Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 2, 2017)
  • 10-Q (Aug 3, 2017)
  • 10-Q (May 4, 2017)
  • 10-Q (Nov 2, 2016)
  • 10-Q (Aug 3, 2016)
  • 10-Q (May 6, 2016)

 
8-K

 
Other

Aqua America 10-Q 2016

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
wtr-20160930_Taxonomy2016

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 September 30, 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  

October 20, 2016:  177,358,257

  

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

 



TABLE OF CONTENTS



 



Page

Part I – Financial Information



 

Item 1.  Financial Statements:

 



 

Consolidated Balance Sheets (unaudited) – September 30, 2016 and December 31, 2015

2

 

 

Consolidated Statements of Net Income (unaudited)
Three Months Ended September 30, 2016 and 2015

3



 

Consolidated Statements of Net Income (unaudited) –
Nine Months Ended September 30, 2016 and 2015

4



 

Consolidated Statements of Comprehensive Income (unaudited) –
Three and Nine Months Ended September 30, 2016 and 2015

5



 

Consolidated Statements of Capitalization (unaudited) –
September 30, 2016 and December 31, 2015

6



 

Consolidated Statement of Equity (unaudited) –
Nine Months Ended September 30, 2016

7



 

Consolidated Statements of Cash Flow (unaudited) –
Nine Months Ended September 30, 2016 and 2015

8



 

Notes to Consolidated Financial Statements (unaudited)

9



 

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

23



 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

28



 

Item 4.  Controls and Procedures

28



Part II – Other Information



 

Item 1.  Legal Proceedings

28



 

Item 1A.  Risk Factors

28



 

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

29



 

Item 6.  Exhibits

29



 

Signatures

30



 

Exhibit Index

31





 

1


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED BALANCE SHEETS 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)





 

 

 

 

 

 



 

 

 

 

 



 

September 30,

 

December 31,

Assets

 

2016

 

2015

Property, plant and equipment, at cost

 

$

6,386,445 

 

$

6,088,011 

Less:  accumulated depreciation

 

 

1,484,959 

 

 

1,399,086 

Net property, plant and equipment

 

 

4,901,486 

 

 

4,688,925 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

 

3,712 

 

 

3,229 

Accounts receivable and unbilled revenues, net

 

 

109,986 

 

 

99,146 

Inventory, materials and supplies

 

 

12,298 

 

 

12,414 

Prepayments and other current assets

 

 

11,799 

 

 

11,802 

Assets held for sale

 

 

3,606 

 

 

1,779 

Total current assets

 

 

141,401 

 

 

128,370 



 

 

 

 

 

 

Regulatory assets

 

 

911,455 

 

 

830,118 

Deferred charges and other assets, net

 

 

30,903 

 

 

28,878 

Investment in joint venture

 

 

8,859 

 

 

7,716 

Goodwill

 

 

41,921 

 

 

33,866 

Total assets

 

$

6,036,025 

 

$

5,717,873 

Liabilities and Equity

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,268,028 and 179,363,660 as of September 30, 2016 and December 31, 2015

 

$

90,134 

 

$

89,682 

Capital in excess of par value

 

 

795,139 

 

 

773,585 

Retained earnings

 

 

1,017,261 

 

 

930,061 

Treasury stock, at cost, 2,912,938 and 2,819,569 shares as of September 30, 2016 and December 31, 2015

 

 

(70,990)

 

 

(68,085)

Accumulated other comprehensive income

 

 

656 

 

 

687 

Total stockholders' equity

 

 

1,832,200 

 

 

1,725,930 



 

 

 

 

 

 

Long-term debt, excluding current portion

 

 

1,748,689 

 

 

1,743,612 

Less:  debt issuance costs

 

 

22,196 

 

 

23,165 

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

 

 

1,726,493 

 

 

1,720,447 

Commitments and contingencies (See Note 13)

 

 

 -

 

 

 -



 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

 

83,777 

 

 

35,593 

Loans payable

 

 

47,990 

 

 

16,721 

Accounts payable

 

 

44,073 

 

 

56,452 

Accrued interest

 

 

18,236 

 

 

12,651 

Accrued taxes

 

 

18,475 

 

 

21,887 

Other accrued liabilities

 

 

39,447 

 

 

49,895 

Total current liabilities

 

 

251,998 

 

 

193,199 



 

 

 

 

 

 

Deferred credits and other liabilities:

 

 

 

 

 

 

Deferred income taxes and investment tax credits

 

 

1,236,516 

 

 

1,118,923 

Customers' advances for construction

 

 

93,023 

 

 

86,934 

Regulatory liabilities

 

 

250,108 

 

 

259,507 

Other

 

 

107,623 

 

 

100,498 

Total deferred credits and other liabilities

 

 

1,687,270 

 

 

1,565,862 



 

 

 

 

 

 

Contributions in aid of construction

 

 

538,064 

 

 

512,435 

Total liabilities and equity

 

$

6,036,025 

 

$

5,717,873 



 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 9 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



 

September 30,



 

2016

 

2015

Operating revenues

 

$

226,593 

 

$

221,051 



 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Operations and maintenance

 

 

79,812 

 

 

78,519 

Depreciation

 

 

33,881 

 

 

31,981 

Amortization

 

 

389 

 

 

816 

Taxes other than income taxes

 

 

14,712 

 

 

14,663 

Total operating expenses

 

 

128,794 

 

 

125,979 



 

 

 

 

 

 

Operating income

 

 

97,799 

 

 

95,072 



 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

Interest expense, net

 

 

20,168 

 

 

19,239 

Allowance for funds used during construction

 

 

(2,267)

 

 

(1,708)

Gain on sale of other assets

 

 

(62)

 

 

(170)

Equity (earnings) loss in joint venture

 

 

(1,621)

 

 

698 

Income before income taxes

 

 

81,581 

 

 

77,013 

Provision for income taxes

 

 

8,411 

 

 

9,584 

Net income

 

$

73,170 

 

$

67,429 



 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.41 

 

$

0.38 

Diluted

 

$

0.41 

 

$

0.38 



 

 

 

 

 

 

Average common shares outstanding during the period:

 

 

 

 

 

 

Basic

 

 

177,336 

 

 

176,704 

Diluted

 

 

177,817 

 

 

177,495 



 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.191 

 

$

0.178 



 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 9 of this report.



 

 

 

 

 

 





















3


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)





 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

September 30,



 

2016

 

2015

Operating revenues

 

$

623,076 

 

$

617,137 



 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Operations and maintenance

 

 

227,347 

 

 

231,454 

Depreciation

 

 

97,645 

 

 

93,530 

Amortization

 

 

1,367 

 

 

2,589 

Taxes other than income taxes

 

 

43,094 

 

 

43,079 

Total operating expenses

 

 

369,453 

 

 

370,652 



 

 

 

 

 

 

Operating income

 

 

253,623 

 

 

246,485 



 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

Interest expense, net

 

 

60,136 

 

 

56,804 

Allowance for funds used during construction

 

 

(6,446)

 

 

(3,930)

Gain on sale of other assets

 

 

(390)

 

 

(338)

Equity (earnings) loss in joint venture

 

 

(1,143)

 

 

1,496 

Income before income taxes

 

 

201,466 

 

 

192,453 

Provision for income taxes

 

 

16,933 

 

 

19,097 

Net income

 

$

184,533 

 

$

173,356 



 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

1.04 

 

$

0.98 

Diluted

 

$

1.04 

 

$

0.98 



 

 

 

 

 

 

Average common shares outstanding during the period:

 

 

 

 

 

 

Basic

 

 

177,243 

 

 

176,891 

Diluted

 

 

177,781 

 

 

177,670 



 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.547 

 

$

0.508 



 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 9 of this report.













 

4


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(In thousands of dollars) 

(UNAUDITED)

  





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2016

 

2015

 

2016

 

2015

Net income

 

$

73,170 

 

$

67,429 

 

$

184,533 

 

$

173,356 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) on investments, net of tax expense (benefit) of $11 and $(120) for the three months and $14 and $(90) for the nine months ended September 30, 2016 and 2015, respectively

 

 

20 

 

 

(223)

 

 

26 

 

 

(169)

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

 

 

 -

 

 

 -

 

 

(57)

 

 

 -

Comprehensive income

 

$

73,190 

 

$

67,206 

 

$

184,502 

 

$

173,187 



 

 

 

 

 

 

 

 

 

 

 

 

(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 nine months ended September 30, 2016.



 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 9 of this report.

 

  



 

5


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CAPITALIZATION 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)







 

 

 

 

 

 

 



 

 

 

 

 

 



 

 

September 30,

 

December 31,



 

 

2016

 

2015

Stockholders' equity:

 

 

 

 

 

 

 

    Common stock, $.50 par value

 

 

$

90,134 

 

$

89,682 

    Capital in excess of par value

 

 

 

795,139 

 

 

773,585 

    Retained earnings

 

 

 

1,017,261 

 

 

930,061 

    Treasury stock, at cost

 

 

 

(70,990)

 

 

(68,085)

    Accumulated other comprehensive income

 

 

656 

 

 

687 

Total stockholders' equity

 

 

 

1,832,200 

 

 

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

 

 

4,661 

 

 

5,148 

1.00% to  1.99%

2017 to 2035

 

 

15,837 

 

 

20,811 

2.00% to  2.99%

2024 to 2031

 

 

20,073 

 

 

19,167 

3.00% to  3.99%

2019 to 2047

 

 

296,622 

 

 

297,275 

4.00% to  4.99%

2020 to 2054

 

 

488,367 

 

 

487,093 

5.00% to  5.99%

2017 to 2043

 

 

213,196 

 

 

221,435 

6.00% to  6.99%

2017 to 2036

 

 

52,980 

 

 

52,964 

7.00% to  7.99%

2022 to 2027

 

 

33,243 

 

 

33,762 

8.00% to  8.99%

2021 to 2025

 

 

6,678 

 

 

14,502 

9.00% to  9.99%

2018 to 2026

 

 

26,400 

 

 

27,100 

10.00% to 10.99%

2018

 

 

6,000 

 

 

6,000 



 

 

 

1,164,057 

 

 

1,185,257 



 

 

 

 

 

 

 

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

 

 

155,000 

 

 

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 2017 through 2024

 

 

133,600 

 

 

144,400 

Notes ranging from 5.20% to 5.95%, due 2017 through 2037

 

 

159,809 

 

 

169,548 

Total long-term debt

 

 

 

1,832,466 

 

 

1,779,205 



 

 

 

 

 

 

 

Current portion of long-term debt

 

 

 

83,777 

 

 

35,593 

Long-term debt, excluding current portion

 

 

1,748,689 

 

 

1,743,612 

Less:  debt issuance costs

 

 

 

22,196 

 

 

23,165 

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

 

 

1,726,493 

 

 

1,720,447 



 

 

 

 

 

 

 

Total capitalization

 

 

$

3,558,693 

 

$

3,446,377 



 

 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 9 of this report.



 

 

 

 

 

 

 















 



 

6


 

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

 

 

 -

 

 

 -

 

 

184,533 

 

 

 -

 

 

 -

 

 

184,533 

Other comprehensive loss, net of income tax benefit of $16

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(31)

 

 

(31)

Dividends

 

 

 -

 

 

 -

 

 

(96,994)

 

 

 -

 

 

 -

 

 

(96,994)

Stock issued for acquisition (439,943 shares)

 

 

220 

 

 

12,625 

 

 

 -

 

 

 -

 

 

 -

 

 

12,845 

Sale of stock (34,699 shares)

 

 

17 

 

 

1,012 

 

 

 -

 

 

 -

 

 

 -

 

 

1,029 

Repurchase of stock (93,369 shares)         

 

 

 -

 

 

 -

 

 

 -

 

 

(2,905)

 

 

 -

 

 

(2,905)

Equity compensation plan (225,712 shares)

 

 

113 

 

 

(113)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Exercise of stock options (204,014 shares)

 

 

102 

 

 

3,734 

 

 

 -

 

 

 -

 

 

 -

 

 

3,836 

Stock-based compensation

 

 

 -

 

 

3,642 

 

 

(339)

 

 

 -

 

 

 -

 

 

3,303 

Employee stock plan tax benefits

 

 

 -

 

 

1,263 

 

 

 -

 

 

 -

 

 

 -

 

 

1,263 

Other  

 

 

 -

 

 

(609)

 

 

 -

 

 

 -

 

 

 -

 

 

(609)

Balance at September 30, 2016

 

$

90,134 

 

$

795,139 

 

$

1,017,261 

 

$

(70,990)

 

$

656 

 

$

1,832,200 



See notes to consolidated financial statements beginning on page 9 of this report.

















  

 

 

7


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CASH FLOW 

(In thousands of dollars) 

(UNAUDITED)



  



 

 

 

 

 

 



 

Nine Months Ended



 

September 30,



 

2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

184,533 

 

$

173,356 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

99,012 

 

 

96,119 

Deferred income taxes

 

 

15,345 

 

 

13,855 

Provision for doubtful accounts

 

 

3,533 

 

 

3,693 

Stock-based compensation

 

 

3,642 

 

 

4,728 

Gain on sale of utility system and market-based business unit

 

 

(1,824)

 

 

 -

Gain on sale of other assets

 

 

(390)

 

 

(338)

Net change in receivables, inventory and prepayments

 

 

(15,235)

 

 

(18,677)

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

 

 

(241)

 

 

16,450 

Other

 

 

(116)

 

 

(6,804)

Net cash flows from operating activities

 

 

288,259 

 

 

282,382 

Cash flows from investing activities:

 

 

 

 

 

 

Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $1,626 and $1,015

 

 

(270,019)

 

 

(257,478)

Acquisitions of utility systems and other, net

 

 

(5,626)

 

 

(26,327)

Release of funds previously restricted for construction activity

 

 

 -

 

 

47 

Net proceeds from the sale of utility system and other assets

 

 

6,545 

 

 

513 

Other

 

 

(32)

 

 

(1,027)

Net cash flows used in investing activities

 

 

(269,132)

 

 

(284,272)

Cash flows from financing activities:

 

 

 

 

 

 

Customers' advances and contributions in aid of construction

 

 

6,006 

 

 

4,286 

Repayments of customers' advances

 

 

(1,882)

 

 

(2,332)

Net proceeds of short-term debt

 

 

31,269 

 

 

9,632 

Proceeds from long-term debt

 

 

234,288 

 

 

313,440 

Repayments of long-term debt

 

 

(181,359)

 

 

(203,851)

Change in cash overdraft position

 

 

(12,586)

 

 

(14,918)

Proceeds from issuing common stock

 

 

1,029 

 

 

344 

Proceeds from exercised stock options

 

 

3,836 

 

 

4,518 

Stock-based compensation windfall tax benefits

 

 

1,263 

 

 

1,469 

Repurchase of common stock

 

 

(2,905)

 

 

(20,268)

Dividends paid on common stock

 

 

(96,994)

 

 

(89,842)

Other

 

 

(609)

 

 

(655)

Net cash flows (used in) from financing activities

 

 

(18,644)

 

 

1,823 

Net change in cash and cash equivalents

 

 

483 

 

 

(67)

Cash and cash equivalents at beginning of period

 

 

3,229 

 

 

4,138 

Cash and cash equivalents at end of period

 

$

3,712 

 

$

4,071 



Non-cash investing activity:

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

 

$

23,548 

 

$

24,724 



See notes to consolidated financial statements beginning on page 9 of this report.

See note 3 - Acquisitions for a description of non-cash activities.





















 

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Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

  

Note 1 – Basis of Presentation 



The accompanying consolidated balance sheets and statements of capitalization of Aqua America, Inc. and subsidiaries (the “Company”) at September 30, 2016, the consolidated statements of net income and comprehensive income for the three and nine months ended September 30, 2016 and 2015 the consolidated statements of cash flow for the nine months ended September 30, 2016 and 2015, and the consolidated statement of equity for the nine months ended September 30, 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 to conform to the current period presentation of debt issuance costs (see Note 15 - Recent Accounting Pronouncements).          



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

 

 

10,095 

 

 

 -

 

 

10,095 

Reclassification to utility plant acquisition adjustment

 

 

(82)

 

 

 -

 

 

(82)

Disposition

 

 

 -

 

 

(996)

 

 

(996)

Classified as assets held for sale

 

 

 -

 

 

(803)

 

 

(803)

Other

 

 

(159)

 

 

 -

 

 

(159)

Balance at September 30, 2016

 

$

37,100 

 

$

4,821 

 

$

41,921 



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’s more likely than not that the fair value of a reporting unit is less than its carrying amount.  When testing goodwill for impairment, we may assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and entity specific events.  Alternatively, we may bypass this qualitative assessment for some of our 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

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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)

  

tested the goodwill attributable for each of our reporting units for impairment as of July 31, 2016, in conjunction with the timing of our 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.







  

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 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 nine acquisitions of water and wastewater utility systems in various states.  The total purchase price of these utility systems consisted of $1,721 in cash, and there was no goodwill recordedIn 2016, the Company recorded goodwill of $1,473 for an acquisition that was completed in a prior periodThe pro forma effect of the businesses 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 consisted 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 which provides liquid waste hauling and disposal services.  This business unit was reported within the Company’s market-based subsidiary, Aqua Resources, and was reported as assets held for sale in the Company’s December 31, 2015 consolidated balance sheet included in this report.    During the second quarter of 2016, this business unit was sold for $3,400 in cash and resulted in a gain on sale of $537.  The gain on sale is reported as a reduction to operations and maintenance expense in the consolidated statements of net income.  This business unit was included in “Other” in the Company’s segment information.    



In the second quarter of 2016, the Company decided to market for sale business units which install and test devices that prevent the contamination of potable water and repair water and wastewater systems.     Further, in the third quarter of 2016, the Company decided to market for sale a business unit which inspects, cleans and repairs storm and sanitary wastewater lines.  These business units are reported within the Company’s market-based subsidiary, Aqua Resources.  These business units are reported as assets held for sale in the Company’s consolidated balance sheets included in this report, and are included in “Other” in the Company’s segment information.          







]

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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 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. 



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 September 30, 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 September 30, 2016 and December 31, 2015, the carrying amount of the Company’s loans payable was $47,990 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

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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)

  

September 30, 2016 and December 31, 2015, the carrying amounts of the Company's cash and cash equivalents was $3,712 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:



 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015

Carrying Amount

 

$

1,832,466 

 

$

1,779,205 

Estimated Fair Value

 

 

2,130,383 

 

 

1,905,393 

 



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 $93,023 as of September 30, 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 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

 

Nine Months Ended



 

September 30,

 

September 30,



 

2016

 

2015

 

2016

 

2015

Average common shares outstanding during the period for basic computation

 

177,336 

 

176,704 

 

177,243 

 

176,891 

Dilutive effect of employee stock-based compensation

 

481 

 

791 

 

538 

 

779