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
September
30
, 2017
,
the consolidated statements of net income and comprehensive income
for the three
and
nine
months ended
September
30
, 2017
and 201
6
the consolidated statements of cash flow
for the
nine
months ended
September
30
, 2017
and 201
6
, and the consolidated statement of equity for the
nine
months ended
September
30
, 2017
are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present
a
fair
statement of
its
consolidated financial position, consolidated changes in equity, consolidated results of operations, and 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, 201
6
. 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, 201
6
consolidated balance sheet data presented herein was derived from the Company’s
December 31, 201
6
audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.
Certain prior period amounts have been reclassified to conform to the current period presentation
in the consolidated statements of cash flows:
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·
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pension and other
postretirement benefit contributions
,
and
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·
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a
s a result of the early adoption
,
in the third quarter of 2017
,
of the
Financial Accounting Standards Board’s (“FASB”)
accounting guidance on the classification of certain
cash receipts and cash payments
,
the presentation of debt
extinguishment costs
(refer to Note 15 –
Recent Accounting Pronouncements
)
.
|
The preparation of financial statements often requires the selection of specific accounting methods and policies. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in
its
consolidated balance sheets, the revenues and expenses in
its
consolidated statements of net income, and the information that is contained in
its
summary of significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that
the Company
include
s
currently in
its
consolidated financial statements, summary of significant accounting policies, and notes.
There have been no changes to the summary of significant accounting policies previously identified in
the Company’s
Annual Report on Form 10-K
for the year ended December 31, 2016
.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 2 –
Goodwill
The following table summarizes the changes in the Company’s goodwill, by business segment:
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Regulated
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Segment
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Other
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Consolidated
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Balance at December 31, 2016
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$
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37,367
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$
|
4,841
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$
|
42,208
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Goodwill acquired
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72
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-
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72
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Reclassification to utility plant acquisition adjustment
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(50)
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-
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(50)
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Balance at September 30, 2017
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$
|
37,389
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$
|
4,841
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|
$
|
42,230
|
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.
Goodwill is not amortized but is tested for impairment annually, or more often, if circumstances indicate a possible impairment may exist, to determine whether it
i
s more likely than not that the fair value of a reporting unit is less than its carrying amount.
When testing goodwill for impairment,
the Company
may assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and entity specific events.
Alternatively,
the Company
may bypass this qualitative assessment for some of
its
reporting units and perform a quantitative goodwill impairment test by determining the fair value of a reporting unit based on a discounted cash flow analysis.
The Company
tested the goodwill attributable
to
each of
its
reporting units for impairment as of July 31, 201
7
, in conjunction with the timing of
its
annual strategic business plan, and concluded that the estimated fair value of each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount, indicating that none of the Company’s goodwill was impaired.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 3 –
Acquisitions
During
the first
nine months
of
2017, the Company completed
four
acquisitions of water and wastewater utility systems in various states
adding
1,003
customers
. The total purchase price of these utility systems
consisted of
$
5,860
in cash,
which resulted in
$72
of
goodwill
being
recorded. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’
s
results of operations.
As part of the Company’s growth-through-acquisition strategy, the Company has entered into
purchase
agreements to acquire the water or wastewater
utility system
assets of
five
municipalities for a total combined purchase price in cash of
$145,700
. The purchase price for these
pending
acquisitions is subject to certain adjustments at closing, and is subject to regulatory approvals.
Closing for these acquisitions are expected to occur by
mid-year 2018, which is subject to the timing of the regulatory approval process
. These acquisitions will add approximately
14,900
customers in two of the states that the Company operates in.
Pursuant to
its
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 consisted 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 2016, the Company completed
eighteen
acquisitions of water and wastewater utility systems in various states
adding
2,469
customers
. The total purchase price of these utility systems consisted of
$
5,518
in cash,
which resulted in
$1,756
of
goodwill
being
recorded. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.
Note
4
–
Assets Held for Sale
In the first quarter of 2017, the Company decided to market for s
ale a
water system that serves approximately
265
customers
.
T
his
water system is reported as assets held for sale in the Company’s consolidated balance sheet.
In the second quarter of 2016, the Company decided to market for sale
two
business units
that are reported within the Company’s market-based subsidiary, Aqua Resources. One business unit
install
ed
and test
ed
devices that prevent the contamination of potable water and repair
ed
water and wastewater systems,
for
which
the
sale was completed in January 2017
. The other business unit
repairs and performs maintenance on water and wastewater systems
, for which the sale was completed in June 2017
.
]
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note
5
–
Capitalization
In October 2017, Aqua Pennsylvania issued
$75,000
of first mortgage bonds, of which
$35,000
is due in
2054
,
$20,000
is due in
2055
, and
$20,000
is due in
2057
with interest rates of
4.06%
,
4.07%
, and
4.09%
, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
In July 2017,
Aqua Illinois issued
$100,000
of first mortgage bonds consisting of the following:
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Amount
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Interest Rate
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Maturity
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$25,000
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3.64%
|
2032
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$6,000
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3.89%
|
2037
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$15,000
|
3.90%
|
2038
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|
$10,000
|
4.18%
|
2047
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|
$22,000
|
4.22%
|
2049
|
|
$22,000
|
4.24%
|
2050
|
The proceeds from these bonds were used to
repay existing indebtedness and for general corporate purposes.
In July 2017, Aqua Pennsylvania issued
$80,000
of first mortgage bonds, of which
$40,000
is due in
2055
and
$40,000
is due in
2057
with interest rates of
4.04%
and
4.06%
, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
In January 2017, Aqua Pennsylvania issued
$50,000
of first mortgage bonds, of which
$10,000
is due in
2042
and
$40,000
is due in
2044
with interest rates of
3.65%
and
3.69%
, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
Note
6
–
Fair Value of Financial Instruments
The Company follows the FASB
’s
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:
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·
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Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;
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·
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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
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·
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Level 3: inputs that are unobservable and significant to the fair value measurement.
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Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. There have been no changes in the valuation techniques used to measure fair value
,
or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended
September
30
, 2017
.
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
September
30
, 2017
and
December 31, 201
6
, the carrying amount of the Company’s loans payable was
$20,990
and $
6,535
, respectively, which equates to their estimated fair value.
The
Company’s
deferred compensation plan liability is determined
by the fair value of mutual funds, which are based
on quoted market prices from active markets utilizing Level 1 methods and assumptions. As of
September
30, 2017 and December 31, 2016, the carrying amount of these secu
rities was
$
18,145
and
$17,072
,
which equates to their fair value, and
is reported in the consolidated balance sheet in deferred charges and other assets
.
T
he fair value of cash and cash equivalents, which is comprised of a money market fund, is determined based on the net asset value per unit utilizing Level 2 methods and assumptions. As of
September
30
, 2017
and
December 31, 201
6
, the carrying amounts of the Company's cash and cash equivalents was
$4,139
and $
3,763
, respectively, which
equates to their fair value.
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
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September 30,
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December 31,
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2017
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2016
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Carrying Amount
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$
|
2,059,031
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$
|
1,910,633
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Estimated Fair Value
|
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2,185,051
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2,018,933
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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
$107,715
as of
September
30
, 2017
, and
$91,843
as of
December 31, 201
6
. 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
2027
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
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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
stock-based compensation
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:
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Three Months Ended
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Nine Months Ended
|
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September 30,
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September 30,
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2017
|
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2016
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2017
|
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2016
|
|
Average common shares outstanding during the period for basic computation
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177,660
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177,336
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177,583
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177,243
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Dilutive effect of employee stock-based compensation
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464
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481
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520
|
|
538
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Average common shares outstanding during the period for diluted computation
|
|
178,124
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|
177,817
|
|
178,103
|
|
177,781
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For the three
and
nine
months ended
September
30
, 2017
and
2016
, all of the Company’s employee stock options were included in the calculations of diluted net income per share as the calculated cost to exercise the stock options was less than the average market price of the Company’s common stock during these periods.
Note
8
–
Stock-based Compensation
Under the Company’s 2009 Omnibus Equity Compensation Plan, as amended as of February 27, 2014 (the “2009 Plan”), as approved by the Company’s shareholders to replace the 2004 Equity Compensation Plan (the “2004 Plan”), stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors. The 2009 Plan authorizes
6,250,000
shares for issuance under the plan. A maximum of
3,125,000
shares under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the 2009 Plan. During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the 2009 Plan for more than
500,000
shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the 2009 Plan. Awards
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
makes such awards
. At
September
30
, 2017
,
3,741,526
shares were still available for
issuance
under the 2009 Plan.
No
further grants may be made under the 2004 Plan.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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:
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|
|
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|
Three Months Ended
|
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Nine Months Ended
|
|
|
|
September 30,
|
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September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Stock-based compensation within operations and maintenance expenses
|
|
$
|
1,035
|
|
$
|
1,012
|
|
$
|
2,875
|
|
$
|
2,504
|
|
Income tax benefit
|
|
|
420
|
|
|
411
|
|
|
1,167
|
|
|
1,013
|
The following table summarizes
the
PSU transactions for the
nine
months ended
September
30
, 2017
:
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Number
|
|
Weighted
|
|
|
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|
of
|
|
Average
|
|
|
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Share Units
|
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Fair Value
|
|
Nonvested share units at beginning of period
|
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|
476,896
|
|
$
|
27.96
|
|
Granted
|
|
|
125,202
|
|
|
30.79
|
|
Performance criteria adjustment
|
|
|
(64,398)
|
|
|
27.75
|
|
Forfeited
|
|
|
(16,306)
|
|
|
28.26
|
|
Share units vested in prior period and issued in current period
|
|
|
32,400
|
|
|
25.31
|
|
Share units issued
|
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|
(125,999)
|
|
|
36.37
|
|
Nonvested share units at end of period
|
|
|
427,795
|
|
$
|
26.13
|
|
|
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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
nine
months ended
September
30
, 2017
and
2016
was
$
30.79
and $
28.89
, 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
the Company’s
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.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Restricted Stock Units
–
A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock. RSUs are eligible to be earned at the end of a specified restricted period, generally
three
years, beginning on the date of grant. 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
the
compensation cost
and income tax benefit
for stock-based compensation related to RSUs:
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|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Stock-based compensation within operations and maintenance expenses
|
|
$
|
311
|
|
$
|
299
|
|
$
|
915
|
|
$
|
763
|
|
Income tax benefit
|
|
|
129
|
|
|
124
|
|
|
378
|
|
|
315
|
The following table summarizes
the
RSU transactions for the
nine
months ended
September
30
, 2017
:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted
|
|
|
|
|
of
|
|
Average
|
|
|
|
|
Stock Units
|
|
Fair Value
|
|
Nonvested stock units at beginning of period
|
|
|
109,273
|
|
$
|
28.48
|
|
Granted
|
|
|
41,293
|
|
|
30.37
|
|
Stock units vested and issued
|
|
|
(26,914)
|
|
|
26.18
|
|
Forfeited
|
|
|
(2,287)
|
|
|
30.52
|
|
Nonvested stock units at end of period
|
|
|
121,365
|
|
$
|
29.60
|
The per unit weighted-average fair value at the date of grant for RSUs granted during the
nine
months ended
September
30
, 2017
and
2016
was $
30.37
and $
32.09
, respectively.
Stock Options
–
A stock option represents the option to purchase a number of shares of common stock of the Company as specified in the stock option grant
agreement
at the exercise price per share as
determined by the closing market price of
our
common stock on the grant date
.
Stock o
ptions are
exercisable in
installments
of
33%
annually
, starting
one
year from the grant date and expire
10
years from the grant date.
The fair value of each stock option is amortized into compensation expense using the graded-vesting method, which results in the recognition of compensation costs over the requisite service period for each separately vesting tranche of the stock options as though the stock options were, in substance, multiple stock option grants.
The following table provides
the compensation cost
and income tax benefit
for stock-based compensation related to stock options:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Stock-based compensation within operations and maintenance expenses
|
|
$
|
73
|
|
$
|
-
|
|
$
|
177
|
|
$
|
-
|
|
Income tax benefit
|
|
|
43
|
|
|
15
|
|
|
167
|
|
|
249
|
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 options was estimated at the gran
t
date using the Black-Scholes option-pricing model. The following assumptions were used in the application of this valuation model:
|
|
|
|
|
2017
|
|
Expected term (years)
|
5.45
|
|
Risk-free interest rate
|
2.01%
|
|
Expected volatility
|
17.7%
|
|
Dividend yield
|
2.51%
|
|
Grant date fair value per option
|
$ 4.07
|
Historical information was the principal basis for the selection of the expected term and dividend yield. The expected volatility is based on a weighted-average combination of historical and implied volatilities over a time period that approximates the expected term of the option. The risk-free interest rate was selected based upon the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.
For the
nine
months ended
September
30
, 2016
, there were
no
compensation costs for stock-based compensation related to stock options, as
the previous
stock option
grant that occurred in 2010 became
fully amortized in 2013. Additionally, there were
no
stock options granted during the
nine
months ended
September
30
, 2016
.
The following table summarizes stock option transactions for the
nine
months ended
September
30
, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
Life (years)
|
|
Value
|
|
Outstanding at beginning of period
|
|
427,335
|
|
$
|
15.55
|
|
|
|
|
|
|
Granted
|
|
120,127
|
|
|
30.47
|
|
|
|
|
|
|
Forfeited
|
|
(2,439)
|
|
|
30.47
|
|
|
|
|
|
|
Expired / Cancelled
|
|
(2,812)
|
|
|
14.26
|
|
|
|
|
|
|
Exercised
|
|
(157,621)
|
|
|
16.51
|
|
|
|
|
|
|
Outstanding at end of period
|
|
384,590
|
|
$
|
19.73
|
|
3.9
|
|
$
|
5,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
266,902
|
|
$
|
15.00
|
|
1.4
|
|
$
|
4,855
|
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Stock Awards
–
Stock awards represent the issuance of
the Company’s
common stock, without restriction. The issuance of stock awards results in compensation expense which is equal to the fair market value of the stock on the grant date, and is expensed immediately upon grant.
The following table provides
the
compensation cost
and income tax benefit
for stock-based compensation related to stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Stock-based compensation within operations and maintenance expenses
|
|
$
|
150
|
|
$
|
131
|
|
$
|
412
|
|
$
|
375
|
|
Income tax benefit
|
|
|
62
|
|
|
54
|
|
|
171
|
|
|
155
|
The following table summarizes stock award transactions for the
nine
months ended
September
30
, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted
|
|
|
|
of
|
|
Average
|
|
|
|
Stock Awards
|
|
Fair Value
|
|
Nonvested stock awards at beginning of period
|
|
-
|
|
$
|
-
|
|
Granted
|
|
12,529
|
|
|
32.92
|
|
Vested
|
|
(12,529)
|
|
|
32.92
|
|
Nonvested stock awards at end of period
|
|
-
|
|
$
|
-
|
The per unit weighted-average fair value at the date of grant for stock awards granted during the
nine
months ended
September
30
, 2017
and
2016
was
$
32.92
and
$
32.57
, respectively
.
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
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Service cost
|
|
$
|
794
|
|
$
|
784
|
|
$
|
2,382
|
|
$
|
2,394
|
|
Interest cost
|
|
|
3,108
|
|
|
3,251
|
|
|
9,324
|
|
|
9,787
|
|
Expected return on plan assets
|
|
|
(4,270)
|
|
|
(4,215)
|
|
|
(12,810)
|
|
|
(12,696)
|
|
Amortization of prior service cost
|
|
|
145
|
|
|
145
|
|
|
435
|
|
|
435
|
|
Amortization of actuarial loss
|
|
|
2,001
|
|
|
1,797
|
|
|
6,003
|
|
|
5,354
|
|
Settlement charge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,028
|
|
Special termination benefit charge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
302
|
|
Net periodic benefit cost
|
|
$
|
1,778
|
|
$
|
1,762
|
|
$
|
5,334
|
|
$
|
8,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Postretirement Benefits
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Service cost
|
|
$
|
255
|
|
$
|
253
|
|
$
|
765
|
|
$
|
761
|
|
Interest cost
|
|
|
737
|
|
|
726
|
|
|
2,211
|
|
|
2,202
|
|
Expected return on plan assets
|
|
|
(647)
|
|
|
(645)
|
|
|
(1,941)
|
|
|
(2,001)
|
|
Amortization of prior service cost
|
|
|
(127)
|
|
|
(137)
|
|
|
(381)
|
|
|
(411)
|
|
Amortization of actuarial loss
|
|
|
291
|
|
|
220
|
|
|
873
|
|
|
707
|
|
Net periodic benefit cost
|
|
$
|
509
|
|
$
|
417
|
|
$
|
1,527
|
|
$
|
1,258
|
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
$
15,421
to its Pension Plan during the first
six
months of
2017
,
which completed the Company’
s
2017 cash contributions
.
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
nine
months of
2017
, the Company’s operating divisions in
Indiana and
Ohio
were granted base rate increases designed to increase total operating revenues on an annual basis by
$
7,403
. Further, during the first
nine
months of
2017
, the Company’s operating divisions in
Illinois
, New Jersey,
and North Carolina
received
approval to bill
infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by
$
3,659
.
Note
11
–
Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Property
|
|
$
|
6,955
|
|
$
|
7,007
|
|
$
|
20,608
|
|
$
|
20,119
|
|
Gross receipts, excise and franchise
|
|
|
3,969
|
|
|
3,409
|
|
|
10,507
|
|
|
9,468
|
|
Payroll
|
|
|
2,066
|
|
|
2,140
|
|
|
7,322
|
|
|
7,775
|
|
Regulatory assessments
|
|
|
674
|
|
|
639
|
|
|
1,933
|
|
|
1,991
|
|
Pumping fees
|
|
|
1,526
|
|
|
1,442
|
|
|
3,820
|
|
|
3,501
|
|
Other
|
|
|
44
|
|
|
75
|
|
|
200
|
|
|
240
|
|
Total taxes other than income
|
|
$
|
15,234
|
|
$
|
14,712
|
|
$
|
44,390
|
|
$
|
43,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
12
–
Segment Information
The Company has
ten
operating segments and
one
reportable segment. The Regulated segment, the Company’s single reportable segment, is comprised of
eight
operating segments representing
its
water and wastewater regulated utility companies which are organized by the states where
the Company
provide
s
water and wastewater services. These operating segments are aggregated into one reportable segment
because
each of these operating segments has the following similarities: economic characteristics, nature of services, production processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment.
Two
operating segments are included within the Other category below. These segments are not quantitatively significant and are comprised of Aqua Resources and Aqua Infrastructure.
Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to
its
utility companies’ service territories; and offers, through a third party, water and sewer line repair service and protection solutions to households. Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry.
In addition to these segments, Other is comprised of other business activities not included in the reportable segment, including corporate costs that have not been allocated to the Regulated segment and intersegment eliminations. Corporate costs include general and administrative expenses, and interest expense.
Additionally, contained within total assets for
the
Other
category, in the table below,
is a regulatory asset for postretirement benefits for the underfunded status of the Company’
s
pension and other postretirement benefit plans and an intercompany receivable.
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
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
|
|
Regulated
|
|
Other
|
|
Consolidated
|
|
Regulated
|
|
Other
|
|
Consolidated
|
|
Operating revenues
|
|
$
|
214,032
|
|
$
|
976
|
|
$
|
215,008
|
|
$
|
222,231
|
|
$
|
4,362
|
|
$
|
226,593
|
|
Operations and maintenance expense
|
|
|
70,772
|
|
|
(2,790)
|
|
|
67,982
|
|
|
73,013
|
|
|
6,799
|
|
|
79,812
|
|
Depreciation
|
|
|
34,533
|
|
|
(269)
|
|
|
34,264
|
|
|
34,025
|
|
|
(144)
|
|
|
33,881
|
|
Operating income (loss)
|
|
|
94,142
|
|
|
3,344
|
|
|
97,486
|
|
|
100,563
|
|
|
(2,764)
|
|
|
97,799
|
|
Interest expense, net
|
|
|
20,753
|
|
|
1,658
|
|
|
22,411
|
|
|
19,167
|
|
|
1,001
|
|
|
20,168
|
|
Allowance for funds used during construction
|
|
|
3,914
|
|
|
-
|
|
|
3,914
|
|
|
2,267
|
|
|
-
|
|
|
2,267
|
|
Income tax expense (benefit)
|
|
|
3,138
|
|
|
262
|
|
|
3,400
|
|
|
9,027
|
|
|
(616)
|
|
|
8,411
|
|
Net income (loss)
|
|
|
74,208
|
|
|
2,017
|
|
|
76,225
|
|
|
74,681
|
|
|
(1,511)
|
|
|
73,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
|
|
Regulated
|
|
Other
|
|
Consolidated
|
|
Regulated
|
|
Other
|
|
Consolidated
|
|
Operating revenues
|
|
$
|
602,341
|
|
$
|
3,872
|
|
$
|
606,213
|
|
$
|
606,323
|
|
$
|
16,753
|
|
$
|
623,076
|
|
Operations and maintenance expense
|
|
|
210,842
|
|
|
(2,879)
|
|
|
207,963
|
|
|
210,014
|
|
|
17,333
|
|
|
227,347
|
|
Depreciation
|
|
|
102,340
|
|
|
(832)
|
|
|
101,508
|
|
|
98,445
|
|
|
(800)
|
|
|
97,645
|
|
Operating income (loss)
|
|
|
246,361
|
|
|
5,633
|
|
|
251,994
|
|
|
255,431
|
|
|
(1,808)
|
|
|
253,623
|
|
Interest expense, net
|
|
|
60,277
|
|
|
4,847
|
|
|
65,124
|
|
|
57,061
|
|
|
3,075
|
|
|
60,136
|
|
Allowance for funds used during construction
|
|
|
10,570
|
|
|
-
|
|
|
10,570
|
|
|
6,446
|
|
|
-
|
|
|
6,446
|
|
Income tax expense (benefit)
|
|
|
12,243
|
|
|
(344)
|
|
|
11,899
|
|
|
18,610
|
|
|
(1,677)
|
|
|
16,933
|
|
Net income (loss)
|
|
|
184,733
|
|
|
1,532
|
|
|
186,265
|
|
|
186,579
|
|
|
(2,046)
|
|
|
184,533
|
|
Capital expenditures
|
|
|
337,321
|
|
|
410
|
|
|
337,731
|
|
|
269,046
|
|
|
973
|
|
|
270,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Total assets:
|
|
|
|
|
|
|
|
Regulated
|
|
$
|
6,355,896
|
|
$
|
5,953,702
|
|
Other
|
|
|
189,485
|
|
|
205,289
|
|
Consolidated
|
|
$
|
6,545,381
|
|
$
|
6,158,991
|
|
|
|
|
|
|
|
|
Note
13
–
Commitments and Contingencies
The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved. As of
September
30
, 2017
, the aggregate amount of
$
16,898
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
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
cash flows. Further, the Company has insurance coverage for certain of these loss contingencies, and as of
September
30
, 2017
, estimates that approximately
$
5,415
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.
In addition to the aforementioned loss contingencies, the Company self-insures its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for these claims totaled
$
1,451
at
September
30
, 2017
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
nine
months ended
September
30
, 2017
, the Company
’s
Federal net operating loss (“NOL”) carryforward
decreased
by
$
31,935
. In addition, during the
nine
months ended
September
30
, 2017
, the Company’s state NOL carryforward increased by
$
23,173
. As of
September
30
, 2017
, the balance of the Company’s Federal NOL was
$
81,208
. The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires
no
valuation allowance. As of
September
30
, 2017
, the balance of the Company’s gross state NOL was
$
600,358
, a portion of which is offset by a valuation allowance because the Company does not believe the
state
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
$
64,738
and
$
85,523
, respectively. The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were
$
145,947
and
$
685,880
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
third
quarter of
2017
and
2016
was
4.3%
and
10.3%
, respectively
, and for the first
nine
months of 2017 and 2016 was
6.0
%
and
8.4
%
, respectively
.
As of September 30, 2017 regulatory assets increased by
$96,140
, as compared to the beginning of the year, primarily due to the effect of
additional tax deductions for certain qualifying infrastructure improvements, which results in
differences between costs capitalized for book and deducted as an expense for tax purposes.
As of
September
30
, 2017
, the total gross unrecognized tax benefit was
$
28,938
, of which
$
23,700
, 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,
2016
, the Company had unrecognized tax benefits of
$
28,099
.
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
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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 2017, the FASB issued updated accounting guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). Historically, net benefit cost is reported as an employee cost within operating income, net of amounts capitalized. The guidance requires the bifurcation of net benefit cost. The service cost component will be presented with other employee compensation costs in operating income and the other components of net benefit cost will be reported separately outside of operating income, and will not be eligible for capitalization. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period
, and is to be applied retrospectively for the presentation of the service cost component and the other components of net benefit cost, and on a prospective
basis
for the capitalization of only the service cost component of net benefit cost
.
The Company is evaluating the requirements of the updated guidance to determine the impact of adoption, and does not believe it will have a material impact on its results of operations or financial position
.
In January 2017, the FASB issued updated accounting guidance that eliminates step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment.
A goodwill
impairment loss will instead be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The Company
has elected to early adopt
the provisions of the updated guidance
,
for its annual impairment valuation performed in the third quarter of 2017, and the provisions of the updated guidance
did not
have an impact on its results of operations or financial position.
In August 2016, the FASB issued updated accounting guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company
has elected to early adopt the provisions of the updated guidance, which resulted in the reclassification of
$375
debt extinguishment costs
,
for the nine months ended September 30, 2016,
from cash flows from operating to financing activities
to conform to the new classification
.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
In March 2016, the FASB issued updated accounting guidance on simplifying the accounting for share-based payment
s
, 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
was
effective for fiscal years beginning after December 15, 2016, and interim p
e
r
iods within those fiscal years, with early adoption available.
On
January 1, 2017,
the
Company
adopted the updated guidance
, prospectively,
and
recognize
d
a previously unrecognized
windfall
tax
benefit
for stock
-based
compensation
of
$
982
associated with the Company’s 2012 Federal net operating loss, which
was
recorded as an adjustment to
deferred income taxes and
retained earnings
(refer to the presentation of “cumulative effect of change in accounting principle - windfall tax benefit” on
the Company’s
Consolidated Statement of Equity)
.
Additionally, income t
ax benefits in excess of compensation costs or tax deficiencies
for share-based compensation
are now
recorded to
the Company’s
income tax provision, instead of historically to stockholder’s equity, which impact
s
its
effective tax rate. Lastly, all tax-related cash flows resulting from share-based payments
are
reported
prospectively
as operating activities on the statement of cash flows, a change from the historical requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities.
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 January 2016, the FASB issued updated accounting guidance on the recognition and measurement of financial assets and financial liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The updated guidance is effective for interim and annual periods beginning after December 31, 2017.
The Company does not expect the provisions of the updated guidance to have a
material
impact on its results of operations or financial position.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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 recognition. 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. Additionally, the accounting for contributions in aid of construction may be impacted by the updated accounting guidance if the contributions are determined to be in scope. In July 2015, the FASB approved a one year deferral to the original effective date of this guidance. The updated guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the updated guidance in each prior reporting period, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the updated guidance recognized through retained earnings at the date of adoption. In 2016, the Company performed an evaluation of the requirements of the updated guidance and based on current interpretations of the updated guidance believes that the impact of adoption
will
not result in a material change in
the Company’s
measurement of revenue and timing of recognition if contributions in aid of construction
are
determined to not be in scope.
In 2017, t
he American Institute of Certified Public Accountants (AICPA) power and utility entities revenue recognition task force has determined that contributions in aid of construction are not in the scope of the new standard, and submitted its
recommendation
to the AICPA’s revenue recognition working group for approval
.
The Company
plan
s
to implement the updated guidance using the modified retrospective approach
on January 1, 2018
.
Table of Contents
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,
2016
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 Infrastructure, LLC
and
Aqua Resources, Inc.
Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry.
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;
and
offers, through a third party, water and wastewater line repair service and protection solutions to households.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
During 2016, we completed the sale of business units within Aqua Resources which provided liquid waste hauling and disposal services, and inspection, cleaning and repair of storm and sanitary wastewater lines. Additionally, in 2016, we decided to market for sale two business units that are reported within the Company’s market-based subsidiary, Aqua Resources. One business unit installed and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, for which the sale was completed in January 2017. The other business unit repairs and performs maintenance on water and wastewater systems
, for which the sale was completed in June 2017
.
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, which includes water and wastewater utilities and other regulated utilities, and to
opportunistically
pursue growth ventures in
select
market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated businesses.
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
nine
months of 2017, we had
$337,731
of capital expenditures, expended
$5,860
for the acquisition of water and wastewater utility systems, issued
$441,294
of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of
$293,270
. 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 and the issuance
s
of
$80,000 and
$50,000 of first mortgage bonds by Aqua Pennsylvania in
July and
January 2017
and $100,000 of first mortgage bonds by Aqua Illinois in July 2017
.
At
September
30
, 2017, we had
$4,139
of cash and cash equivalents compared to $3,763 at December 31, 2016. During the first
nine
months of 2017, 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.
Table of Contents
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)
At
September
30
, 2017, our $250,000 unsecured revolving credit facility, which expires in February 2021, had $
183,547
available for borrowing. At
September
30
, 2017, we had short-term lines of credit of $135,500, of which $
114,510
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
September
30
, 2017, $
80,000
was available for borrowing.
In
July we issued $180,000 of long-term debt
,
the proceeds of which were used to reduce our borrowings under our revolving credit facilities.
Subsequently, in October we issued $75,000 of long-term debt, the proceeds of which were used to reduce our borrowings under our revolving credit
facilities
.
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
Third
Quarter of 2017 Compared to
Third
Quarter of 2016
Revenues decreased by
$11,585
or
5.1%
, primarily due to a decrease
in customer water consumption,
and
a decrease
in market-based activities revenue of $
3,431
associated with the dispositions of business units, offset by
an increase in water and wastewater rates
and infrastructure rehabilitation surcharges
of $
1,759
, and
additional
water and wastewater
revenues of $
505 associated with a larger customer base due to utility acquisitions
.
Operations and maintenance expenses decreased by
$11,830
or
14.8%
,
primarily
due to a reduction in operating expenses for Aqua Resources of $
4,249
associated with the
completion of the
disposition of business units
, which was finalized in June 2017
, a decrease in water production costs of $2,928
, a decrease in the Company’
s
self-insured employee medical benefit program expense of $2,425, and a decrease in postretirement benefits expense of $1,011
.
The decrease in water production costs is due to a reduction in purchased water expense of $1,907 due to replacing a purchased water supply coincident with the Company securing its own water supply source.
Depreciation expense increased by
$383
or
1.1%
, primarily due to the utility plant placed in service since
September
30
, 2016.
Interest expense increased by
$2,243
or
11.1%
, primarily due to an increase in average borrowings.
Table of Contents
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)
Allowance for funds used during construction (“AFUDC”) increased by
$1,647
, 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
as a result of an increase in the amount of AFUDC related to equity
.
Our effective income tax rate was
4.3%
in the
third
quarter of 2017 and
10.3%
in the
third
quarter of 2016. The effective income tax rate
decreased
due to the effect of
additional
tax deductions recognized in the
third
quarter of 2017 for certain qualifying infrastructure improvements for Aqua Pennsylvania.
Net income
increased
by
$3,055
or
4.2%
, primarily as a result of the factors described above.
Analysis of
First
Nine
Months
of 2017 Compared to
First
Nine
Months
of 2016
Revenues decreased by $
16,863
or
2.7
%, primarily due to a decrease in market-based activities revenue of $
12,970
associated with the dispositions of business units,
and
a decrease in customer water consumption,
offset by
an increase in water and wastewater rates
and infrastructure rehabilitation surcharges
of $
4,586
,
additional
water and wastewater
revenues from organic growth of $
2,296, and additional water and wastewater revenues of $1,257 associated with a larger customer base due to utility acquisitions
.
Operations and maintenance expenses decreased by $
19,384
or
8.5
%,
primarily
due to a reduction in operating expenses for Aqua Resources of $
12,981
associated with the
completion of the
disposition of business units,
which was finalized in June 2017,
a decrease in water production costs of $4,459,
a decrease in the Company’
s
self-insured employee medical benefit program expense of $4,239, and a decrease in postretirement benefits expense of $2,946,
offset by the prior year effect of a gain on sale of a utility system of $
1,215
. The gain on sale of a utility system is reported in the consolidated statement of net income as a component of operations and maintenance expense.
The decrease in water production costs is due to a reduction in purchased water expense of $2,886 due to replacing a purchased water supply coincident with the Company securing its own water supply source.
Depreciation expense increased by $
3,863
or
4.0
%, primarily due to the utility plant placed in service since
September
3
0
, 2016.
Taxes other than income taxes increased by $
1,296
or
3.0
% primarily due to an increase in property taxes of $
489
primarily due to the effect of a benefit recorded in 2016 for Ohio based on the final settlement of a property tax bill
, and an increase in pumping fees of $319 in Texas due to higher rates and water production
.
Interest expense increased by $
4,988
or
8.3
%, primarily due to an increase in average borrowings.
AFUDC increased by $
4,124
, 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
as a result of an increase in the amount of AFUDC related to equity
.
Table of Contents
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)
Our effective income tax rate was
6.0
% in the first
nine
months
of 2017 and
8.4
% in the first
nine
months
of 2016. The effective income tax rate
decreased
due to the effect of
additional
tax deductions recognized in the first
nine
months
of 2017 for certain qualifying infrastructure improvements for Aqua Pennsylvania.
Net income
increased
by $
1,732
or
0.9
%, 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
, to the consolidated finan
cial statements in this report.