

 

1,720,447 



 

 

 

 

 

 

 

Total capitalization

 

 

$

3,504,815 

 

$

3,446,377 



 

 

 

 

 

 

 

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



 

 

 

 

 

 

 











 



 

5


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENT OF EQUITY 

(In thousands of dollars)

(UNAUDITED)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 



 

 

 

 

Capital in

 

 

 

 

 

 

 

Other

 

 

 



 

Common

 

Excess of

 

Retained

 

Treasury

 

Comprehensive

 

 

 



 

Stock

 

Par Value

 

Earnings

 

Stock

 

Income

 

Total

Balance at December 31, 2015

 

$

89,682 

 

$

773,585 

 

$

930,061 

 

$

(68,085)

 

$

687 

 

$

1,725,930 

Net income

 

 

 -

 

 

 -

 

 

51,737 

 

 

 -

 

 

 -

 

 

51,737 

Other comprehensive loss, net of income tax benefit of $34

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(63)

 

 

(63)

Dividends

 

 

 -

 

 

 -

 

 

(31,513)

 

 

 -

 

 

 -

 

 

(31,513)

Stock issued for acquisition (439,943 shares)

 

 

220 

 

 

12,625 

 

 

 -

 

 

 -

 

 

 -

 

 

12,845 

Sale of stock (11,373 shares)

 

 

 

 

326 

 

 

 -

 

 

 -

 

 

 -

 

 

332 

Repurchase of stock (91,102 shares)         

 

 

 -

 

 

 -

 

 

 -

 

 

(2,827)

 

 

 -

 

 

(2,827)

Equity compensation plan (217,725 shares)

 

 

108 

 

 

(108)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Exercise of stock options (143,372 shares)

 

 

72 

 

 

2,744 

 

 

 -

 

 

 -

 

 

 -

 

 

2,816 

Stock-based compensation

 

 

 -

 

 

806 

 

 

(127)

 

 

 -

 

 

 -

 

 

679 

Employee stock plan tax benefits

 

 

 -

 

 

979 

 

 

 -

 

 

 -

 

 

 -

 

 

979 

Other  

 

 

 -

 

 

(208)

 

 

 -

 

 

 -

 

 

 -

 

 

(208)

Balance at March 31, 2016

 

$

90,088 

 

$

790,749 

 

$

950,158 

 

$

(70,912)

 

$

624 

 

$

1,760,707 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













  

 

 

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Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CASH FLOW 

(In thousands of dollars) 

(UNAUDITED)



  



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

51,737 

 

$

48,545 

Adjustments to reconcile net income to net cash flows from operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

32,595 

 

 

31,349 

Deferred income taxes

 

 

1,436 

 

 

2,688 

Provision for doubtful accounts

 

 

817 

 

 

936 

Stock-based compensation

 

 

806 

 

 

1,341 

Gain on sale of utility system

 

 

(1,215)

 

 

 -

Gain on sale of other assets

 

 

(207)

 

 

(169)

Net change in receivables, inventory and prepayments

 

 

5,680 

 

 

191 

Net change in payables, accrued interest, accrued taxes and other accrued liabilities

 

 

4,880 

 

 

11,460 

Other

 

 

(1,691)

 

 

(6,321)

Net cash flows from operating activities

 

 

94,838 

 

 

90,020 

Cash flows from investing activities:

 

 

 

 

 

 

Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $580 and $296

 

 

(72,984)

 

 

(70,284)

Acquisitions of utility systems and other, net

 

 

(4,461)

 

 

(788)

Additions to funds restricted for construction activity

 

 

 

 

 

 

Release of funds previously restricted for construction activity

 

 

 -

 

 

32 

Net proceeds from the sale of utility system and other assets

 

 

2,853 

 

 

232 

Investment in joint venture

 

 

 

 

 

 

Other

 

 

(40)

 

 

(1,180)

Net cash flows used in investing activities

 

 

(74,632)

 

 

(71,988)

Cash flows from financing activities:

 

 

 

 

 

 

Customers' advances and contributions in aid of construction

 

 

1,273 

 

 

1,193 

Repayments of customers' advances

 

 

(349)

 

 

(1,040)

Net proceeds of short-term debt

 

 

11,320 

 

 

14,664 

Proceeds from long-term debt

 

 

96,314 

 

 

52,629 

Repayments of long-term debt

 

 

(80,341)

 

 

(29,800)

Change in cash overdraft position

 

 

(17,250)

 

 

(21,431)

Proceeds from issuing common stock

 

 

332 

 

 

 -

Proceeds from exercised stock options

 

 

2,816 

 

 

2,852 

Stock-based compensation windfall tax benefits

 

 

979 

 

 

1,230 

Repurchase of common stock

 

 

(2,827)

 

 

(3,754)

Dividends paid on common stock

 

 

(31,513)

 

 

(29,176)

Other

 

 

(208)

 

 

(263)

Net cash flows used in financing activities

 

 

(19,454)

 

 

(12,896)

Net change in cash and cash equivalents

 

 

752 

 

 

5,136 

Cash and cash equivalents at beginning of period

 

 

3,229 

 

 

4,138 

Cash and cash equivalents at end of period

 

$

3,981 

 

$

9,274 



Non-cash investing activity:

Property, plant and equipment additions purchased at the period end, but not yet paid for

 

$

19,052 

 

$

20,158 



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

















 

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Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

Note 1 – Basis of Presentation 



The accompanying consolidated balance sheets and statements of capitalization of Aqua America, Inc. and subsidiaries (the “Company”) at March 31, 2016, the consolidated statements of net income and comprehensive income for the three months ended March 31, 2016 and 2015 the consolidated statements of cash flow for the three months ended March 31, 2016 and 2015, and the consolidated statement of equity for the three months ended March 31, 2016 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, 2015.  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, 2015 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2015 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, including debt issuance costs (see Note 15 - Recent Accounting Pronouncements), to conform to the current period presentation.          



Note 2 – Goodwill 



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

 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Regulated

 

 

 

 

 

 



 

Segment

 

Other

 

Consolidated

Balance at December 31, 2015

 

$

27,246 

 

$

6,620 

 

$

33,866 

Goodwill acquired

 

 

8,622 

 

 

 -

 

 

8,622 

Reclassification to utility plant

acquisition adjustment

 

 

(25)

 

 

 -

 

 

(25)

Other

 

 

(159)

 

 

 -

 

 

(159)

Balance at March 31, 2016

 

$

35,684 

 

$

6,620 

 

$

42,304 

 

8


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

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







  

Note 3 – Acquisitions 



Pursuant to our strategy to grow through acquisitions, in January 2016, the Company acquired Superior Water Company, Inc., which provides public water service to approximately 3,900 customers in portions of Berks, Chester, and Montgomery counties in Pennsylvania.  The total purchase price for the utility system was $16,750, which consisted of the issuance of 439,943 shares of the Company’s common stock and $3,905 in cash. The purchase price allocation for this acquisition consists primarily of acquired property, plant and equipment of $25,167, contributions in aid of construction of $16,565, and goodwill of $8,622.  Additionally, during the first quarter of 2016, the Company completed six acquisitions of water and wastewater utility systems in various states.  The total purchase price of these utility systems consisted of $556 in cash.  The pro forma effect of the business acquired is not material either individually or collectively to the Company’s results of operations.     



In April 2015, the Company acquired the water and wastewater utility system assets of North Maine Utilities located in the Village of Glenview, Illinois serving approximately 7,400 customers.  The total purchase price consisted of $23,079 in cash.  The purchase price allocation for this acquisition consists primarily of acquired property, plant and equipment.  Additionally, in 2015, the Company completed 14 acquisitions of water and wastewater utility systems in various states.  The total purchase price of these utility systems consisted of $5,210 in cash.      



Note 4 –  Assets Held for Sale



In December 2015, the Company decided to sell a business unit within the Company’s market-based subsidiary, Aqua Resources, which provides liquid waste hauling and disposal services, and is reported as assets held for sale in the Company’s Consolidated Balance Sheets.  The completion of the sale is expected to occur in the second quarter of 2016.  This business unit is included in “Other” in the Company’s segment information.       







]

Note 5 – Capitalization 



In February 2016, the Company amended its unsecured revolving credit facility to extend the expiration from March 2017 to February 2021, to increase the facility from $200,000 to $250,000, and to add a fourth bank to the lending group.  Funds borrowed under this facility are classified as long-term debt and are used to provide working capital as well as support for letters of credit for insurance policies and other financing arrangements.  Interest under this facility is based at the Company’s option, on the prime rate, an adjusted Euro-Rate, an adjusted federal funds rate or at rates offered by the banks.  A facility fee is charged on the total commitment amount of the agreement. 



9


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

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:



·

Level 1:  unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access; 

 

·

Level 2:  inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in non-active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or 

 

·

Level 3:  inputs that are unobservable and significant to the fair value measurement. 

 

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 March 31, 2016

 

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. 

 

The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions.    As of March 31, 2016 and December 31, 2015, the carrying amount of the Company’s loans payable was $28,041 and $16,721, 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 March 31, 2016 and December 31, 2015, the carrying amounts of the Company's cash and cash equivalents was $3,981 and $3,229, respectively, which equates to their fair value.   

 

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



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015

Carrying Amount

 

$

1,795,758 

 

$

1,779,205 

Estimated Fair Value

 

 

2,020,229 

 

 

1,905,393 

 



10


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

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 $86,546 as of March 31, 2016, and $86,934 as of December 31, 2015.  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 2026 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.



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 treasury stock method assumes that the proceeds from the exercise of stock options are used to purchase the Company’s common stock at the average market price during the period.  The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share: 





 

 

 

 

 



 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Average common shares outstanding during the period for basic computation

 

177,104 

 

176,888 

 

Dilutive effect of employee stock-based compensation

 

715 

 

904 

 

Average common shares outstanding during the period for diluted computation

 

177,819 

 

177,792 

 



 

 

 

 

 



For the three months ended March 31,  2016 and 2015, 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 PlanDuring any calendar year, no individual

11


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

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 to employees and consultants under the 2009 Plan are made by a committee of the Board of Directors of the Company, except that with respect to awards to the Chief Executive Officer, the committee recommends those awards for approval by the non-employee directors of the Board of Directors.  In the case of awards to non-employee directors, the Board of Directors of makes such awards.  At March 31, 2016,  3,989,744 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.     

 

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 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 PSUs





 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Stock-based compensation within operations and maintenance expenses

 

$

525 

 

$

1,078 

 

Income tax benefit

 

 

209 

 

 

439 

 

 

The following table summarizes nonvested PSU transactions for the three months ended March 31, 2016:   





 

 

 

 

 

 



 

 

 

 

 

 



 

 

Number

 

Weighted



 

 

of

 

Average



 

 

Share Units

 

Fair Value

Nonvested share units at December 31, 2015

 

 

424,858 

 

$

25.78 

Granted

 

 

151,156 

 

 

28.89 

Performance criteria adjustment

 

 

26,047 

 

 

25.62 

Forfeited

 

 

(5,900)

 

 

25.89 

Share units vested

 

 

44,625 

 

 

26.88 

Share units issued

 

 

(189,885)

 

 

23.25 

Nonvested share units at March 31, 2016

 

 

450,901 

 

$

27.98 



 

 

 

 

 

 

 

 

 

A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions.  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 three months ended

12


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

March 31, 2016 and 2015 was $28.89 and $26.54, 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 separate 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.   



Restricted Stock UnitsA 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.  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 RSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the RSUs.  The following table provides compensation costs for stock-based compensation related to RSUs:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Stock-based compensation within operations and maintenance expenses

 

$

168 

 

$

263 

 

Income tax benefit

 

 

69 

 

 

109 

 

 



The following table summarizes nonvested RSU transactions for the three months ended March 31, 2016





 

 

 

 

 

 



 

 

 

 

 

 



 

 

Number

 

Weighted



 

 

of

 

Average



 

 

Stock Units

 

Fair Value

Nonvested stock units at December 31, 2015

 

 

88,353 

 

$

24.94 

Granted

 

 

49,636 

 

 

32.04 

Stock units vested and issued

 

 

(24,318)

 

 

23.37 

Forfeited

 

 

(1,500)

 

 

25.53 

Nonvested stock units at March 31, 2016

 

 

112,171 

 

$

28.41 

 



The per unit weighted-average fair value at the date of grant for RSUs granted during the three months ended March 31, 2016 and 2015 was $32.04 and $26.26, respectively.   

13


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  



Stock Options  The following table provides the income tax benefit for stock-based compensation related to stock options granted in prior periods:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Income tax benefit

 

$

216 

 

$

104 

 



 

 

 

 

 

 

 

For the three months ended March 31, 2016 and 2015, there were no compensation costs for stock-based compensation related to stock options, as stock options were fully amortized in 2013.  Additionally, there were no stock options granted during the three months ended March 31, 2016 or 2015



The following table summarizes stock option transactions for the three months ended March 31, 2016:



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

Weighted

 

Weighted

 

 

 



 

 

 

Average

 

Average

 

Aggregate



 

 

 

Exercise

 

Remaining

 

Intrinsic



 

Shares

 

Price

 

Life (years)

 

Value

Outstanding at December 31, 2015

 

659,533 

 

$

16.62 

 

 

 

 

 

Forfeited

 

 -

 

 

 -

 

 

 

 

 

Expired / Cancelled

 

(3,436)

 

 

16.15 

 

 

 

 

 

Exercised

 

(143,372)

 

 

19.64 

 

 

 

 

 

Outstanding and exercisable at March 31, 2016

 

512,725 

 

$

15.78 

 

2.5 

 

$

8,224 

 



Stock Awards – On March 31, 2016, the Company granted 3,522 shares of common stock to the non-employee members of the Board of Directors.  The fair market value of the shares is $31.94 per share.  The shares granted are not subject to any restrictions.  In the first quarter of 2016, the Company recognized $112 of compensation expense and an income tax benefit of $47 associated with these grants.  There were no stock awards granted to the non-employee members of the Board of Directors during the quarter ended March 31, 2015.    



 

14


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  



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:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Pension Benefits



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Service cost

 

$

826 

 

$

925 

 

Interest cost

 

 

3,285 

 

 

3,222 

 

Expected return on plan assets

 

 

(4,266)

 

 

(4,674)

 

Amortization of prior service cost

 

 

145 

 

 

43 

 

Amortization of actuarial loss

 

 

1,760 

 

 

1,532 

 

Settlement charge

 

 

3,028 

 

 

 -

 

Special termination benefit charge

 

 

302 

 

 

 -

 

Net periodic benefit cost

 

$

5,080 

 

$

1,048 

 



 

 

 

 

 

 

 



 

Other



 

Postretirement Benefits



 

 

Three Months Ended

 



 

 

March 31,

 



 

2016

 

2015

 

Service cost

 

$

255 

 

$

406 

 

Interest cost

 

 

750 

 

 

758 

 

Expected return on plan assets

 

 

(711)

 

 

(730)

 

Amortization of prior service cost

 

 

(137)

 

 

(54)

 

Amortization of actuarial loss

 

 

267 

 

 

354 

 

Net periodic benefit cost

 

$

424 

 

$

734 

 



Effective July 1, 2015, the Company added a permanent lump sum option to the form of benefit payments offered to participants of the qualified defined benefit pension plan and non-qualified retirement plans upon retirement or termination.  During the first quarter of 2016, the lump sum payments paid to participants who elected this option for payments from the non-qualified retirement plans resulted in a settlement charge.  The Company made cash contributions of $2,715 to its Pension Plan during the first three months of 2016,  and intends to make cash contributions of $5,430 to the Pension Plan during the remainder of 2016

15


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

Note 10 – Water and Wastewater Rates 

 

During the first three months of 2016, the Company’s operating divisions in Ohio, Texas, and Virginia were granted base rate increases designed to increase total operating revenues on an annual basis by $3,090.  Further, during the first three months of 2016, the Company’s operating divisions in Illinois, Pennsylvania (wastewater), and North Carolina received approval to bill infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $1,365.



Note 11 – Taxes Other than Income Taxes 

 

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



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Property

 

$

6,185 

 

$

6,825 

 

Capital stock

 

 

427 

 

 

540 

 

Gross receipts, excise and franchise

 

 

2,519 

 

 

2,442 

 

Payroll

 

 

3,337 

 

 

3,278 

 

Regulatory assessments

 

 

672 

 

 

653 

 

Other

 

 

1,000 

 

 

883 

 

Total taxes other than income

 

$

14,140 

 

$

14,621 

 



 

 

 

 

 

 

 







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 market-based activities:  Aqua Resources, Inc. and Aqua Infrastructure, LLC.  Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties in close proximity to our utility companies’ service territories; offers, through a third party, water and wastewater line repair service and protection solutions to households; inspects, cleans and repairs storm and sanitary wastewater lines; installs and tests devices that prevent the contamination of potable water; designs and builds water and wastewater systems; and provides other market-based water and wastewater servicesIn addition, Aqua Resources provides liquid waste hauling and disposal services in a business unit that, in December 2015, the Company decided to sell, which is reported as assets held for sale in the Company’s consolidated balance sheets included in this report.  Aqua Infrastructure 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. 



16


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Three Months Ended



 

March 31, 2016

 

March 31, 2015



 

Regulated

 

Other

 

Consolidated

 

Regulated

 

Other

 

Consolidated

Operating revenues

 

$

186,006 

 

$

6,601 

 

$

192,607 

 

$

180,564 

 

$

9,762 

 

$

190,326 

Operations and maintenance expense

 

 

67,325 

 

 

6,216 

 

 

73,541 

 

 

67,018 

 

 

6,171 

 

 

73,189 

Depreciation

 

 

32,206 

 

 

(61)

 

 

32,145 

 

 

30,438 

 

 

62 

 

 

30,500 

Operating income

 

 

72,850 

 

 

(519)

 

 

72,331 

 

 

68,624 

 

 

2,543 

 

 

71,167 

Interest expense, net

 

 

18,801 

 

 

1,052 

 

 

19,853 

 

 

17,902 

 

 

763 

 

 

18,665 

Allowance for funds used during construction

 

 

(2,308)

 

 

 -

 

 

(2,308)

 

 

(1,182)

 

 

 -

 

 

(1,182)

Income tax expense (benefit)

 

 

3,673 

 

 

(666)

 

 

3,007 

 

 

4,367 

 

 

227 

 

 

4,594 

Net income (loss)

 

 

52,894 

 

 

(1,157)

 

 

51,737 

 

 

47,705 

 

 

840 

 

 

48,545 

Capital expenditures

 

 

72,389 

 

 

595 

 

 

72,984 

 

 

70,111 

 

 

173 

 

 

70,284 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015

Total assets:

 

 

 

 

 

 

  Regulated

 

$

5,639,573 

 

$

5,541,335 

  Other

 

 

175,870 

 

 

176,538 

  Consolidated

 

$

5,815,443 

 

$

5,717,873 



 

 

 

 

 

 

 

 

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 March 31, 2016, the aggregate amount of $14,913 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 March 31, 2016, estimates that approximately $1,544 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

17


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

Company’s reserve for these claims totaled $1,496 at March 31, 2016 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.  





Note 14 – Income Taxes 

 

During the three months ended March 31, 2016, the Company utilized $22 of its Federal net operating loss (“NOL”) carryforward.  In addition, during the three months ended March 31, 2016, the Company’s state NOL carryforward increased by $8,473.  As of March 31, 2016, the balance of the Company’s Federal NOL was $158,254.  The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires no valuation allowance.  As of March 31, 2016, the balance of the Company’s gross state NOL was $557,144, a portion of which is offset by a valuation allowance 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 2032 and 2023, respectively.  The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of $63,286 and $89,251, respectively.  The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were $221,540 and $646,395 respectively.  The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability. 



In accordance with a 2012 settlement agreement with the Pennsylvania Public Utility Commission, Aqua Pennsylvania expenses, for tax purposes, qualifying utility asset improvement costs, which 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 first quarter of 2016 and 2015, was 5.5% and 8.6%, respectively. 



As of March 31, 2016, the total gross unrecognized tax benefit was $28,208, of which $18,597, if recognized, would affect the Company’s effective tax rate as a result of the regulatory treatment afforded for qualifying infrastructure improvements in Pennsylvania.  At December 31, 2015, the Company had unrecognized tax benefits of $28,016



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 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 March 2016, the FASB issued updated accounting guidance on simplifying the accounting for share-based payments, which includes several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.   The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption available.  The Company is evaluating the requirements of the updated guidance to determine the impact of adoption.    

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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  



In February 2016, the FASB issued updated accounting guidance on accounting for leases, which requires lessees to establish a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  For income statement purposes, leases will be classified as either operating or finance.  Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern.  The updated accounting guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption available.  The Company is evaluating the requirements of the updated guidance to determine the impact of adoption.



In September 2015, the FASB issued updated accounting guidance on simplifying measurement-period adjustment in business combinations, which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively.  Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment.  The Company adopted the provisions of this accounting standard,  as required on January 1, 2016, and it did not have an impact on its results of operations or financial position.  

 

In April 2015, the FASB issued updated accounting guidance on simplifying the presentation of debt issuance costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability.  Previously, debt issuance costs were presented in the balance sheet as a deferred charge.    The Company adopted the provisions of this accounting standard as required on January 1, 2016.  The adoption of this standard was applied retrospectively and resulted in the reclassification of $23,165 from deferred charges and other assets, net to debt issuance costs, which is reported as a reduction to long-term debt, in the December 31, 2015 Consolidated Balance Sheet.  



In August 2014, the FASB issued an accounting standard that will require management to assess an entity’s ability to continue as a going concern for each annual and interim reporting period and to provide related footnote disclosures in circumstances in which substantial doubt exists.  The accounting standard is effective in the first annual reporting period ending after December 15, 2016.  The Company does not expect the provisions of this accounting standard to have an impact on its results of operations or financial position.



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.  In July 2015, the FASB approved a one year deferral to the original effective date of this guidance.  The updated guidance is effective for reporting periods beginning after December 15, 2017, and will be applied retrospectively.  The Company is evaluating the requirements of the updated guidance to determine the impact of adoption.   



 

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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)

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

Forward-looking Statements 

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements address, among other things: the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “plans,”  “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions.  Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements.  These risks and uncertainties include, among others: the effects of regulation, abnormal weather, changes in capital requirements and funding, acquisitions, changes to the capital markets, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such report.  As a result, readers are cautioned not to place undue reliance on any forward-looking statements.  We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.     

 

General Information 

 

Aqua America, Inc. (“we”,  “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water or wastewater services to what we estimate to be almost three million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, and Virginia.  Our largest operating subsidiary, Aqua Pennsylvania,  provides water or wastewater services to approximately one-half of the total number of people we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 27 other counties in Pennsylvania.  Our other regulated utility subsidiaries provide similar services in seven other states.  In addition, the Company’s market-based activities are conducted through Aqua Resources, Inc. and Aqua Infrastructure, LLC.  Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to our utility companies’ service territories; offers, through a third party, water and wastewater line repair service and protection solutions to households; inspects, cleans and repairs storm and sanitary wastewater lines; installs and tests devices that prevent the contamination of potable water; designs and builds water and wastewater systems; and provides other market-based water and wastewater services.  In addition, Aqua Resources provides liquid waste hauling and disposal services in a business unit that, in December 2015, the Company decided to sell, which is reported as assets held for sale in the Company’s Consolidated Balance Sheets.  Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry. 

 

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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)

 

Aqua America, Inc., which prior to its name change in 2004 was known as Philadelphia Suburban Corporation, was formed in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania, formerly known as Philadelphia Suburban Water Company.  In the early 1990s, we embarked on a growth-through-acquisition strategy focused on water and wastewater operations.  Our most significant transactions to date have been the merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition of American Water Works Company, Inc.’s regulated operations in Ohio in 2012.  Since the early 1990s, our business strategy has been primarily directed toward the regulated water and wastewater utility industry, where we have more than quadrupled the number of regulated customers we serve, and has extended our regulated operations from southeastern Pennsylvania to include operations in seven other states.  Currently, the Company seeks to acquire businesses in the U.S. regulated sector and to pursue growth ventures in market-based activities that are supplementary and complementary to our regulated businesses.



Beginning in 2010, and substantially completed in 2013, we pursued a portfolio rationalization strategy to focus our operations in areas where we have critical mass and economic growth potential and to divest operations where limited customer growth opportunities exist, or where we are unable to achieve favorable operating results or a return on equity that we consider acceptable.  In 2014, we sold our operation in Georgia; in 2013, we sold our operations in Florida; in 2012, we sold our operations in Maine and New York; in 2011, we sold our operations in Missouri; and in 2010, we sold our operations in South Carolina.  In connection with the sale of our New York and Missouri operations, we acquired additional utility systems (and customers) in Ohio and Texas, two of the larger states in our portfolio.         



The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes.



Financial Condition

 

During the first three months of 2016, we had $72,984 of capital expenditures, expended $4,461 for the acquisition of water and wastewater utility systems, issued $96,314 of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of $80,341. The capital expenditures were related to new and replacement water mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, and other enhancements and improvements.  The issuance of long-term debt was comprised principally of the funds borrowed under our revolving credit facility.  In addition, we issued 439,943 shares of the Company’s common stock, and paid $3,905 in cash for the acquisition of Superior Water Company, Inc. as described in Note 3 – Acquisitions.         

 

At March 31, 2016, we had $3,981 of cash and cash equivalents compared to $3,229 at December 31, 2015.  During the first three months of 2016, we used the proceeds from the issuance of long-term debt and internally generated funds to fund the cash requirements discussed above and to pay dividends.   

 

At March 31, 2016, our $250,000 unsecured revolving credit facility, which was amended and now expires in February 2021, had $141,690 available for borrowing.  At March 31, 2016, we had short-term

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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)

 

lines of credit of $135,500, of which $107,459 was available for borrowing.  One of our short-term lines of credit is an Aqua Pennsylvania $100,000 364-day unsecured revolving credit facility with four banks, which is used to provide working capital, and as of March 31, 2016, $76,798 was available for borrowing. 



Our short-term lines of credit of $135,500 are subject to renewal on an annual basis.  Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be.     

 

The Company’s consolidated balance sheet historically has had a negative working capital position whereby routinely our current liabilities exceed our current assets.  Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months



Results of Operations 



Analysis of First Quarter of 2016 Compared to First Quarter of 2015 

  

Revenues increased by $2,281 or 1.2%, primarily due to additional water and wastewater revenues of $3,564 associated with a larger customer base due to utility acquisitions, an increase in water and wastewater rates of $1,263, and an increase in infrastructure rehabilitation surcharges of $1,124, offset by a decrease in market-based activities revenues of $3,162 and lower customer water consumption.  The market-based activities revenues decreased due to the absence in the first quarter of 2016 of a significant short-term wastewater services contract that occurred in the first quarter of 2015.    

  

Operations and maintenance expenses increased by $352 or 0.5%, primarily due to additional operating costs associated with acquired utility systems of $2,410, an increase in the Company’s self-insured employee medical benefit program expense of $915, and an increase in insurance of $773, offset by decreases in market-based activities expenses of $2,147 and  water production costs of $1,056.   

 

Depreciation expense increased by $1,645 or 5.4%, primarily due to the utility plant placed in service since March 31, 2015

   

Taxes other than income taxes decreased by $481 or 3.3%, primarily due to a decrease in property taxes of $640 resulting from a reduction in property taxes for our Ohio operating subsidiary.    



Interest expense increased by $1,188 or 6.4%, primarily due to an increase in average borrowings. 



Allowance for funds used during construction (“AFUDC”) increased by $1,126, due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied and an increase in the AFUDC rate. 



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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)

 

Equity loss in joint venture decreased by $465 primarily due to a reduction in depreciation expense resulting from the noncash impairment charge recognized by the joint venture on its long-lived assets in the fourth quarter of 2015.



Our effective income tax rate was 5.5% in the first quarter of 2016 and 8.6% in the first quarter of 2015.  The effective income tax rate decreased due to the effect of additional tax deductions recognized in the first quarter of 2016 for certain qualifying infrastructure improvements for Aqua Pennsylvania.     

  

Net income  increased by $3,192 or 6.6%, primarily as a result of the factors described above. 



Impact of Recent Accounting Pronouncements 

 

We describe the impact of recent accounting pronouncements in Note 15,  Recent Accounting Pronouncements, of the consolidated financial statements in this report.  

 

  

 

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Item 3  – Quantitative and Qualitative Disclosures About Market Risk 

 

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices.  There have been no significant changes in our exposure to market risks since December 31, 2015.  Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for additional information.



Item 4  – Controls and Procedures 

 

(a)

Evaluation of Disclosure Controls and Procedures 

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.   

 

(b)

Changes in Internal Control over Financial Reporting 

 

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Part II.  Other Information

 

Item 1 – Legal Proceedings 

 

We are party to various legal proceedings.  Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our properties is the subject that we believe are material or are expected to have a material adverse effect on our financial position, results of operations or cash flows.     

 

Item 1A – Risk Factors 

 

There have been no material changes to the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015  under “Part 1, Item 1A – Risk Factors.”

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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds



The following table summarizes the Company’s purchases of its common stock for the quarter ended March 31, 2016:





 

 

 

 

 

 

 

 

 



 

Issuer Purchases of Equity Securities

 

 



 

 

 

 

 

 

Total

 

Maximum



 

 

 

 

 

 

Number of

 

Number of



 

 

 

 

 

 

Shares

 

Shares



 

 

 

 

 

 

Purchased

 

that May



 

 

 

 

 

 

as Part of

 

Yet be



 

Total

 

 

 

 

Publicly

 

Purchased



 

Number

 

Average

 

Announced

 

Under the



 

of Shares

 

Price Paid

 

Plans or

 

Plan or

Period

 

Purchased (1)

 

per Share

 

Programs

 

Programs (2)

January 1-31, 2016

 

13,425 

 

$

30.21 

 

 -

 

720,348 

February 1-29, 2016

 

77,144 

 

$

31.18 

 

 -

 

720,348 

March 1-31, 2016

 

533 

 

$

31.94 

 

 -

 

720,348 

Total

 

91,102 

 

$

31.04 

 

 -

 

720,348 

 

 

(1)

These amounts include the following: (a) 73,265 shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of stock-based compensation; and (b) 17,837 shares we acquired from our employees who elected to pay the exercise price of their stock options (and then hold shares of the stock), upon exercise, by delivering to us shares of our common stock in accordance with the terms of our equity compensation plan that were previously approved by our shareholders and disclosed in our proxy statements.  These features of our equity compensation plan are available to all employees who receive stock-based compensation under the plan.  We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day of vesting of the stock-based compensation or the day prior to the option exercise.     



(2)

In December 2014, our Board of Directors authorized a share buyback program of up to 1,000,000 shares to minimize share dilution through timely and orderly share repurchases.  In December 2015, our Board of Directors added 400,000 shares to this program.  This program expires on the earliest of December 31, 2016 or when all authorized repurchases have been made.     



Item 6 – Exhibits  

 

The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference.

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SIGNATURES 

 

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. 



May 6, 2016



 

 

 

 

 



 

Aqua America, Inc.                  



 

Registrant



 

 

 



 

 

 



 

 

 



 

/s/ Christopher H. Franklin



 

Christopher H. Franklin



 

President and



 

Chief Executive Officer



 

 

 



 

 

 



 

 

 



 

/s/ David P. Smeltzer



 

David P. Smeltzer



 

Executive Vice President and



 

Chief Financial Officer 



  

 

 

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EXHIBIT INDEX 





 

 

Exhibit No.

 

 

Description

10.2.3

Third Amendment to Revolving Credit Agreement, dated as of February 24, 2016, between Aqua America, Inc. and PNC Bank, National Association, CoBank, ACB, Huntingdon National Bank, and Bank of America, N.A.

31.1 

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934.

31.2 

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934.

32.1 

Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.

32.2 

Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRES

XBRL Taxonomy Extension Presentation Linkbase Document



  



*Indicates management contract

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