wtr-2018-3-31

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC  20549

FORM 10-Q

(Mark One) 

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

For the quarterly period ended March 31, 2018 

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

For the transition period from_______________ to _______________

Commission File Number 1-6659 

AQUA AMERICA, INC. 

(Exact name of registrant as specified in its charter) 





 

 

 

Pennsylvania

23-1702594

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)



 

762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania

19010 -3489

(Address of principal executive offices)

(Zip Code)



 

(610) 527-8000

(Registrant’s telephone number, including area code)



(Former Name, former address and former fiscal year, if changed since last report.)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 



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



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



 

Large accelerated filer 

Accelerated filer 

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

Smaller reporting company 

Emerging growth company  

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



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

 

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

April 30,  2018:  177,897,654

  

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

 



TABLE OF CONTENTS



 



Page

Part I – Financial Information



 

Item 1.  Financial Statements:

 



 

Consolidated Balance Sheets (unaudited) – March 31, 2018 and December 31, 2017

 

 

Consolidated Statements of Net Income (unaudited) –
Three Months Ended March 31, 2018 and 2017



 

Consolidated Statements of Comprehensive Income (unaudited) –
Three Months Ended March 31, 2018 and 2017



 

Consolidated Statements of Capitalization (unaudited) –
March 31, 2018 and December 31, 2017



 

Consolidated Statement of Equity (unaudited) –
Three Months Ended March 31, 2018  



 

Consolidated Statements of Cash Flow (unaudited) –
Three Months Ended March 31, 2018 and 2017



 

Notes to Consolidated Financial Statements (unaudited)



 

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

25 



 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

29 



 

Item 4.  Controls and Procedures

29 

 

Part II – Other Information

 

 

Item 1.  Legal Proceedings

29 



 

Item 1A.  Risk Factors

29 



 

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

30 



 

Item 6.  Exhibits

30 



 

Exhibit Index

31 



 

Signatures

32 







 

1


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED BALANCE SHEETS 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)





 

 

 

 

 

 



 

 

 

 

 



 

March 31,

 

December 31,

Assets

 

2018

 

2017

Property, plant and equipment, at cost

 

$

7,088,016 

 

$

7,003,993 

Less:  accumulated depreciation

 

 

1,627,797 

 

 

1,604,133 

Net property, plant and equipment

 

 

5,460,219 

 

 

5,399,860 



 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

 

3,202 

 

 

4,204 

Accounts receivable and unbilled revenues, net

 

 

91,818 

 

 

98,596 

Inventory, materials and supplies

 

 

15,290 

 

 

14,361 

Prepayments and other current assets

 

 

12,274 

 

 

12,542 

Assets held for sale

 

 

1,558 

 

 

1,543 

Total current assets

 

 

124,142 

 

 

131,246 



 

 

 

 

 

 

Regulatory assets

 

 

731,417 

 

 

713,971 

Deferred charges and other assets, net

 

 

38,696 

 

 

38,485 

Investment in joint venture

 

 

7,004 

 

 

6,671 

Goodwill

 

 

42,230 

 

 

42,230 

Total assets

 

$

6,403,708 

 

$

6,332,463 

Liabilities and Equity

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,955,861 and 180,700,251 as of March 31, 2018 and December 31, 2017

 

$

90,478 

 

$

90,350 

Capital in excess of par value

 

 

809,624 

 

 

807,135 

Retained earnings

 

 

1,147,828 

 

 

1,132,556 

Treasury stock, at cost, 3,058,248 and 2,986,308 shares as of March 31, 2018 and December 31, 2017

 

 

(75,771)

 

 

(73,280)

Accumulated other comprehensive income

 

 

 -

 

 

860 

Total stockholders' equity

 

 

1,972,159 

 

 

1,957,621 



 

 

 

 

 

 

Long-term debt, excluding current portion

 

 

2,084,283 

 

 

2,029,358 

Less:  debt issuance costs

 

 

21,217 

 

 

21,605 

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

 

 

2,063,066 

 

 

2,007,753 

Commitments and contingencies (See Note 14)

 

 

 

 

 

 



 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

 

103,832 

 

 

113,769 

Loans payable

 

 

20,342 

 

 

3,650 

Accounts payable

 

 

40,211 

 

 

59,165 

Book overdraft

 

 

12,685 

 

 

21,629 

Accrued interest

 

 

24,624 

 

 

21,359 

Accrued taxes

 

 

22,971 

 

 

23,764 

Other accrued liabilities

 

 

34,470 

 

 

41,152 

Total current liabilities

 

 

259,135 

 

 

284,488 



 

 

 

 

 

 

Deferred credits and other liabilities:

 

 

 

 

 

 

Deferred income taxes and investment tax credits

 

 

786,014 

 

 

769,073 

Customers' advances for construction

 

 

90,599 

 

 

93,186 

Regulatory liabilities

 

 

543,449 

 

 

541,910 

Other

 

 

107,746 

 

 

107,341 

Total deferred credits and other liabilities

 

 

1,527,808 

 

 

1,511,510 



 

 

 

 

 

 

Contributions in aid of construction

 

 

581,540 

 

 

571,091 

Total liabilities and equity

 

$

6,403,708 

 

$

6,332,463 



 

 

 

 

 

 

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

 



 

2


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)







 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017

Operating revenues

 

$

194,347 

 

$

187,787 



 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Operations and maintenance

 

 

73,946 

 

 

67,890 

Depreciation

 

 

35,967 

 

 

33,837 

Amortization

 

 

130 

 

 

189 

Taxes other than income taxes

 

 

14,967 

 

 

14,737 

Total operating expenses

 

 

125,010 

 

 

116,653 



 

 

 

 

 

 

Operating income

 

 

69,337 

 

 

71,134 



 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

Interest expense, net

 

 

23,471 

 

 

21,326 

Allowance for funds used during construction

 

 

(2,867)

 

 

(3,193)

Gain on sale of other assets

 

 

(196)

 

 

(269)

Equity (earnings) loss in joint venture

 

 

(382)

 

 

30 

Other

 

 

603 

 

 

1,238 

Income before income taxes

 

 

48,708 

 

 

52,002 

Provision for income tax (benefit) expense

 

 

(2,131)

 

 

2,930 

Net income

 

$

50,839 

 

$

49,072 



 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.29 

 

$

0.28 

Diluted

 

$

0.29 

 

$

0.28 



 

 

 

 

 

 

Average common shares outstanding during the period:

 

 

 

 

 

 

Basic

 

 

177,801 

 

 

177,479 

Diluted

 

 

178,238 

 

 

177,969 



 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.2047 

 

$

0.1913 



 

 

 

 

 

 

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



 

 

 

 

 

 

 





 

3


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(In thousands of dollars) 

(UNAUDITED)

  





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017

Net income

 

$

50,839 

 

$

49,072 

Other comprehensive income, net of tax:

 

 

 

 

 

 

Unrealized holding gain on investments, net of tax expense of $31 for the three months ended March 31, 2017

 

 

 -

 

 

58 

Comprehensive income

 

$

50,839 

 

$

49,130 



 

 

 

 

 

 

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

 

  



 

4


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CAPITALIZATION 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)







 

 

 

 

 

 

 



 

 

 

 

 

 



 

 

March 31,

 

December 31,



 

 

2018

 

2017

Stockholders' equity:

 

 

 

 

 

 

 

    Common stock, $.50 par value

 

 

$

90,478 

 

$

90,350 

    Capital in excess of par value

 

 

 

809,624 

 

 

807,135 

    Retained earnings

 

 

 

1,147,828 

 

 

1,132,556 

    Treasury stock, at cost

 

 

 

(75,771)

 

 

(73,280)

    Accumulated other comprehensive income

 

 

 -

 

 

860 

Total stockholders' equity

 

 

 

1,972,159 

 

 

1,957,621 



 

 

 

 

 

 

 

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

 

 

 

 

 

 

Interest Rate Range

Maturity Date Range

 

 

 

 

 

 

0.00% to  0.99%

2023 to 2033

 

 

4,148 

 

 

4,196 

1.00% to  1.99%

2019 to 2035

 

 

12,626 

 

 

12,914 

2.00% to  2.99%

2019 to 2033

 

 

18,817 

 

 

19,254 

3.00% to  3.99%

2019 to 2056

 

 

474,525 

 

 

475,232 

4.00% to  4.99%

2020 to 2057

 

 

631,513 

 

 

631,599 

5.00% to  5.99%

2019 to 2043

 

 

205,445 

 

 

205,578 

6.00% to  6.99%

2018 to 2036

 

 

44,000 

 

 

44,000 

7.00% to  7.99%

2022 to 2027

 

 

32,146 

 

 

32,335 

8.00% to  8.99%

2021 to 2025

 

 

5,968 

 

 

6,092 

9.00% to  9.99%

2018 to 2026

 

 

25,700 

 

 

25,700 

10.00% to 10.99%

2018

 

 

6,000 

 

 

6,000 



 

 

 

1,460,888 

 

 

1,462,900 



 

 

 

 

 

 

 

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

 

 

117,000 

 

 

60,000 

Unsecured notes payable:

 

 

 

 

 

 

 

Bank notes at 1.975% and 2.48% due 2018 and 2019

 

 

100,000 

 

 

100,000 

Notes at 3.01% and 3.59% due 2027 and 2041

 

 

245,000 

 

 

245,000 

Notes ranging from 4.62% to 4.87%, due 2018 through 2024

 

 

122,800 

 

 

122,800 

Notes ranging from 5.20% to 5.95%, due 2018 through 2037

 

 

142,427 

 

 

152,427 

Total long-term debt

 

 

 

2,188,115 

 

 

2,143,127 



 

 

 

 

 

 

 

Current portion of long-term debt

 

 

 

103,832 

 

 

113,769 

Long-term debt, excluding current portion

 

 

2,084,283 

 

 

2,029,358 

Less:  debt issuance costs

 

 

 

21,217 

 

 

21,605 

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

 

 

2,063,066 

 

 

2,007,753 



 

 

 

 

 

 

 

Total capitalization

 

 

$

4,035,225 

 

$

3,965,374 



 

 

 

 

 

 

 

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

 



 



 

5


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENT OF EQUITY 

(In thousands of dollars)

(UNAUDITED)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 



 

 

 

 

Capital in

 

 

 

 

 

 

 

Other

 

 

 



 

Common

 

Excess of

 

Retained

 

Treasury

 

Comprehensive

 

 

 



 

Stock

 

Par Value

 

Earnings

 

Stock

 

Income

 

Total

Balance at December 31, 2017

 

$

90,350 

 

$

807,135 

 

$

1,132,556 

 

$

(73,280)

 

$

860 

 

$

1,957,621 

Net income

 

 

 -

 

 

 -

 

 

50,839 

 

 

 -

 

 

 -

 

 

50,839 

Dividends

 

 

 -

 

 

 -

 

 

(36,386)

 

 

 -

 

 

 -

 

 

(36,386)

Sale of stock (11,252 shares)

 

 

 

 

355 

 

 

 -

 

 

 -

 

 

 -

 

 

361 

Repurchase of stock (71,940 shares)         

 

 

 -

 

 

 -

 

 

 -

 

 

(2,491)

 

 

 -

 

 

(2,491)

Equity compensation plan (181,670 shares)

 

 

91 

 

 

(91)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Exercise of stock options (62,688 shares)

 

 

31 

 

 

979 

 

 

 -

 

 

 -

 

 

 -

 

 

1,010 

Stock-based compensation

 

 

 -

 

 

1,443 

 

 

(41)

 

 

 -

 

 

 -

 

 

1,402 

Cumulative effect of change in accounting principle - financial instruments

 

 

 -

 

 

 -

 

 

860 

 

 

 -

 

 

(860)

 

 

 -

Other  

 

 

 -

 

 

(197)

 

 

 -

 

 

 -

 

 

 -

 

 

(197)

Balance at March 31, 2018

 

$

90,478 

 

$

809,624 

 

$

1,147,828 

 

$

(75,771)

 

$

 -

 

$

1,972,159 



Refer to Note 15 - Recent Accounting Pronouncements for a discussion of the cumulative effect of change in accounting principle - financial instruments

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

 

  

 

 

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Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CASH FLOW 

(In thousands of dollars) 

(UNAUDITED)



  



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

50,839 

 

$

49,072 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

36,097 

 

 

34,026 

Deferred income taxes

 

 

(2,849)

 

 

2,681 

Provision for doubtful accounts

 

 

896 

 

 

1,111 

Stock-based compensation

 

 

1,444 

 

 

1,312 

Loss on sale of market-based business unit

 

 

 -

 

 

278 

Gain on sale of other assets

 

 

(196)

 

 

(269)

Net change in receivables, inventory and prepayments

 

 

5,402 

 

 

5,729 

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

 

 

(996)

 

 

(4,519)

Pension and other postretirement benefits contributions

 

 

(5,217)

 

 

(7,711)

Other

 

 

2,934 

 

 

(507)

Net cash flows from operating activities

 

 

88,354 

 

 

81,203 

Cash flows from investing activities:

 

 

 

 

 

 

Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $782 and $721

 

 

(105,136)

 

 

(94,562)

Acquisitions of utility systems and other, net

 

 

(190)

 

 

(220)

Net proceeds from the sale of market-based business unit and other assets

 

 

174 

 

 

639 

Other

 

 

(75)

 

 

(171)

Net cash flows used in investing activities

 

 

(105,227)

 

 

(94,314)

Cash flows from financing activities:

 

 

 

 

 

 

Customers' advances and contributions in aid of construction

 

 

1,742 

 

 

1,585 

Repayments of customers' advances

 

 

(1,014)

 

 

(511)

Net proceeds of short-term debt

 

 

16,692 

 

 

21,197 

Proceeds from long-term debt

 

 

66,996 

 

 

117,879 

Repayments of long-term debt

 

 

(21,898)

 

 

(89,666)

Change in cash overdraft position

 

 

(8,944)

 

 

(2,403)

Proceeds from issuing common stock

 

 

361 

 

 

360 

Proceeds from exercised stock options

 

 

1,010 

 

 

1,536 

Repurchase of common stock

 

 

(2,491)

 

 

(2,053)

Dividends paid on common stock

 

 

(36,386)

 

 

(33,945)

Other

 

 

(197)

 

 

(206)

Net cash flows from financing activities

 

 

15,871 

 

 

13,773 

Net change in cash and cash equivalents

 

 

(1,002)

 

 

662 

Cash and cash equivalents at beginning of period

 

 

4,204 

 

 

3,763 

Cash and cash equivalents at end of period

 

$

3,202 

 

$

4,425 



Non-cash investing activities:

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

 

$

23,629 

 

$

27,084 

Non-cash customer advances and contributions in aid of construction

 

 

4,979 

 

 

4,282 



 

 

 

 

 

 

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

 



 

7


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

Note 1 – Basis of Presentation 



The accompanying consolidated balance sheets and statements of capitalization of Aqua America, Inc. and subsidiaries (the “Company”) at March 31, 2018, the consolidated statements of net income and comprehensive income for the three months ended March 31, 2018 and 2017 the consolidated statements of cash flow for the three months ended March 31, 2018 and 2017, and the consolidated statement of equity for the three months ended March 31, 2018 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, 2017.  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, 2017 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2017 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 net income as a result of the adoption, in the first quarter of 2018, of the Financial Accounting Standards Board’s (“FASB”) accounting guidance on the presentation of net periodic pension and postretirement benefit cost (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 includes 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, other than as described in Note 2 – Revenue Recognition as a result of the adoption of a new accounting pronouncement adopted on January 1, 2018, previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  

 

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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)

 

Note 2 – Revenue Recognition



The Company recognizes  revenue as water and wastewater services are provided to our customers, which happens over time as the service is delivered and the performance obligation is satisfied.  The Company’s utility revenues recognized in an accounting period include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the last billing to the end of the accounting period.  Unbilled amounts are calculated by deriving estimates based on average usage of the prior monthThe Company’s actual results could differ from these estimates, which would result in operating revenues being adjusted in the period that the revision to our estimates is determined.  Unbilled amounts are included in accounts receivable and unbilled revenues, net on the consolidated balance sheet.   



Generally, payment is due within 30 days once a bill is issued to a customer.  Sales tax and other taxes we collect on behalf of government authorities, concurrent with our revenue-producing activities, are primarily excluded from revenue.  The Company has determined that its revenue recognition is not materially different under the FASB’s new accounting standard for revenue from contracts with customer, and has not made any changes to our accounting policy.  The Company’s revenues are being reported identical to how they were reported under the FASB’s former accounting standard for revenue recognitionThe following table presents our revenues disaggregated by major source and customer class:







 

 

 

 

 

 



Three Months Ended



March 31,2018



Water Revenues

Wastewater Revenues

Other Revenues

Regulated:

 

 

 

 

 

 

Residential

$

113,837 

$

17,532 

$

 -

Commercial

 

30,342 

 

2,888 

 

 -

Fire protection

 

7,938 

 

 -

 

 -

Industrial

 

6,360 

 

463 

 

 -

Other water

 

11,021 

 

 -

 

 -

Other wastewater

 

 -

 

791 

 

 -

Other utility

 

 -

 

 -

 

2,335 

Regulated segment total

 

169,498 

 

21,674 

 

2,335 

Other and eliminations

 

 -

 

 -

 

840 

Consolidated

$

169,498 

$

21,674 

$

3,175 



 

 

 

 

 

 



Regulated Segment Revenues – These revenues are composed of three main categories:  water, wastewater, and other.  Water revenues represent revenues earned for supplying customers with water service.  Wastewater revenues represent revenues earned for treating wastewater and releasing it into the water supply.  Other revenues are associated fees that relate to the regulated business but are not water and wastewater revenues.  See description below for a discussion on the performance obligation for each of these revenue streams.



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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

Tariff Revenues – These revenues are categorized by customer class:  residential, commercial, fire protection, industrial, and other water and other wastewater.  The rates that generate these revenues are approved by the respective state utility commission, and revenues are billed cyclically and accrued for when unbilled.  Other water and other wastewater revenues consist primarily of fines, penalties, surcharges, and availability lot fees.  Our performance obligation for tariff revenues is to provide potable water or wastewater treatment service to customers.  This performance obligation is satisfied over time as the services are rendered.



Other Utility Revenues – Other utility revenues represent revenues earned primarily from:  antenna revenues, which represent fees received from telecommunication operators that have put cellular antennas on our water towers, operation and maintenance and billing contracts, which represent fees earned from municipalities for our operation of their water or wastewater treatment services or performing billing services, and fees earned from developers for accessing our water mains.  The performances obligations vary for these revenues, but all are primarily recognized over time as the service is delivered.



Other and EliminationsOther and eliminations consist of our market-based revenues, which comprises:   Aqua Infrastructure and Aqua Resources (described below), and intercompany eliminations for revenue billed between our subsidiaries. 



Aqua Infrastructure is the holding company for our 49% investment in a joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale of north central Pennsylvania.  The joint venture earns revenues through providing non-utility raw water supply services to companies which enter into a water supply contract in the natural gas drilling industry.  The performance obligation is to deliver non-potable water to its customers.  Aqua Infrastructure’s share of the revenues recognized by the joint venture is reflected, net, in equity earnings in joint venture on our consolidated statements of net income.   



Aqua Resources earns revenues by providing non-regulated water and wastewater services through operating and maintenance contracts, and third party water and sewer line repair service.  The performance obligations are performing agreed upon services in the contract, most commonly operation of third party water or wastewater treatment services, or billing services, or allowing the use of our logo to a third party water and sewer line repair service.  Revenues are primarily recognized over time as service is delivered.





Note 3 –  Goodwill 



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

 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Regulated

 

 

 

 

 

 



 

Segment

 

Other

 

Consolidated

Balance at December 31, 2017

 

$

37,389 

 

$

4,841 

 

$

42,230 

Goodwill acquired

 

 

 -

 

 

 -

 

 

 -

Balance at March 31, 2018

 

$

37,389 

 

$

4,841 

 

$

42,230 



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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 







  

Note 4 –  Acquisitions 



During the first three months of 2018, the Company completed three acquisitions of water and wastewater utility systems in various states adding 448 customers.  The total purchase price of these utility systems consisted of $190 in cash.  The purchase price allocation for these acquisition consisted primarily of acquired property, plant and equipment.  The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.



During 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 six municipalities for a total combined purchase price in cash of $150,700, which we plan to finance by the issuance of long-term debt.  The purchase price for these pending acquisitions is subject to certain adjustments at closing, and the pending acquisitions are subject to regulatory approvals, including the final determination of the fair value of the rate base acquired.  Closings for these acquisitions are expected to occur by the end of 2018, subject to the timing of the regulatory approval process.  These acquisitions are expected to add approximately 16,325 customers in two of the states that the Company operates in.     



Note 5 –  Assets Held for Sale



In the first quarter of 2017, the Company decided to market for sale a water system that serves approximately 265 customersThis water system is reported as assets held for sale in the Company’s consolidated balance sheet.







]

 

Note 6  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:



·

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

 

·

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

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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

 

·

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



The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  There have been no changes in the valuation techniques used to measure fair value, or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended March 31, 2018



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



The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions.    As of March 31, 2018 and December 31, 2017, the carrying amount of the Company’s loans payable was $20,342 and $3,650, respectively, which equates to their estimated fair value.  The Company’s assets underlying the deferred compensation and non-qualified pension plans are 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 March 31, 2018 and December 31, 2017, the carrying amount of these securities was $21,576 and $21,776,  which equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assetsThe fair value of cash and cash equivalents, which is comprised of uninvested cash, is determined based on the net asset value per unit utilizing Level 1 methods and assumptions.  As of March 31, 2018 and December 31, 2017, the carrying amounts of the Company's cash and cash equivalents was $3,202 and $4,204, respectively, which equates to their fair value.



Unrealized gain and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:







 

 

 



 

 

 



 

Three Months Ended



 

March 31,



 

2018

Net loss recognized during the period on equity securities

 

$

21 

Less:  net gain / loss recognized during the period on equity securities sold during the period

 

 

 -

Unrealized loss recognized during the reporting period on equity securities still held at the reporting date

 

$

21 

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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 



The net loss recognized on equity securities is presented on the consolidated statements of net income on the line item “Other.”  Additionally, the unrealized gain recognized during the three months ended March 31, 2017, was reported on the consolidated statements of comprehensive income. 



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



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Carrying amount

 

$

2,188,115 

 

$

2,143,127 

Estimated fair value

 

 

2,235,447 

 

 

2,262,785 

 



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 $90,599 as of March 31, 2018, and $93,186 as of December 31, 2017.  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 rates.  Portions of these non-interest bearing instruments are payable annually through 2028 and amounts not paid by the respective contract expiration dates become non-refundable.  The fair value of these amounts would, however, be less than their carrying value due to the non-interest bearing feature.

 

Note 7  –  Net Income per Common Share 

 

Basic net income per common share is based on the weighted average number of common shares outstanding.  Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares.  The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share.  The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.  The treasury stock method assumes that the proceeds from 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: 





 

 

 

 



 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017

Average common shares outstanding during the period for basic computation

 

177,801 

 

177,479 

Dilutive effect of employee stock-based compensation

 

437 

 

490 

Average common shares outstanding during the period for diluted computation

 

178,238 

 

177,969 



 

 

 

 



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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

For the three months ended March 31, 2018 and 2017, 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.  No further grants may be made under the 2004 Plan.  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 March 31, 2018,  3,454,922 shares were still available for issuance under the 2009 Plan.   

 

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





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017

Stock-based compensation within operations and maintenance expenses

 

$

859 

 

$

870 

Income tax benefit

 

 

241 

 

 

353 

 

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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

The following table summarizes the PSU transactions for the three months ended March 31, 2018:   





 

 

 

 

 

 



 

 

 

 

 

 



 

 

Number

 

Weighted



 

 

of

 

Average



 

 

Share Units

 

Fair Value

Nonvested share units at beginning of period

 

 

452,333 

 

$

26.16 

Granted

 

 

87,593 

 

 

37.65 

Performance criteria adjustment

 

 

(33,109)

 

 

29.71 

Forfeited

 

 

(5,522)

 

 

29.59 

Share units vested in prior period and issued in current period

 

 

9,400 

 

 

26.54 

Share units issued

 

 

(136,081)

 

 

31.70 

Nonvested share units at end of period

 

 

374,614 

 

 

26.48 



 

 

 

 

 

 

 

 

 

A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions.  The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied.  The per unit weighted-average fair value at the date of grant for PSUs granted during the three months ended March 31, 2018 and 2017 was $37.65 and $30.79, 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.   



Restricted Stock UnitsA restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock.  RSUs are eligible to be earned at the end of a specified restricted period, generally three years, beginning on the date of grant.  The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.  As the payout of the RSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the RSUs.  The following table provides the compensation cost and income tax benefit for stock-based compensation related to RSUs:



 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017

Stock-based compensation within operations and maintenance expenses

 

$

351 

 

$

281 

Income tax benefit

 

 

100 

 

 

116 

 



15


 

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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

The following table summarizes the RSU transactions for the three months ended March 31, 2018





 

 

 

 

 

 



 

 

 

 

 

 



 

 

Number

 

Weighted



 

 

of

 

Average



 

 

Stock Units

 

Fair Value

Nonvested stock units at beginning of period

 

 

116,787 

 

$

29.46 

Granted

 

 

54,073 

 

 

34.91 

Stock units vested in prior period and issued in current period

 

 

1,467 

 

 

31.47 

Stock units vested and issued

 

 

(42,836)

 

 

26.39 

Forfeited

 

 

 -

 

 

 -

Nonvested stock units at end of period

 

 

129,491 

 

 

31.78 

 



The per unit weighted-average fair value at the date of grant for RSUs granted during the three months ended March 31, 2018 and 2017 was $34.91 and $30.37, 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 dateStock options 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:



 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017

Stock-based compensation within operations and maintenance expenses

 

$

94 

 

$

30 

Income tax benefit

 

 

58 

 

 

92 



 

 

 

 

 

 

The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model.  The following assumptions were used in the application of this valuation model:





 

 



2018

2017

Expected term (years)

5.46  5.45 

Risk-free interest rate

2.72%  2.01% 

Expected volatility

17.2%  17.7% 

Dividend yield

2.37%  2.51% 

Grant date fair value per option

$       5.10

$       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

16


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

 

selected based upon the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.



The following table summarizes stock option transactions for the three months ended March 31, 2018:



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

Weighted

 

Weighted

 

 

 



 

 

 

Average

 

Average

 

Aggregate



 

 

 

Exercise

 

Remaining

 

Intrinsic



 

Shares

 

Price

 

Life (years)

 

Value

Outstanding at beginning of period

 

364,932 

 

$

19.83 

 

 

 

 

 

Granted

 

160,859 

 

 

34.51 

 

 

 

 

 

Forfeited

 

(2,371)

 

 

30.47 

 

 

 

 

 

Expired / Cancelled

 

(41)

 

 

30.47 

 

 

 

 

 

Exercised

 

(62,688)

 

 

16.11 

 

 

 

 

 

Outstanding at end of period

 

460,691 

 

$

25.40 

 

6.2 

 

$

4,060 



 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

225,594 

 

$

17.24 

 

2.6 

 

$

3,794 

 



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



 

March 31,



 

2018

 

2017

Stock-based compensation within operations and maintenance expenses

 

$

140 

 

$

131 

Income tax benefit

 

 

40 

 

 

54 



The following table summarizes stock award transactions for the three months ended March 31, 2018:







 

 

 

 

 



 

 

 

 

 



 

Number

 

Weighted



 

of

 

Average



 

Stock Awards

 

Fair Value

Nonvested stock awards at beginning of period

 

 -

 

$

 -

Granted