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Aqua America 10-Q 2016
wtr-20160331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC  20549

FORM 10-Q

(Mark One) 

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

For the quarterly period ended March 31, 2016 

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

For the transition period from_______________ to _______________

Commission File Number 1-6659 

AQUA AMERICA, INC. 

(Exact name of registrant as specified in its charter) 





 

 

 

Pennsylvania

23-1702594

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)



 

762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania

19010 -3489

(Address of principal executive offices)

(Zip Code)



 

(610) 527-8000

(Registrant’s telephone number, including area code)



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



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



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



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



 

Large accelerated filer

Accelerated filer

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

Smaller reporting company



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

 

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

April 22, 2016:  177,271,652

  

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

 



TABLE OF CONTENTS



 



Page

Part I – Financial Information



 

Item 1.  Financial Statements:

 



 

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

2

 

 

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

3



 

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

4



 

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

5



 

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

6



 

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

7



 

Notes to Consolidated Financial Statements (unaudited)

8



 

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

20



 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

24



 

Item 4.  Controls and Procedures

24



Part II – Other Information



 

Item 1.  Legal Proceedings

24



 

Item 1A.  Risk Factors

24



 

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

25



 

Item 6.  Exhibits

25



 

Signatures

26



 

Exhibit Index

27





 

1


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED BALANCE SHEETS 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,

Assets

 

2016

 

2015

Property, plant and equipment, at cost

 

$

6,183,513 

 

$

6,088,011 

Less:  accumulated depreciation

 

 

1,430,632 

 

 

1,399,086 

Net property, plant and equipment

 

 

4,752,881 

 

 

4,688,925 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

 

3,981 

 

 

3,229 

Accounts receivable and unbilled revenues, net

 

 

91,761 

 

 

99,146 

Inventory, materials and supplies

 

 

12,499 

 

 

12,414 

Prepayments and other current assets

 

 

12,713 

 

 

11,802 

Assets held for sale

 

 

1,779 

 

 

1,779 

Total current assets

 

 

122,733 

 

 

128,370 



 

 

 

 

 

 

Regulatory assets

 

 

859,830 

 

 

830,118 

Deferred charges and other assets, net

 

 

30,228 

 

 

28,878 

Investment in joint venture

 

 

7,467 

 

 

7,716 

Goodwill

 

 

42,304 

 

 

33,866 

Total assets

 

$

5,815,443 

 

$

5,717,873 

Liabilities and Equity

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

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

 

$

90,088 

 

$

89,682 

Capital in excess of par value

 

 

790,749 

 

 

773,585 

Retained earnings

 

 

950,158 

 

 

930,061 

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

 

 

(70,912)

 

 

(68,085)

Accumulated other comprehensive income

 

 

624 

 

 

687 

Total stockholders' equity

 

 

1,760,707 

 

 

1,725,930 



 

 

 

 

 

 

Long-term debt, excluding current portion

 

 

1,766,662 

 

 

1,743,612 

Less:  debt issuance costs

 

 

22,554 

 

 

23,165 

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

 

 

1,744,108 

 

 

1,720,447 

Commitments and contingencies (See Note 13)

 

 

 -

 

 

 -



 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

 

29,096 

 

 

35,593 

Loans payable

 

 

28,041 

 

 

16,721 

Accounts payable

 

 

33,971 

 

 

56,452 

Accrued interest

 

 

21,778 

 

 

12,651 

Accrued taxes

 

 

21,821 

 

 

21,887 

Other accrued liabilities

 

 

39,636 

 

 

49,895 

Total current liabilities

 

 

174,343 

 

 

193,199 



 

 

 

 

 

 

Deferred credits and other liabilities:

 

 

 

 

 

 

Deferred income taxes and investment tax credits

 

 

1,152,343 

 

 

1,118,923 

Customers' advances for construction

 

 

86,546 

 

 

86,934 

Regulatory liabilities

 

 

255,434 

 

 

259,507 

Other

 

 

110,509 

 

 

100,498 

Total deferred credits and other liabilities

 

 

1,604,832 

 

 

1,565,862 



 

 

 

 

 

 

Contributions in aid of construction

 

 

531,453 

 

 

512,435 

Total liabilities and equity

 

$

5,815,443 

 

$

5,717,873 



 

 

 

 

 

 

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

















  

 

2


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)







 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2016

 

2015

Operating revenues

 

$

192,607 

 

$

190,326 



 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Operations and maintenance

 

 

73,541 

 

 

73,189 

Depreciation

 

 

32,145 

 

 

30,500 

Amortization

 

 

450 

 

 

849 

Taxes other than income taxes

 

 

14,140 

 

 

14,621 

Total operating expenses

 

 

120,276 

 

 

119,159 



 

 

 

 

 

 

Operating income

 

 

72,331 

 

 

71,167 



 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

Interest expense, net

 

 

19,853 

 

 

18,665 

Allowance for funds used during construction

 

 

(2,308)

 

 

(1,182)

Gain on sale of other assets

 

 

(207)

 

 

(169)

Equity loss in joint venture

 

 

249 

 

 

714 

Income before income taxes

 

 

54,744 

 

 

53,139 

Provision for income taxes

 

 

3,007 

 

 

4,594 

Net income

 

$

51,737 

 

$

48,545 



 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.29 

 

$

0.27 

Diluted

 

$

0.29 

 

$

0.27 



 

 

 

 

 

 

Average common shares outstanding during the period:

 

 

 

 

 

 

Basic

 

 

177,104 

 

 

176,888 

Diluted

 

 

177,819 

 

 

177,792 



 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.178 

 

$

0.165 



 

 

 

 

 

 

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

 

 

 



















 

3


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(In thousands of dollars) 

(UNAUDITED)

  





 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Net income

 

$

51,737 

 

$

48,545 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

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

 

 

(6)

 

 

75 

 

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

 

 

(57)

 

 

 -

 

Comprehensive income

 

$

51,674 

 

$

48,620 

 



 

 

 

 

 

 

 

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



 

 

 

 

 

 

 

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

 

  



 

4


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CAPITALIZATION 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

March 31,

 

December 31,



 

 

2016

 

2015

Stockholders' equity:

 

 

 

 

 

 

 

    Common stock, $.50 par value

 

 

$

90,088 

 

$

89,682 

    Capital in excess of par value

 

 

 

790,749 

 

 

773,585 

    Retained earnings

 

 

 

950,158 

 

 

930,061 

    Treasury stock, at cost

 

 

 

(70,912)

 

 

(68,085)

    Accumulated other comprehensive income

 

 

624 

 

 

687 

Total stockholders' equity

 

 

 

1,760,707 

 

 

1,725,930 



 

 

 

 

 

 

 

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

 

 

 

 

 

 

Interest Rate Range

Maturity Date Range

 

 

 

 

 

 

0.00% to  0.99%

2023 to 2033

 

 

5,098 

 

 

5,148 

1.00% to  1.99%

2016 to 2035

 

 

18,487 

 

 

20,811 

2.00% to  2.99%

2024 to 2031

 

 

20,703 

 

 

19,167 

3.00% to  3.99%

2016 to 2047

 

 

296,662 

 

 

297,275 

4.00% to  4.99%

2020 to 2054

 

 

486,987 

 

 

487,093 

5.00% to  5.99%

2017 to 2043

 

 

214,817 

 

 

221,435 

6.00% to  6.99%

2017 to 2036

 

 

52,969 

 

 

52,964 

7.00% to  7.99%

2022 to 2027

 

 

33,593 

 

 

33,762 

8.00% to  8.99%

2021 to 2025

 

 

14,394 

 

 

14,502 

9.00% to  9.99%

2018 to 2026

 

 

27,100 

 

 

27,100 

10.00% to 10.99%

2018

 

 

6,000 

 

 

6,000 



 

 

 

1,176,810 

 

 

1,185,257 



 

 

 

 

 

 

 

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

 

 

85,000 

 

 

60,000 

Unsecured notes payable:

 

 

 

 

 

 

 

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

 

 

 

100,000 

 

 

100,000 

Notes at 3.57% and 3.59% due 2027 and 2030

 

 

 

120,000 

 

 

120,000 

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

 

 

144,400 

 

 

144,400 

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

 

 

169,548 

 

 

169,548 

Total long-term debt

 

 

 

1,795,758 

 

 

1,779,205 



 

 

 

 

 

 

 

Current portion of long-term debt

 

 

 

29,096 

 

 

35,593 

Long-term debt, excluding current portion

 

 

1,766,662 

 

 

1,743,612 

Less:  debt issuance costs

 

 

 

22,554 

 

 

23,165 

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

 

 

1,744,108 

 

 

1,720,447 



 

 

 

 

 

 

 

Total capitalization

 

 

$

3,504,815 

 

$

3,446,377 



 

 

 

 

 

 

 

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



 

 

 

 

 

 

 











 



 

5


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENT OF EQUITY 

(In thousands of dollars)

(UNAUDITED)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 



 

 

 

 

Capital in

 

 

 

 

 

 

 

Other

 

 

 



 

Common

 

Excess of

 

Retained

 

Treasury

 

Comprehensive

 

 

 



 

Stock

 

Par Value

 

Earnings

 

Stock

 

Income

 

Total

Balance at December 31, 2015

 

$

89,682 

 

$

773,585 

 

$

930,061 

 

$

(68,085)

 

$

687 

 

$

1,725,930 

Net income

 

 

 -

 

 

 -

 

 

51,737 

 

 

 -

 

 

 -

 

 

51,737 

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

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(63)

 

 

(63)

Dividends

 

 

 -

 

 

 -

 

 

(31,513)

 

 

 -

 

 

 -

 

 

(31,513)

Stock issued for acquisition (439,943 shares)

 

 

220 

 

 

12,625 

 

 

 -

 

 

 -

 

 

 -

 

 

12,845 

Sale of stock (11,373 shares)

 

 

 

 

326 

 

 

 -

 

 

 -

 

 

 -

 

 

332 

Repurchase of stock (91,102 shares)         

 

 

 -

 

 

 -

 

 

 -

 

 

(2,827)

 

 

 -

 

 

(2,827)

Equity compensation plan (217,725 shares)

 

 

108 

 

 

(108)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Exercise of stock options (143,372 shares)

 

 

72 

 

 

2,744 

 

 

 -

 

 

 -

 

 

 -

 

 

2,816 

Stock-based compensation

 

 

 -

 

 

806 

 

 

(127)

 

 

 -

 

 

 -

 

 

679 

Employee stock plan tax benefits

 

 

 -

 

 

979 

 

 

 -

 

 

 -

 

 

 -

 

 

979 

Other  

 

 

 -

 

 

(208)

 

 

 -

 

 

 -

 

 

 -

 

 

(208)

Balance at March 31, 2016

 

$

90,088 

 

$

790,749 

 

$

950,158 

 

$

(70,912)

 

$

624 

 

$

1,760,707 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













  

 

 

6


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CASH FLOW 

(In thousands of dollars) 

(UNAUDITED)



  



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

51,737 

 

$

48,545 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

32,595 

 

 

31,349 

Deferred income taxes

 

 

1,436 

 

 

2,688 

Provision for doubtful accounts

 

 

817 

 

 

936 

Stock-based compensation

 

 

806 

 

 

1,341 

Gain on sale of utility system

 

 

(1,215)

 

 

 -

Gain on sale of other assets

 

 

(207)

 

 

(169)

Net change in receivables, inventory and prepayments

 

 

5,680 

 

 

191 

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

 

 

4,880 

 

 

11,460 

Other

 

 

(1,691)

 

 

(6,321)

Net cash flows from operating activities

 

 

94,838 

 

 

90,020 

Cash flows from investing activities:

 

 

 

 

 

 

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

 

 

(72,984)

 

 

(70,284)

Acquisitions of utility systems and other, net

 

 

(4,461)

 

 

(788)

Additions to funds restricted for construction activity

 

 

 

 

 

 

Release of funds previously restricted for construction activity

 

 

 -

 

 

32 

Net proceeds from the sale of utility system and other assets

 

 

2,853 

 

 

232 

Investment in joint venture

 

 

 

 

 

 

Other

 

 

(40)

 

 

(1,180)

Net cash flows used in investing activities

 

 

(74,632)

 

 

(71,988)

Cash flows from financing activities:

 

 

 

 

 

 

Customers' advances and contributions in aid of construction

 

 

1,273 

 

 

1,193 

Repayments of customers' advances

 

 

(349)

 

 

(1,040)

Net proceeds of short-term debt

 

 

11,320 

 

 

14,664 

Proceeds from long-term debt

 

 

96,314 

 

 

52,629 

Repayments of long-term debt

 

 

(80,341)

 

 

(29,800)

Change in cash overdraft position

 

 

(17,250)

 

 

(21,431)

Proceeds from issuing common stock

 

 

332 

 

 

 -

Proceeds from exercised stock options

 

 

2,816 

 

 

2,852 

Stock-based compensation windfall tax benefits

 

 

979 

 

 

1,230 

Repurchase of common stock

 

 

(2,827)

 

 

(3,754)

Dividends paid on common stock

 

 

(31,513)

 

 

(29,176)

Other

 

 

(208)

 

 

(263)

Net cash flows used in financing activities

 

 

(19,454)

 

 

(12,896)

Net change in cash and cash equivalents

 

 

752 

 

 

5,136 

Cash and cash equivalents at beginning of period

 

 

3,229 

 

 

4,138 

Cash and cash equivalents at end of period

 

$

3,981 

 

$

9,274 



Non-cash investing activity:

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

 

$

19,052 

 

$

20,158 



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

















 

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, 2016, the consolidated statements of net income and comprehensive income for the three months ended March 31, 2016 and 2015 the consolidated statements of cash flow for the three months ended March 31, 2016 and 2015, and the consolidated statement of equity for the three months ended March 31, 2016 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in equity, the consolidated results of operations, and the consolidated cash flow for the periods presented.  Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  The results of operations for interim periods may not be indicative of the results that may be expected for the entire year.  The December 31, 2015 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2015 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.    Certain prior period amounts have been reclassified, including debt issuance costs (see Note 15 - Recent Accounting Pronouncements), to conform to the current period presentation.          



Note 2 – Goodwill 



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

 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Regulated

 

 

 

 

 

 



 

Segment

 

Other

 

Consolidated

Balance at December 31, 2015

 

$

27,246 

 

$

6,620 

 

$

33,866 

Goodwill acquired

 

 

8,622 

 

 

 -

 

 

8,622 

Reclassification to utility plant

acquisition adjustment

 

 

(25)

 

 

 -

 

 

(25)

Other

 

 

(159)

 

 

 -

 

 

(159)

Balance at March 31, 2016

 

$

35,684 

 

$

6,620 

 

$

42,304 

 

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







  

Note 3 – Acquisitions 



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



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



Note 4 –  Assets Held for Sale



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







]

Note 5 – Capitalization 



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



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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 6 – Fair Value of Financial Instruments 

 

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



·

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

 

·

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

 

·

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

 

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  There have been no changes in the valuation techniques used to measure fair value or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended March 31, 2016

 

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

 

The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions.    As of March 31, 2016 and December 31, 2015, the carrying amount of the Company’s loans payable was $28,041 and $16,721, respectively, which equates to their estimated fair value.  The fair value of cash and cash equivalents, which is comprised of a money market fund, is determined based on the net asset value per unit utilizing Level 2 methods and assumptions.  As of March 31, 2016 and December 31, 2015, the carrying amounts of the Company's cash and cash equivalents was $3,981 and $3,229, respectively, which equates to their fair value.   

 

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



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015

Carrying Amount

 

$

1,795,758 

 

$

1,779,205 

Estimated Fair Value

 

 

2,020,229 

 

 

1,905,393 

 



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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 fair value of long-term debt has been determined by discounting the future cash flows using current market interest rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions.  The Company’s customers’ advances for construction have a carrying value of $86,546 as of March 31, 2016, and $86,934 as of December 31, 2015.  Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rate increases.  Portions of these non-interest bearing instruments are payable annually through 2026 and amounts not paid by the respective contract expiration dates become non-refundable.  The fair value of these amounts would, however, be less than their carrying value due to the non-interest bearing feature.



Note 7 – Net Income per Common Share 

 

Basic net income per common share is based on the weighted average number of common shares outstanding.  Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares.  The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share.  The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.  The treasury stock method assumes that the proceeds from the exercise of stock options are used to purchase the Company’s common stock at the average market price during the period.  The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share: 





 

 

 

 

 



 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Average common shares outstanding during the period for basic computation

 

177,104 

 

176,888 

 

Dilutive effect of employee stock-based compensation

 

715 

 

904 

 

Average common shares outstanding during the period for diluted computation

 

177,819 

 

177,792 

 



 

 

 

 

 



For the three months ended March 31,  2016 and 2015, all of the Company’s employee stock options were included in the calculations of diluted net income per share as the calculated cost to exercise the stock options was less than the average market price of the Company’s common stock during these periods.  

 

 

 

 



 

Note 8 – Stock-based Compensation 

 

Under the Company’s 2009 Omnibus Equity Compensation Plan, as amended as of February 27, 2014 (the “2009 Plan”), as approved by the Company’s shareholders to replace the 2004 Equity Compensation Plan (the “2004 Plan”), stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors.  The 2009 Plan authorizes 6,250,000 shares for issuance under the plan.  A maximum of 3,125,000 shares under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the 2009 PlanDuring any calendar year, no individual

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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

may be granted (i) stock options and stock appreciation rights under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the 2009 Plan.  Awards to employees and consultants under the 2009 Plan are made by a committee of the Board of Directors of the Company, except that with respect to awards to the Chief Executive Officer, the committee recommends those awards for approval by the non-employee directors of the Board of Directors.  In the case of awards to non-employee directors, the Board of Directors of makes such awards.  At March 31, 2016,  3,989,744 shares underlying stock-based compensation awards were still available for grants under the 2009 Plan.    No further grants may be made under the 2004 Plan.     

 

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





 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Stock-based compensation within operations and maintenance expenses

 

$

525 

 

$

1,078 

 

Income tax benefit

 

 

209 

 

 

439 

 

 

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





 

 

 

 

 

 



 

 

 

 

 

 



 

 

Number

 

Weighted



 

 

of

 

Average



 

 

Share Units

 

Fair Value

Nonvested share units at December 31, 2015

 

 

424,858 

 

$

25.78 

Granted

 

 

151,156 

 

 

28.89 

Performance criteria adjustment

 

 

26,047 

 

 

25.62 

Forfeited

 

 

(5,900)

 

 

25.89 

Share units vested

 

 

44,625 

 

 

26.88 

Share units issued

 

 

(189,885)

 

 

23.25 

Nonvested share units at March 31, 2016

 

 

450,901 

 

$

27.98 



 

 

 

 

 

 

 

 

 

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

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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

March 31, 2016 and 2015 was $28.89 and $26.54, respectively.  The fair value of each PSU grant is amortized monthly into compensation expense on a straight-line basis over their respective vesting periods, generally 36 months.  The accrual of compensation costs is based on our estimate of the final expected value of the award, and is adjusted as required for the portion based on the performance-based condition.  The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.  As the payout of the PSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the PSUs.  The recording of compensation expense for PSUs has no impact on net cash flows.   



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



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Stock-based compensation within operations and maintenance expenses

 

$

168 

 

$

263 

 

Income tax benefit

 

 

69 

 

 

109 

 

 



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





 

 

 

 

 

 



 

 

 

 

 

 



 

 

Number

 

Weighted



 

 

of

 

Average



 

 

Stock Units

 

Fair Value

Nonvested stock units at December 31, 2015

 

 

88,353 

 

$

24.94 

Granted

 

 

49,636 

 

 

32.04 

Stock units vested and issued

 

 

(24,318)

 

 

23.37 

Forfeited

 

 

(1,500)

 

 

25.53 

Nonvested stock units at March 31, 2016

 

 

112,171 

 

$

28.41 

 



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

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AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  



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



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three Months Ended

 



 

March 31,

 



 

2016

 

2015

 

Income tax benefit

 

$

216 

 

$

104