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, 2014
☐ 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 23, 2014: 177,060,756
1
(In thousands of dollars, except per share amounts)
(UNAUDITED)
March 31, |
December 31, |
|||||
Assets |
2014 |
2013 |
||||
Property, plant and equipment, at cost |
$ |
5,397,141 |
$ |
5,348,195 | ||
Less: accumulated depreciation |
1,237,686 | 1,211,806 | ||||
Net property, plant and equipment |
4,159,455 | 4,136,389 | ||||
Current assets: |
||||||
Cash and cash equivalents |
17,508 | 5,058 | ||||
Accounts receivable and unbilled revenues, net |
89,892 | 94,704 | ||||
Income tax receivable |
1,211 | 7,873 | ||||
Deferred income taxes |
49,846 | 40,038 | ||||
Inventory, materials and supplies |
11,794 | 11,353 | ||||
Prepayments and other current assets |
11,129 | 11,081 | ||||
Assets of discontinued operations held for sale |
32,250 | 32,926 | ||||
Total current assets |
213,630 | 203,033 | ||||
Regulatory assets |
599,717 | 585,140 | ||||
Deferred charges and other assets, net |
51,253 | 50,290 | ||||
Investment in joint venture |
47,666 | 48,695 | ||||
Funds restricted for construction activity |
47 | 47 | ||||
Goodwill |
27,999 | 28,223 | ||||
Total assets |
$ |
5,099,767 |
$ |
5,051,817 | ||
Liabilities and Equity |
||||||
Aqua America stockholders' equity: |
||||||
Common stock at $.50 par value, authorized 300,000,000 shares, issued 178,316,578 and 177,928,922 as of March 31, 2014 and December 31, 2013 |
$ |
89,158 |
$ |
88,964 | ||
Capital in excess of par value |
748,080 | 743,335 | ||||
Retained earnings |
745,161 | 729,272 | ||||
Treasury stock, at cost, 1,258,279 and 1,178,323 shares in March 31, 2014 and December 31, 2013 |
(29,055) | (27,082) | ||||
Accumulated other comprehensive income |
667 | 346 | ||||
Total Aqua America stockholders' equity |
1,554,011 | 1,534,835 | ||||
Noncontrolling interest |
223 | 208 | ||||
Total equity |
1,554,234 | 1,535,043 | ||||
Long-term debt, excluding current portion |
1,498,040 | 1,468,583 | ||||
Commitments and contingencies (See Note 13) |
- |
- |
||||
Current liabilities: |
||||||
Current portion of long-term debt |
97,789 | 86,288 | ||||
Loans payable |
27,913 | 36,740 | ||||
Accounts payable |
31,547 | 65,815 | ||||
Accrued interest |
21,175 | 13,615 | ||||
Accrued taxes |
13,362 | 14,176 | ||||
Other accrued liabilities |
30,419 | 33,596 | ||||
Liabilities of discontinued operations held for sale |
29,037 | 29,649 | ||||
Total current liabilities |
251,242 | 279,879 | ||||
Deferred credits and other liabilities: |
||||||
Deferred income taxes and investment tax credits |
901,391 | 866,211 | ||||
Customers' advances for construction |
73,728 | 73,892 | ||||
Regulatory liabilities |
278,283 | 281,014 | ||||
Other |
75,230 | 81,552 | ||||
Total deferred credits and other liabilities |
1,328,632 | 1,302,669 | ||||
Contributions in aid of construction |
467,619 | 465,643 | ||||
Total liabilities and equity |
$ |
5,099,767 |
$ |
5,051,817 | ||
See notes to consolidated financial statements beginning on page 8 of this report. |
2
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Three Months Ended |
||||||
March 31, |
||||||
2014 |
2013 |
|||||
Operating revenues |
$ |
182,672 |
$ |
178,552 | ||
Operating expenses: |
||||||
Operations and maintenance |
71,686 | 67,794 | ||||
Depreciation |
30,981 | 29,045 | ||||
Amortization |
1,133 | 1,377 | ||||
Taxes other than income taxes |
12,102 | 13,398 | ||||
Total operating expenses |
115,902 | 111,614 | ||||
Operating income |
66,770 | 66,938 | ||||
Other expense (income): |
||||||
Interest expense, net |
19,310 | 19,275 | ||||
Allowance for funds used during construction |
(1,167) | (552) | ||||
Loss (gain) on sale of other assets |
348 | (92) | ||||
Equity loss in joint venture |
686 | 656 | ||||
Income from continuing operations before income taxes |
47,593 | 47,651 | ||||
Provision for income taxes |
5,192 | 6,787 | ||||
Income from continuing operations |
42,401 | 40,864 | ||||
Discontinued operations: |
||||||
Income from discontinued operations before income taxes |
772 | 8,925 | ||||
Provision for income taxes |
314 | 3,224 | ||||
Income from discontinued operations |
458 | 5,701 | ||||
Net income attributable to common shareholders |
$ |
42,859 |
$ |
46,565 | ||
Income from continuing operations per share: |
||||||
Basic |
$ |
0.24 |
$ |
0.23 | ||
Diluted |
$ |
0.24 |
$ |
0.23 | ||
Income from discontinued operations per share: |
||||||
Basic |
$ |
0.00 |
$ |
0.03 | ||
Diluted |
$ |
0.00 |
$ |
0.03 | ||
Net income per common share: |
||||||
Basic |
$ |
0.24 |
$ |
0.27 | ||
Diluted |
$ |
0.24 |
$ |
0.26 | ||
Average common shares outstanding during the period: |
||||||
Basic |
176,839 | 175,415 | ||||
Diluted |
177,810 | 176,499 | ||||
Cash dividends declared per common share |
$ |
0.152 |
$ |
0.140 | ||
See notes to consolidated financial statements beginning on page 8 of this report. |
||||||
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
(UNAUDITED)
Three Months Ended |
||||||
March 31, |
||||||
2014 |
2013 |
|||||
Net income attributable to common shareholders |
$ |
42,859 |
$ |
46,565 | ||
Other comprehensive income, net of tax: |
||||||
Unrealized holding gain (loss) on investments, net of tax of $38 and $(5) for the three months ended, March 31, respectively |
72 | (9) | ||||
Reclassification adjustment for loss reported in net income, net of tax benefit of $(134) for the three months ended, March 31, 2014 (1) |
249 |
- |
||||
Comprehensive income |
$ |
43,180 |
$ |
46,556 | ||
(1) Amount of pre-tax loss of $383 reclassified from accumulated other comprehensive income to loss on sale of other assets on the consolidated statements of net income for the three months ended March 31, 2014. |
||||||
See notes to consolidated financial statements beginning on page 8 of this report. |
4
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
March 31, |
December 31, |
||||||
2014 |
2013 |
||||||
Aqua America stockholders' equity: |
|||||||
Common stock, $.50 par value |
$ |
89,158 |
$ |
88,964 | |||
Capital in excess of par value |
748,080 | 743,335 | |||||
Retained earnings |
745,161 | 729,272 | |||||
Treasury stock, at cost |
(29,055) | (27,082) | |||||
Accumulated other comprehensive income |
667 | 346 | |||||
Total Aqua America stockholders' equity |
1,554,011 | 1,534,835 | |||||
Noncontrolling interest |
223 | 208 | |||||
Total equity |
1,554,234 | 1,535,043 | |||||
Long-term debt: |
|||||||
Long-term debt of subsidiaries (substantially secured by utility plant): |
|||||||
Interest Rate Range |
Maturity Date Range |
||||||
0.00% to 0.99% |
2023 to 2033 |
6,093 | 5,035 | ||||
1.00% to 1.99% |
2014 to 2035 |
26,911 | 28,615 | ||||
2.00% to 2.99% |
2024 to 2031 |
15,890 | 14,903 | ||||
3.00% to 3.99% |
2016 to 2047 |
166,794 | 167,365 | ||||
4.00% to 4.99% |
2020 to 2048 |
444,574 | 447,297 | ||||
5.00% to 5.99% |
2015 to 2043 |
256,514 | 284,362 | ||||
6.00% to 6.99% |
2015 to 2036 |
64,929 | 64,923 | ||||
7.00% to 7.99% |
2022 to 2027 |
34,900 | 35,056 | ||||
8.00% to 8.99% |
2021 to 2025 |
19,192 | 19,283 | ||||
9.00% to 9.99% |
2018 to 2026 |
28,500 | 28,500 | ||||
10.40% |
2018 |
6,000 | 6,000 | ||||
1,070,297 | 1,101,339 | ||||||
Notes payable to bank under revolving credit agreement, variable rate, due March 2017 |
72,000 |
- |
|||||
Unsecured notes payable: |
|||||||
Notes at 3.57% due 2027 |
50,000 | 50,000 | |||||
Notes ranging from 4.62% to 4.87%, due 2014 through 2024 |
171,400 | 171,400 | |||||
Notes ranging from 5.01% to 5.95%, due 2015 through 2037 |
232,132 | 232,132 | |||||
1,595,829 | 1,554,871 | ||||||
Current portion of long-term debt |
97,789 | 86,288 | |||||
Long-term debt, excluding current portion |
1,498,040 | 1,468,583 | |||||
Total capitalization |
$ |
3,052,274 |
$ |
3,003,626 | |||
See notes to consolidated financial statements beginning on page 8 of this report. |
|||||||
5
CONSOLIDATED STATEMENT OF EQUITY
(In thousands of dollars)
(UNAUDITED)
Accumulated |
|||||||||||||||||||||
Capital in |
Other |
||||||||||||||||||||
Common |
Excess of |
Retained |
Treasury |
Comprehensive |
Noncontrolling |
||||||||||||||||
Stock |
Par Value |
Earnings |
Stock |
Income |
Interest |
Total |
|||||||||||||||
Balance At December 31, 2013 |
$ |
88,964 |
$ |
743,335 |
$ |
729,272 |
$ |
(27,082) |
$ |
346 |
$ |
208 |
$ |
1,535,043 | |||||||
Net income |
- |
- |
42,859 |
- |
- |
15 | 42,874 | ||||||||||||||
Other comprehensive income, net of income tax of $172 |
- |
- |
- |
- |
321 |
- |
321 | ||||||||||||||
Dividends |
- |
- |
(26,873) |
- |
- |
- |
(26,873) | ||||||||||||||
Repurchase of stock (79,961 shares) |
- |
- |
- |
(1,973) |
- |
- |
(1,973) | ||||||||||||||
Equity compensation plan (198,920 shares) |
100 | (100) |
- |
- |
- |
- |
- |
||||||||||||||
Exercise of stock options (188,736, shares) |
94 | 2,663 |
- |
- |
- |
- |
2,757 | ||||||||||||||
Stock-based compensation |
- |
1,322 | (97) |
- |
- |
- |
1,225 | ||||||||||||||
Employee stock plan tax benefits |
- |
1,041 |
- |
- |
- |
- |
1,041 | ||||||||||||||
Other |
- |
(181) |
- |
- |
- |
- |
(181) | ||||||||||||||
Balance At March 31, 2014 |
$ |
89,158 |
$ |
748,080 |
$ |
745,161 |
$ |
(29,055) |
$ |
667 |
$ |
223 |
$ |
1,554,234 | |||||||
See notes to consolidated financial statements beginning on page 8 of this report. |
|||||||||||||||||||||
6
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
Three Months Ended |
||||||
March 31, |
||||||
2014 |
2013 |
|||||
Cash flows from operating activities: |
||||||
Net income |
$ |
42,859 |
$ |
46,565 | ||
Income from discontinued operations |
458 | 5,701 | ||||
Income from continuing operations |
42,401 | 40,864 | ||||
Adjustments to reconcile income from continuing operations |
||||||
to net cash flows from operating activities: |
||||||
Depreciation and amortization |
32,114 | 30,422 | ||||
Deferred income taxes |
3,692 | 11,189 | ||||
Provision for doubtful accounts |
1,508 | 925 | ||||
Stock-based compensation |
1,331 | 1,015 | ||||
Loss (gain) on sale of other assets |
348 | (92) | ||||
Net increase in receivables, inventory and prepayments |
3,644 | 5,492 | ||||
Net increase in payables, accrued interest, accrued taxes and other accrued liabilities |
13,269 | 514 | ||||
Other |
(7,833) | (1,704) | ||||
Operating cash flows from continuing operations |
90,474 | 88,625 | ||||
Operating cash flows (used in) from discontinued operations, net |
(545) | 361 | ||||
Net cash flows from operating activities |
89,929 | 88,986 | ||||
Cash flows from investing activities: |
||||||
Property, plant and equipment additions, including the non-equity component of allowance for funds used during construction of $367 and $472 |
(59,819) | (59,085) | ||||
Acquisitions of utility systems and other, net |
(4,045) | (10,674) | ||||
Additions to funds restricted for construction activity |
- |
(2) | ||||
Release of funds previously restricted for construction activity |
- |
394 | ||||
Net proceeds from the sale of utility system and other assets |
133 | 95 | ||||
Investment in joint venture |
- |
(4,900) | ||||
Other |
(91) | (233) | ||||
Investing cash flows used in continuing operations |
(63,822) | (74,405) | ||||
Investing cash flows from discontinued operations, net |
39 | 51,312 | ||||
Net cash flows used in investing activities |
(63,783) | (23,093) | ||||
Cash flows from financing activities: |
||||||
Customers' advances and contributions in aid of construction |
1,142 | 794 | ||||
Repayments of customers' advances |
(234) | (577) | ||||
Net (repayments) proceeds of short-term debt |
(8,827) | 17,453 | ||||
Proceeds from long-term debt |
73,192 | 35,010 | ||||
Repayments of long-term debt |
(31,874) | (77,991) | ||||
Change in cash overdraft position |
(21,753) | (11,881) | ||||
Proceeds from issuing common stock |
- |
3,427 | ||||
Proceeds from exercised stock options |
2,757 | 7,901 | ||||
Stock-based compensation windfall tax benefits |
964 |
- |
||||
Repurchase of common stock |
(1,973) | (1,618) | ||||
Dividends paid on common stock |
(26,873) | (24,562) | ||||
Other |
(181) |
- |
||||
Financing cash flows used in continuing operations |
(13,660) | (52,044) | ||||
Financing cash flows used in discontinued operations, net |
(36) | (17) | ||||
Net cash flows used in financing activities |
(13,696) | (52,061) | ||||
Net increase in cash and cash equivalents |
12,450 | 13,832 | ||||
Cash and cash equivalents at beginning of period |
5,058 | 5,521 | ||||
Cash and cash equivalents at end of period |
$ |
17,508 |
$ |
19,353 | ||
See notes to consolidated financial statements beginning on page 8 of this report. |
7
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The accompanying consolidated balance sheets and statements of capitalization of Aqua America, Inc. and subsidiaries (the “Company”) at March 31, 2014, the consolidated statements of net income and comprehensive income for the three months ended March 31, 2014 and 2013, the consolidated statements of cash flow for the three months ended March 31, 2014 and 2013, and the consolidated statement of equity for the three months ended March 31, 2014 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, 2013. 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, 2013 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2013 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements. All common share, per common share, stock unit, and per stock unit data, for all periods presented, has been adjusted to give effect to the September 1, 2013 five-for-four stock split effected in the form of a 25% stock distribution (see Note 5). Certain prior period amounts have been reclassified to conform to the reporting of discontinued operations (see Note 4).
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, 2013 |
$ |
24,102 |
$ |
4,121 |
$ |
28,223 | ||||
Reclassifications to utility plant acquisition adjustment |
(202) |
- |
(202) | |||||||
Other |
(22) |
- |
(22) | |||||||
Balance at March 31, 2014 |
$ |
23,878 |
$ |
4,121 |
$ |
27,999 |
8
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 in the table above results from a mechanism approved by the applicable public utility commission. The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with certain acquisitions upon achieving certain objectives.
Note 3 Acquisitions
In May 2014, the Company entered into an asset purchase agreement for the acquisition of the water and wastewater utility system assets of North Maine Utilities owned by the Village of Glenview, Illinois serving approximately 7,200 customers, for cash at closing of up to $22,000, subject to final adjustment pursuant to the purchase agreement. Closing of this acquisition is anticipated to occur in mid-year 2015.
In March 2014, the Company acquired the wastewater utility system assets of Penn Township located in Chester County, Pennsylvania serving approximately 800 customers. The total purchase price consisted of $3,668 in cash.
In March 2013, the Company acquired the water and wastewater utility system assets of Total Environmental Solutions, Inc. located in Clearfield County, Pennsylvania serving approximately 4,200 customers. The total purchase price consisted of $10,350 in cash.
Note 4 Discontinued Operations and Other Disposition
Discontinued Operations – In September 2012, the Company began to market for sale its water and wastewater operations in Florida, which served approximately 38,000 customers, and the Company’s wastewater treatment facility in Georgia. In March, April, and December 2013, through five separate sales transactions, the Company completed the sale of its water and wastewater utility systems in Florida, which concluded its regulated operations in Florida. The Company received total net proceeds from these sales of $88,934 and recognized a gain on sale of $21,178 ($13,766 after-tax), including a first quarter 2013 gain on sale of $6,451 ($4,193 after-tax). One of the Company’s sales in Florida, which was completed in March 2013, and represented approximately 8% of its customers served in Florida, remains subject to customary regulatory review, for which the Company expects to receive the regulator’s decision by midyear 2014. If the regulator does not approve this sale, the purchase price would be refunded and the assets sold would revert back to the Company. On March 12, 2014, the Company completed the sale of its wastewater treatment facility in Georgia.
The City of Fort Wayne, Indiana (the “City”) has authorized the acquisition by eminent domain of the northern portion of the utility system of one of the Company’s operating subsidiaries in Indiana (the “Northern Assets”). In January 2008, the Company reached a settlement with the City to transition the Northern Assets in February 2008 upon receipt
9
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
of the City’s initial valuation payment of $16,911. The settlement agreement specifically stated that the final valuation of the Northern Assets will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation. On February 12, 2008, the Company turned over the Northern Assets to the City upon receipt of the initial valuation payment. The proceeds received by the Company are in excess of the book value of the assets relinquished. No gain has been recognized due to the contingency over the final valuation of the assets. The net book value of the Northern Assets has been removed from the consolidated balance sheet and the difference between the net book value and the initial payment received has been deferred and is recorded in other accrued liabilities on the Company’s consolidated balance sheet. Once the contingency is resolved and the asset valuation is finalized, through the finalization of the litigation between the Company and the City, the amounts deferred will be recognized in the Company’s consolidated statement of net income. On March 16, 2009, oral argument was held on certain procedural aspects with respect to the valuation evidence that may be presented and whether the Company is entitled to a jury trial. On October 12, 2010, the Wells County Indiana Circuit Court ruled that the Company is not entitled to a jury trial, and that the Wells County judge should review the City of Fort Wayne Board of Public Works’ assessment based upon a “capricious, arbitrary or an abuse of discretion” standard. The Company disagreed with the Court’s decision and appealed the Wells County Indiana Circuit Court’s decision to the Indiana Court of Appeals. On January 13, 2012, the Indiana Court of Appeals reached a decision upholding the Wells County Indiana Circuit Court decision. On February 10, 2012, the Company filed a petition for transfer requesting that the Indiana Supreme Court review the matter. On April 11, 2013, the Indiana Supreme Court ruled that the statute at issue gives the Company the right to a full evidentiary hearing before a jury regarding the value of the assets and remanded the case to the trial court for a proceeding consistent with that ruling. The Company continues to evaluate its legal options with respect to this decision. Depending upon the outcome of all of the legal proceedings, including the planned transaction below, which would resolve this litigation, the Company may be required to refund a portion of the initial valuation payment, or may receive additional proceeds. The Northern Assets relinquished represent approximately 0.4% of the Company’s total assets.
In addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public convenience and necessity” to acquire certain of the Company's water utility system assets located in the southwest section of the City and in Allen County (the “Southern Assets”), and if negotiations with Fort Wayne officials were to fail, to condemn the Southern Assets. The first public hearing on the ordinance was held on January 22, 2013 and a subsequent hearing scheduled for February 5, 2013 was not held due to ongoing settlement discussions between the parties. On July 2, 2013, the Company’s operating subsidiary and the City signed a letter of intent, which among other items, addresses many of the terms by which the City would purchase the Company’s Southern Assets, will resolve the litigation between the Company and the City with respect to the Northern Assets, and will establish the terms by which the Company’s operating
10
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
subsidiary will treat wastewater sent to it by the City. The letter of intent states that the City agrees to pay the Company $50,100 for the Northern Assets and Southern Assets in addition to the $16,911 paid to the Company by the City in 2008 as an initial valuation payment for the Northern Assets (for a total payment of $67,011). The letter of intent is conditioned on the Company’s Board of Directors and City Council approving the final terms of the possible transaction, and the Company and the City entering into several definitive agreements that cover the subject matter of the letter of intent. On February 27, 2014, the Company’s Board of Directors authorized management to enter into agreements with the City on terms and conditions that are consistent with the July 2, 2013 letter of intent, for among other items, the sale of the Company’s Northern Assets and Southern Assets to the City. Further, the completion of the transaction is subject to regulatory requirements and approval. The planned sale of these operations is accounted for as businesses held for sale beginning in the first quarter of 2014. If this transaction is consummated, the Company will expand its sewer customer base by accepting new wastewater from the City. The completion of the transaction is not expected to close until the fourth quarter of 2014. The Company continues to evaluate its legal and operational options on an ongoing basis.
The operating results, cash flows, and financial position of the Company’s operations named above, during the periods owned, have been presented in the Company’s consolidated statements of net income, consolidated statements of cash flow, and consolidated balance sheets as discontinued operations. These operations were included in the Company’s “Regulated” segment.
A summary of discontinued operations presented in the consolidated statements of net income include the following:
Three Months Ended |
|||||||
March 31, |
|||||||
2014 |
2013 |
||||||
Operating revenues |
$ |
1,579 |
$ |
7,493 | |||
Total operating expenses |
673 | 5,020 | |||||
Operating income |
906 | 2,473 | |||||
Other (income) expense: |
|||||||
Loss (gain) on sale |
134 | (6,451) | |||||
Other, net |
- |
(1) | |||||
Income from discontinued operations before income taxes |
772 | 8,925 | |||||
Provision for income taxes |
314 | 3,224 | |||||
Income from discontinued operations |
$ |
458 |
$ |
5,701 |
11
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The assets and liabilities of discontinued operations presented in the consolidated balance sheets include the following:
March 31, |
December 31, |
||||||
2014 |
2013 |
||||||
Property, plant and equipment, at cost |
$ |
39,747 |
$ |
39,976 | |||
Less: accumulated depreciation |
8,753 | 8,872 | |||||
Net property, plant and equipment |
30,994 | 31,104 | |||||
Current assets |
814 | 1,362 | |||||
Regulatory assets |
442 | 460 | |||||
Assets of discontinued operations held for sale |
32,250 | 32,926 | |||||
Current liabilities |
15,209 | 16,212 | |||||
Deferred income taxes and investment tax credits |
1,725 | 1,308 | |||||
Contributions in aid of construction |
10,935 | 10,935 | |||||
Other liabilities |
1,168 | 1,194 | |||||
Liabilities of discontinued operations held for sale |
29,037 | 29,649 | |||||
Net assets |
$ |
3,213 |
$ |
3,277 | |||
]
Note 5 Capitalization
In May 2013, the Board of Directors of the Company approved a five-for-four stock split to be effected in the form of a 25% stock distribution to shareholders of record on August 16, 2013. Common shares outstanding do not include shares held by the Company in treasury. The new shares were distributed on September 1, 2013. Aqua America’s par value of $0.50 per share did not change as a result of the common stock distribution, and $17,655 was transferred from capital in excess of par value to common stock to record the stock split. All common share, per common share, stock unit, and per stock unit data, for all periods presented, has been adjusted to give effect to the stock split.
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
12
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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, 2014.
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 funds restricted for construction activity and loans payable are determined based on their carrying amount and utilizing Level 1 methods and assumptions. As of March 31, 2014 and December 31, 2013, the carrying amount of the Company’s funds restricted for construction activity was $47 and $47, respectively, which equates to their estimated fair value. As of March 31, 2014 and December 31, 2013, the carrying amount of the Company’s loans payable was $27,913 and $36,740, 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, 2014 and December 31, 2013, the carrying amounts of the Company's cash and cash equivalents was $17,508 and $5,058, respectively, which equates to their fair value.
13
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
March 31, |
December 31, |
||||||
2014 |
2013 |
||||||
Carrying Amount |
$ |
1,595,829 |
$ |
1,554,871 | |||
Estimated Fair Value |
1,622,265 | 1,540,296 |
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 $73,728 as of March 31, 2014, and $73,892 as of December 31, 2013. 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 2029 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 following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share:
Three Months Ended |
|||||
March 31, |
|||||
2014 |
2013 |
||||
Average common shares outstanding during the period for basic computation |
176,839 | 175,415 | |||
Dilutive effect of employee stock-based compensation |
971 | 1,084 | |||
Average common shares outstanding during the period for diluted computation |
177,810 | 176,499 | |||
For the three months ended March 31, 2014, all of the Company’s employee stock options were included in the calculations of diluted net income per share as the calculated cost to
14
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
exercise the stock options was less than the average market price of the Company’s common stock during these periods. For the three months ended March 31, 2013, employee stock options to purchase 494,156 shares of common stock, were excluded from the calculations of diluted net income per share as the calculated cost to exercise the stock options was greater 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 (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 50% of the shares available for issuance under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards and the maximum number of shares that may be subject to grants under the 2009 Plan to any one individual in any one year is 250,000. Awards under the 2009 Plan are made by a committee of the Board of Directors. At March 31, 2014, 4,483,011 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 certain 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 performance share units:
Three Months Ended |
|||||||
March 31, |
|||||||
2014 |
2013 |
||||||
Stock-based compensation for performance share units within operations and maintenance expenses |
$ |
1,002 |
$ |
715 | |||
Income tax benefit |
410 | 291 |
15
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes nonvested PSU transactions for the three months ended March 31, 2014:
Number |
Weighted |
||||||
of |
Average |
||||||
Share Units |
Fair Value |
||||||
Nonvested share units at beginning of period |
528,092 |
$ |
21.25 | ||||
Granted |
143,630 | 25.31 | |||||
Performance criteria adjustment |
16,927 | 19.45 | |||||
Forfeited |
(3,939) | 22.23 | |||||
Share units vested in prior period and issued in current period |
18,000 | 19.51 | |||||
Share units issued |
(174,148) | 18.93 | |||||
Nonvested share units at end of period |
528,562 |
$ |
22.99 | ||||