Notes to Financial
Statements
December 31, 2016 and 2015
Note 1—Description of Plan
The following description of the Aqua America, Inc. 401(k) Plan (the “Plan”) is provided for general information purposes only.
Participants should refer to the plan document for a more complete description of the Plan’s provisions.
General
The Plan is a defined contribution plan sponsored by Aqua America, Inc. (the “Plan Sponsor” and the “Plan Administrator”).
Direct and indirect subsidiaries of Aqua America, Inc. that adopt the Plan are participating employers. All participating employers are referred to herein as the “Company”. The Plan’s trustee is T. Rowe Price Trust Company (the
“Trustee”). The Plan is designed to conform to all of the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and with the applicable provisions of the Internal Revenue Code (“IRC”)
and the regulations thereunder.
Eligibility
Covered employees are any employees other than: (i) bargaining unit employees unless their union contract provides for participation in
the Plan, (ii) leased employees, (iii) nonresident aliens, and (iv) persons performing services who are classified by the Company as other common law employees.
There are five active groups of covered employees designated as follows:
Active Groups:
|
|
•
|
|
Group 1 Covered Employee: any covered employee who was a participant in the Aqua America, Inc. Thrift Plan on December 31, 2007.
|
|
|
•
|
|
Group 3 Covered Employee: any covered employee of the Local 542 union hired on/after January 1, 2014 and Aqua Resources.
|
|
|
•
|
|
Group 4 Covered Employee: any covered employee who was a participant in the Personal Savings Plan for Local 473 Employees of the Philadelphia Suburban Division of Aqua Pennsylvania, Inc. on December 31, 2007.
|
|
|
•
|
|
Group 6 Covered Employee: any covered employee (i) whose date of hire or rehire with Aqua Ohio Water Company was on or after January 1, 2001 and (ii) who is represented by one of the following unions: the
International Union of Operating Engineers Local Union 18S (Tiffin District) except an employee hired on or after October 31, 2013, Utility Workers Union of America, AFL-CIO Local Union No. 434 (Marion District), and Utility Workers Union
of America, AFL-CIO Local No. 397 (Ashtabula District). In addition, any covered employee (i) whose date of hire with Aqua Ohio Water Company was prior to January 1, 2001, (ii) who has remained continuously employed by
Ohio-American Water Company and, after April 30, 2012, by Aqua Ohio Water Company, and (iii) who is represented by one of the following unions: the International Union of Operating Engineers Local Union 18S (Tiffin District), Utility
Workers Union of America, AFL-CIO Local Union No. 434 (Marion District), and Utility Workers Union of America, AFL-CIO Local No. 397 (Ashtabula District).
|
4
Aqua America, Inc. 401(k) Plan
Notes to Financial Statements
December 31, 2016 and 2015
|
|
•
|
|
Group 8 Covered Employee: any covered employee of Aqua North Carolina who was previously in Group 3, but not a participant in the Aqua America, Inc. Thrift Plan on December 31, 2007. Employees hired or rehired by
Aqua North Carolina after May 12, 2014 are also participants in Group 8. Aqua North Carolina employees who are not eligible for Group 8 are employees who are under a collective bargaining agreement (unless their collective bargaining agreement
provides for participation in the Plan), leased employees, and nonresident aliens. This group is also comprised of all participants from Group 2 and Group 3, with the exception of Local 542 and Aqua Resources participants as noted above. Group 2
participants include former Consumers Water Company union and non-union employees hired before April 1, 2003, and Group 3 includes any covered employee who was a participant in the Plan on December 31, 2007; any person who is a covered
employee of any other entity that becomes an affiliate of Aqua America, Inc. on or after April 1, 2003 and that adopts the Plan as a participating employer; any covered employee hired or rehired on or after April 1, 2003 (except an
employee rehired after March 2003 and prior to August 6, 2003) who was eligible to participate in another 401(k) plan of an employer; any covered employee represented by the International Union of Operating Engineers Local Union 18S (Tiffin
District) hired on or after October 31, 2013; and any employee, other than an employee classified as a seasonal employee shall become a participant in the Plan on the later of the employee’s employment commencement date or the date in
which the employee becomes a covered employee.
|
In addition, any seasonal employee shall become a participant in the Plan as
of the first day of a calendar quarter coincident with or next following the date on which the employee first completes one year of service, provided the employee is a covered employee on such date.
Contributions
Any newly
hired or rehired eligible employee is automatically enrolled in the Plan at a deferral of 3% of eligible compensation as soon as practical following a 30-day period, unless they elect otherwise. Participants may elect to contribute from 1% to 25%
(15% for participants who are highly compensated) of their pre-tax eligible compensation pursuant to a salary deferral election, up to an annual maximum permitted under applicable laws and regulations governing 401(k) plans of $18,000 in 2016 and
2015, which is partially matched by the Company. Additionally, participants who are age 50 or who will attain age 50 prior to the end of the Plan year may make additional deferral contributions (“Catch-Up”), provided the participant made
the maximum amount of deferral contributions permitted under the Plan. The maximum annual amount of allowable catch-up contributions for 2016 and 2015 is $6,000. Participants may choose to make after-tax deferral contributions as a Roth contribution
(“Roth”) instead of or in addition to pre-tax deferral contributions, subject to the same limitations, which may be partially matched by the Company. The Plan also allows participants to invest from 1% to 10% of their after-tax
compensation, which is not matched by the Company. Plan participants may make transfers between funds or suspend their contributions at any time. They may also contribute amounts representing distributions from other qualified defined benefit or
contribution plans (“Rollovers”).
5
Aqua America, Inc. 401(k) Plan
Notes to Financial Statements
December 31, 2016 and 2015
The Plan provides for employer contributions as follows:
Employer Matching Contributions
Matching contributions are made to the Plan in the form of cash that is used for the purchase of Aqua America, Inc. common stock. Each
participant may elect to transfer amounts in their account which are invested in Aqua America, Inc. common stock to another investment fund under the Plan, subject to procedures established by the Plan Administrator.
|
|
•
|
|
Groups 1 and 3: The Company will make a matching contribution equal to 50% of the first 6% of a participant’s eligible compensation that is contributed to the Plan as a pre-tax deferral contribution or a Roth
deferral contribution.
|
|
|
•
|
|
Group 4: The Company will make a matching contribution equal to 50% of the first 4% of a participant’s eligible compensation that is contributed to the Plan as a pre-tax deferral contribution or a Roth deferral
contribution.
|
|
|
•
|
|
Group 6: The Company will make a matching contribution equal to 100% of the first 3% of a participant’s eligible compensation that is contributed to the Plan and 50% of the next 2% of a participant’s
compensation that is contributed to the Plan as a pre-tax deferral contribution or a Roth deferral contribution.
|
|
|
•
|
|
Group 8: The Company will make a matching contribution equal to 100% of the first 2% of the participant’s eligible compensation that is contributed to the Plan as a pre-tax deferral contribution or a Roth deferral
contribution. The Company will also make a matching contribution equal to 50% of the next 4% of eligible compensation that is contributed as a pre-tax deferral contribution or a Roth deferral contribution.
|
Discretionary Contributions
The Company may make additional discretionary contributions to the Plan for the benefit of active participants. Discretionary contributions are
allocated to active Group 1, Group 3 and Group 8 participant accounts on a pro-rated basis based on each participant’s compensation compared to the compensation of all active participants in Group 1, Group 3 and Group 8. The other groups in the
plan are not eligible for discretionary contributions. This discretionary contribution will be made to the Plan in the form of cash that is used for the purchase of Aqua America, Inc. common stock. The Company did not make any discretionary
contributions during 2016 and 2015.
Non-Discretionary Contributions
The Company will make additional non-discretionary contributions of 5.25% of eligible hourly wages to the Plan for the benefit of active Group
6 participants who qualify for a Company “Enhanced Match”, defined as 100% of the first 3% and 50% of the next 2% of eligible compensation contributed. The Company made such non-discretionary contributions for 2016 and 2015 of $153,873 and
$143,173, respectively.
6
Aqua America, Inc. 401(k) Plan
Notes to Financial Statements
December 31, 2016 and 2015
Employer Profit Sharing Contributions
The Company may, at its discretion, make a profit sharing contribution to the Plan to benefit all Group 3 eligible employees. The profit
sharing contribution will be made in the form of cash and into participant-directed accounts. The Company made profit sharing contributions for 2016 and 2015 of $222,336 and $237,813, respectively.
Employer Performance Contributions
The Company may, at its discretion, make an employer performance contribution on behalf of eligible participants if certain established
performance goals are achieved. Performance contributions are to be made to the Plan in the form of cash, Company stock, or any combination thereof. The Company did not make any performance contributions during 2016 and 2015.
Excess Contributions
In
order to satisfy the relevant nondiscrimination provisions of the Plan for the year ended December 31, 2015, the Plan reimbursed $17,261 in excess contributions to select participants prior to the Internal Revenue Service (“IRS”)
deadline for correction of excess deferrals of April 15
th
2016. The excess contributions are recorded as a liability and as a reduction of participant contribution. No such reimbursements for
excess contributions were required based on the testing results of the Plan for the year ended December 31, 2016.
Year-End
Corporate Contribution
The Company may make a discretionary year-end corporate contribution, of up to 3% of an employee’s
eligible compensation, for participants of Group 8 who were employed on the last day of the Plan year. This contribution will be made in cash into participant-directed accounts. The Company made year-end corporate contributions for 2016 and 2015 in
the amount of $1,815,445 and $1,698,687, respectively.
Other Contributions
The Plan maintains an Administrative Budget account funded by the Plan’s Trustee. The funds in the account are treated as Plan assets and
must be used only for payment of permissible Plan expenses or allocation to participants. The Administrative Budget funds are invested in the T. Rowe Price Prime Reserve Fund. The T. Rowe Price Prime Reserve Fund is not an available investment
option for plan participants. All funds utilized from this account are treated as administrative expenses on the Statements of Changes in Net Assets Available for Benefits. Contributions to the Administrative Budget account were $25,000 for 2016 and
2015. Administrative Budget account funds utilized amounted to $20,289 and $35,163 during 2016 and 2015, respectively. The balance in the Administrative Budget account was $6,413 and $1,702 as of December 31, 2016 and 2015, respectively.
Participants’ Accounts
Each participant’s account is credited with the participant’s contribution and allocations of the Company’s contribution and
plan earnings or losses. Allocations are based on participant contributions or account balances, as defined by the plan document. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested
account.
7
Aqua America, Inc. 401(k) Plan
Notes to Financial Statements
December 31, 2016 and 2015
Vesting
Each participant will always be 100% vested in the balances in their deferral contribution, voluntary contribution, discretionary contribution,
employer performance contribution, and rollover contribution accounts. Group 3 and Group 8 covered employees become 100% vested in their employer matching and employer profit sharing/corporate contributions after three years of service*. Group 6
covered employees become 100% vested in their employer non-discretionary contribution upon completing a year of service*.
Vesting for
Group 1 and Group 4 covered employees’ employer matching contributions is in accordance with the following schedule:
|
|
|
|
|
Years of Service *
|
|
% Vested
|
|
Less than 2
|
|
0%
|
|
2 but less than 3
|
|
20%
|
|
3 but less than 4
|
|
40%
|
|
4 but less than 5
|
|
60%
|
|
5 but less than 6
|
|
80%
|
|
6 or more
|
|
100%
|
|
*
|
A “year of service” for vesting purposes means each plan year (the calendar year) in which the participant is credited with 1,000 or more hours of service.
|
Common Stock
Matching
contributions are made in the form of cash that is used for the purpose of purchasing Aqua America, Inc. common stock. Discretionary contributions may be made in cash into participant directed accounts or for the purchase of Aqua America, Inc.
common stock. Each participant may elect to transfer amounts in their account invested in common stock to another investment option under the Plan, subject to procedures established by the Plan Administrator.
Participants who are 100% vested in this fund have an opportunity to elect that any dividends with respect to Aqua America, Inc. common stock
held be paid in cash to the participant’s account or allocated to their investment mix held by the Trustee rather than allocated to their account for investment in additional shares of Aqua America, Inc. common stock.
Investment Options
Participants can direct, at the time they enroll in the Plan, that their salary deferral and voluntary contributions be invested entirely in
one of the funds offered by the Plan or divided among the funds. The Plan also permits participants to acquire an interest in Aqua America, Inc. common stock. Participants may change their investment allocation instructions and reinvest their
contributions into a different fund or funds at any time.
8
Aqua America, Inc. 401(k) Plan
Notes to Financial Statements
December 31, 2016 and 2015
Payment of Benefits
Distributions from the Plan are normally made shortly after the participant’s retirement, disability, or death. If the participant’s
account balance does not exceed $1,000, the participant will receive a lump-sum distribution as soon as practicable following termination of employment. If the account balance is greater than $1,000 but less than $5,000 and the participant does not
elect to receive the distribution directly, then the Trustee will pay the distribution in a direct rollover to an individual retirement plan designated by the Plan Administrator. Withdrawals will be made in cash or shares of Aqua America, Inc.
common stock, to the extent permitted by law. Under certain circumstances, a participant may withdraw all or a portion of the employee contributions while still employed.
Notes Receivable from Participants
Participants may borrow funds from their account balance in amounts that do not exceed the lesser of $50,000 or 50% of their vested account
balance for a period not to exceed five years, unless the note is used to purchase the participant’s principal residence. Repayment for active employees is made through payroll deductions. All new notes receivable are issued at an interest rate
of prime plus 1%. The notes are secured by the balance in the participant’s account and bear interest at rates that range from 4.25% to 4.50% and apply to loans issued between January 1, 2010 to December 31, 2016.
Plan Forfeitures
Participants who take a distribution prior to being fully vested forfeit their portion of non-vested employer contributions unless they resume
employment as a Covered Employee and repay the full amount of the distribution to the Plan prior to the earlier of (a) five years after the date on which they were reemployed, or (b) the close of the first period of five consecutive
one-year breaks in service, commencing after the distribution, in which case the non-vested amount, unadjusted by any subsequent gains or losses, shall be restored.
Forfeited non-vested accounts are used first to restore any non-vested amounts and shall then be applied as promptly as practicable to reduce
employer contributions. Employer contributions were reduced by $192,635 and $113,946 during 2016 and 2015, respectively, as a result of forfeited non-vested accounts. The balance in the forfeiture account was $1,135 and $19,944 as of
December 31, 2016 and 2015, respectively.
Note 2—Summary of Significant Accounting Policies
A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
Basis of Accounting
The
accompanying financial statements have been prepared using the accrual basis of accounting.
9
Aqua America, Inc. 401(k) Plan
Notes to Financial Statements
December 31, 2016 and 2015
Use of Estimates
The preparation of the financial statements, in conformity with accounting principles generally accepted in the United States of America,
requires plan management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure at the date of the financial statements, as well as reported amounts of additions and deductions during the
reporting period. Significant estimates include the determination of the fair value of Plan assets. Actual results could differ from these estimates.
Administration
The Plan
is administered by a committee (the “Committee”) consisting of three or more individuals selected by and who may be removed at any time by the Board of Directors of Aqua America, Inc. The Committee members may be employees of Aqua America,
Inc. and may be participants in the Plan. The Committee members receive no compensation from the Plan for their services in such capacity. The Committee has extensive administrative powers in connection with the Plan, including authority to
interpret the provisions of the Plan, to adopt rules for its administration and to make other decisions with respect to the Plan.
The
Trustee for the Plan invests the Plan’s funds as instructed by participants. The Trustee invests funds received from contributions, investment sales, interest, and dividend income and makes distribution payments to participants.
Certain administrative expenses of the Plan are paid by the Company. The Company may, at its discretion, elect to have certain administrative
expenses reimbursed by the Administrative Budget account funded by the Trustee.
Investment Valuation and Income Recognition
The Plan’s investments are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The Committee determines the Plan’s valuation policies utilizing information provided by the investment advisors and Trustee. See Note 3 – “Fair
Value Measurements” for a discussion on fair value measurements.
On occasion, trades or fund exchanges initiated by a Plan
participant may not settle by the last day of a calendar year but will settle in the subsequent plan year. In that event, the participant’s account is credited with the cash value of such trades and fund exchanges and the cash is reported as
cash and cash equivalents on the Statements of Net Assets Available for Benefits. As of December 31, 2016, and 2015, there were unsettled transactions of $20,000 and $0, respectively.
Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Realized gains and losses on the sale of
Aqua America, Inc. stock are based on average cost of the securities sold. Net appreciation includes the gains and losses on investments bought and sold as well as held during the year. Purchases and sales are recorded on a trade-date basis.
Investment Fees
Net
investment returns reflect certain fees paid to the investment advisors, transfer agents, and others as further described in each fund prospectus or other published documents. These fees are deducted prior to allocation of the Plan’s investment
activity and thus are not separately identifiable as an expense.
10
Aqua America, Inc. 401(k) Plan
Notes to Financial Statements
December 31, 2016 and 2015
Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent notes
receivable are recorded as distributions based upon the terms of the plan document. No allowance for credit losses has been recorded as of December 31, 2016 and 2015.
Concentration of Investments
Concentrations in the Plan’s investments which management determined to be greater than 10% of the Plan’s investments are as follows:
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
Aqua America, Inc. common stock
|
|
32.0%
|
|
31.4%
|
|
T. Rowe Price Retirement 2020 Fund
|
|
10.9%
|
|
11.2%
|
|
T. Rowe Price Retirement 2025 Fund
|
|
10.1%
|
|
*
|
|
*
|
Investment did not represent 10% or more of the Plan’s investments.
|
Payment of
Benefits
Benefits are recorded when paid.
Income Taxes
The Plan is
exempt from federal income taxes under the IRC.
Note 3—Fair Value Measurements
The framework that the authoritative guidance establishes for measuring fair value includes a hierarchy used to classify the valuation inputs
used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input
that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
|
|
•
|
|
Level 1—Fair value is based on unadjusted quoted prices in active markets that are accessible to the Plan for identical assets. These generally provide the most reliable evidence and are used to measure fair value
whenever available.
|
|
|
•
|
|
Level 2—Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable
market data. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, quoted market prices in inactive markets for identical or similar assets, and other observable inputs.
|
|
|
•
|
|
Level 3—Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and similar
techniques.
|
11
Aqua America, Inc. 401(k) Plan
Notes to Financial Statements
December 31, 2016 and 2015
The following is a description of the valuation methodologies used for assets measured at
fair value. There have been no changes in the valuation techniques used to measure fair value for the years ended December 31, 2016 and 2015.
|
|
•
|
|
Aqua America, Inc. common stock is valued at the closing price reported on the active market on which the stock is traded.
|
|
|
•
|
|
Mutual funds are valued at the daily closing price as reported by the fund. Mutual funds held by the Plan are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are
required to publish their daily NAV and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
|
|
|
•
|
|
The Stable Value Common Trust Fund (the “Trust”) is comprised primarily of fully benefit-responsive investment contracts that are valued at the NAV of units of the Trust. The NAV is used as a practical
expedient to estimate fair value. This practical expedient would not be used if it is determined to be probable that the fund will sell the investment for an amount different from the reported NAV. Participant transactions (purchases and sales) may
occur daily. Under the terms of the Trust, retirement plans invested in the Trust are required to provide either 12 or 30 months’ advance written notice to the trustee prior to redemption of trust units; the notice period may be shortened or
waived by the trustee at its sole discretion.
|
The following table sets forth by level, within the fair value hierarchy, the
Plan’s assets at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
Mutual funds
|
|
$
|
113,531,701
|
|
|
$
|
110,833,860
|
|
|
Aqua America, Inc. common stock
|
|
|
58,695,513
|
|
|
|
57,429,479
|
|
Investments Measured Using NAV per Share Practical Expedient
The following table summarizes investments for which fair value is measured using the NAV per share practical expedient as of December 31,
2016 and 2015, respectively. There are no participant redemption restrictions for these investments; the redemption notice period is applicable only to the Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
2016
Fair Value
|
|
|
2015
Fair Value
|
|
|
Unfunded
Commitment
|
|
|
Redemption
Frequency
(if currently eligible)
|
|
Redemption
Notice Period
|
|
|
Common Trust Fund
|
|
$
|
11,240,591
|
|
|
$
|
10,380,058
|
|
|
$
|
20,000
|
|
|
Daily
|
|
|
12 or 30 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Aqua America, Inc. 401(k) Plan
Notes to Financial Statements
December 31, 2016 and 2015
Note 4—Related Party and Party-in-Interest Transactions
Certain of the Plan’s investments are shares of mutual funds managed by the Trustee, therefore, these transactions qualify as
party-in-interest transactions. Investment management fees paid to the Trustee during 2016 and 2015 were netted against investment returns. As discussed in Note 1, employer matching contributions are invested in the common stock of the Plan Sponsor.
Participants may also elect to invest in the common stock of the Plan Sponsor. These transactions qualify as related party and party-in-interest transactions. Total purchases at market value related to the common stock of the Plan Sponsor for 2016
and 2015 were $9,083,784 and $6,599,862, respectively. Total sales at market value related to the common stock of the Plan Sponsor for 2016 and 2015 were $8,413,466 and $10,595,107, respectively. Additionally, the Plan issues loans to participants,
which are secured by the participants’ account balances. These transactions qualify as party-in-interest transactions.
Note 5—Plan
Termination
Although it has not expressed any intent to do so, the Company has the right to discontinue its contributions at any time
and to terminate the Plan subject to the provisions of ERISA. In the event of plan termination, participants will become 100 percent vested in their Company contributions.
Note 6—Tax Status
The IRS issued a
determination letter dated September 8, 2015, which stated that the Plan and related trust qualified under applicable provisions of the IRC and, therefore, are exempt from federal income taxes. This determination letter expires on
January 31, 2020. The Plan has been amended since receiving the latest determination letter. The Plan Administrator and the Plan’s counsel believe that the Plan is currently designed and being operated in compliance with applicable
requirements of the IRC.
Accounting principles generally accepted in the United States of America require management to evaluate tax
positions taken by the Plan and recognize a tax liability if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The Plan Administrator has analyzed the tax positions taken by the
Plan and has concluded that as of December 31, 2016, there are no uncertain positions taken, or expected to be taken, that would require recognition of a liability or disclosure in the financial statements. The Plan is subject to routine audits
by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Plan Administrator believes it is no longer subject to income tax examinations for years prior to 2014.
Note 7—Risks and Uncertainties
The
Plan invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably
possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statements of Net Assets Available for
Benefits.
13