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, 2015
☐ 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, 2015: 177,069,727
1
AQUA AMERICA, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
(UNAUDITED)
March 31, |
December 31, |
|||||
Assets |
2015 |
2014 |
||||
Property, plant and equipment, at cost |
$ |
5,764,467 |
$ |
5,707,017 | ||
1,331,323 | 1,305,027 | |||||
Net property, plant and equipment |
4,433,144 | 4,401,990 | ||||
Current assets: |
||||||
Cash and cash equivalents |
9,274 | 4,138 | ||||
Accounts receivable and unbilled revenues, net |
95,405 | 96,999 | ||||
Deferred income taxes |
35,202 | 26,849 | ||||
Inventory, materials and supplies |
12,591 | 12,788 | ||||
Prepayments and other current assets |
11,753 | 11,748 | ||||
Total current assets |
164,225 | 152,522 | ||||
Regulatory assets |
748,911 | 725,591 | ||||
Deferred charges and other assets, net |
54,864 | 52,084 | ||||
Investment in joint venture |
42,619 | 43,334 | ||||
Funds restricted for construction activity |
15 | 47 | ||||
Goodwill |
33,954 | 31,184 | ||||
Total assets |
$ |
5,477,732 |
$ |
5,406,752 | ||
Liabilities and Equity |
||||||
Aqua America stockholders' equity: |
||||||
Common stock at $.50 par value, authorized 300,000,000 shares, issued 179,041,925 and 178,591,254 as of March 31, 2015 and December 31, 2014 |
$ |
89,521 |
$ |
89,296 | ||
Capital in excess of par value |
763,259 | 758,145 | ||||
Retained earnings |
869,203 | 849,952 | ||||
Treasury stock, at cost, 1,978,968 and 1,837,984 shares as of March 31, 2015 and December 31, 2014 |
(46,592) | (42,838) | ||||
Accumulated other comprehensive income |
863 | 788 | ||||
Total Aqua America stockholders' equity |
1,676,254 | 1,655,343 | ||||
Noncontrolling interest |
40 | 40 | ||||
Total equity |
1,676,294 | 1,655,383 | ||||
Long-term debt, excluding current portion |
1,594,980 | 1,560,655 | ||||
Commitments and contingencies (See Note 13) |
- |
- |
||||
Current liabilities: |
||||||
Current portion of long-term debt |
47,042 | 58,615 | ||||
Loans payable |
33,062 | 18,398 | ||||
Accounts payable |
34,717 | 63,035 | ||||
Accrued interest |
20,477 | 12,437 | ||||
Accrued taxes |
31,653 | 31,462 | ||||
Other accrued liabilities |
38,168 | 41,388 | ||||
Total current liabilities |
205,119 | 225,335 | ||||
Deferred credits and other liabilities: |
||||||
Deferred income taxes and investment tax credits |
1,041,418 | 1,000,791 | ||||
Customers' advances for construction |
75,833 | 78,301 | ||||
Regulatory liabilities |
273,873 | 278,317 | ||||
Other |
106,279 | 109,692 | ||||
Total deferred credits and other liabilities |
1,497,403 | 1,467,101 | ||||
Contributions in aid of construction |
503,936 | 498,278 | ||||
Total liabilities and equity |
$ |
5,477,732 |
$ |
5,406,752 | ||
See notes to consolidated financial statements beginning on page 8 of this report. |
2
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Three Months Ended |
||||||
March 31, |
||||||
2015 |
2014 |
|||||
Operating revenues |
$ |
190,326 |
$ |
182,672 | ||
Operating expenses: |
||||||
Operations and maintenance |
73,189 | 71,686 | ||||
Depreciation |
30,500 | 30,981 | ||||
849 | 1,133 | |||||
Taxes other than income taxes |
14,621 | 12,102 | ||||
Total operating expenses |
119,159 | 115,902 | ||||
Operating income |
71,167 | 66,770 | ||||
Other expense (income): |
||||||
Interest expense, net |
18,665 | 19,310 | ||||
Allowance for funds used during construction |
(1,182) | (1,167) | ||||
(Gain) loss on sale of other assets |
(169) | 348 | ||||
Equity loss in joint venture |
714 | 686 | ||||
Income from continuing operations before income taxes |
53,139 | 47,593 | ||||
Provision for income taxes |
4,594 | 5,192 | ||||
Income from continuing operations |
48,545 | 42,401 | ||||
Discontinued operations: |
||||||
Income from discontinued operations before income taxes |
- |
772 | ||||
Provision for income taxes |
- |
314 | ||||
Income from discontinued operations |
- |
458 | ||||
Net income attributable to common shareholders |
$ |
48,545 |
$ |
42,859 | ||
Income from continuing operations per share: |
||||||
Basic |
$ |
0.27 |
$ |
0.24 | ||
Diluted |
$ |
0.27 |
$ |
0.24 | ||
Income from discontinued operations per share: |
||||||
Basic |
$ |
- |
$ |
0.00 | ||
Diluted |
$ |
- |
$ |
0.00 | ||
Net income per common share: |
||||||
Basic |
$ |
0.27 |
$ |
0.24 | ||
Diluted |
$ |
0.27 |
$ |
0.24 | ||
Average common shares outstanding during the period: |
||||||
Basic |
176,888 | 176,839 | ||||
Diluted |
177,792 | 177,810 | ||||
Cash dividends declared per common share |
$ |
0.165 |
$ |
0.152 | ||
See notes to consolidated financial statements beginning on page 8 of this report. |
||||||
3
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
(UNAUDITED)
Three Months Ended |
|||||||
March 31, |
|||||||
2015 |
2014 |
||||||
Net income attributable to common shareholders |
$ |
48,545 |
$ |
42,859 | |||
Other comprehensive income, net of tax: |
|||||||
Unrealized holding gain on investments, net of tax expense of $41 and $38 for the three months ended March 31, 2015 and 2014, respectively |
75 | 72 | |||||
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 |
$ |
48,620 |
$ |
43,180 | |||
(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
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
March 31, |
December 31, |
||||||
2015 |
2014 |
||||||
Aqua America stockholders' equity: |
|||||||
Common stock, $.50 par value |
$ |
89,521 |
$ |
89,296 | |||
Capital in excess of par value |
763,259 | 758,145 | |||||
Retained earnings |
869,203 | 849,952 | |||||
Treasury stock, at cost |
(46,592) | (42,838) | |||||
Accumulated other comprehensive income |
863 | 788 | |||||
Total Aqua America stockholders' equity |
1,676,254 | 1,655,343 | |||||
Noncontrolling interest |
40 | 40 | |||||
Total equity |
1,676,294 | 1,655,383 | |||||
Long-term debt of subsidiaries (substantially secured by utility plant): |
|||||||
Interest Rate Range |
Maturity Date Range |
||||||
0.00% to 0.99% |
2023 to 2033 |
5,587 | 5,653 | ||||
1.00% to 1.99% |
2016 to 2035 |
25,681 | 24,871 | ||||
2.00% to 2.99% |
2024 to 2031 |
15,641 | 15,578 | ||||
3.00% to 3.99% |
2016 to 2047 |
190,271 | 190,875 | ||||
4.00% to 4.99% |
2020 to 2054 |
484,084 | 484,168 | ||||
5.00% to 5.99% |
2015 to 2043 |
241,991 | 242,102 | ||||
6.00% to 6.99% |
2015 to 2036 |
64,949 | 64,944 | ||||
7.00% to 7.99% |
2022 to 2027 |
34,261 | 34,424 | ||||
8.00% to 8.99% |
2021 to 2025 |
18,809 | 18,907 | ||||
9.00% to 9.99% |
2018 to 2026 |
27,800 | 27,800 | ||||
10.00% to 10.99% |
2018 |
6,000 | 6,000 | ||||
1,115,074 | 1,115,322 | ||||||
Notes payable to bank under revolving credit agreement, variable rate, due 2017 |
113,000 | 72,000 | |||||
Unsecured notes payable: |
|||||||
Bank note at 1.921% due 2017 |
50,000 | 50,000 | |||||
Notes at 3.57% due 2027 |
50,000 | 50,000 | |||||
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 | 187,548 | |||||
Total long-term debt |
1,642,022 | 1,619,270 | |||||
Current portion of long-term debt |
47,042 | 58,615 | |||||
Long-term debt, excluding current portion |
1,594,980 | 1,560,655 | |||||
Total capitalization |
$ |
3,271,274 |
$ |
3,216,038 | |||
See notes to consolidated financial statements beginning on page 8 of this report. |
|||||||
5
AQUA AMERICA, INC. AND SUBSIDIARIES
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, 2014 |
$ |
89,296 |
$ |
758,145 |
$ |
849,952 |
$ |
(42,838) |
$ |
788 |
$ |
40 |
$ |
1,655,383 | |||||||
Net income |
- |
- |
48,545 |
- |
- |
- |
48,545 | ||||||||||||||
Other comprehensive income, net of income tax of $41 |
- |
- |
- |
- |
75 |
- |
75 | ||||||||||||||
Dividends |
- |
- |
(29,176) |
- |
- |
- |
(29,176) | ||||||||||||||
Repurchase of stock (140,984 shares) |
- |
- |
- |
(3,754) |
- |
- |
(3,754) | ||||||||||||||
Equity compensation plan (280,401 shares) |
140 | (140) |
- |
- |
- |
- |
- |
||||||||||||||
Exercise of stock options (170,270 shares) |
85 | 2,767 |
- |
- |
- |
- |
2,852 | ||||||||||||||
Stock-based compensation |
- |
1,341 | (118) |
- |
- |
- |
1,223 | ||||||||||||||
Employee stock plan tax benefits |
- |
1,409 |
- |
- |
- |
- |
1,409 | ||||||||||||||
Other |
- |
(263) |
- |
- |
- |
- |
(263) | ||||||||||||||
Balance at March 31, 2015 |
$ |
89,521 |
$ |
763,259 |
$ |
869,203 |
$ |
(46,592) |
$ |
863 |
$ |
40 |
$ |
1,676,294 | |||||||
See notes to consolidated financial statements beginning on page 8 of this report. |
|||||||||||||||||||||
6
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
Three Months Ended |
||||||
March 31, |
||||||
2015 |
2014 |
|||||
Cash flows from operating activities: |
||||||
Net income |
$ |
48,545 |
$ |
42,859 | ||
Income from discontinued operations |
- |
458 | ||||
Income from continuing operations |
48,545 | 42,401 | ||||
Adjustments to reconcile income from continuing operations |
||||||
to net cash flows from operating activities: |
||||||
Depreciation and amortization |
31,349 | 32,114 | ||||
Deferred income taxes |
2,688 | 3,692 | ||||
Provision for doubtful accounts |
936 | 1,508 | ||||
Stock-based compensation |
1,341 | 1,331 | ||||
(Gain) loss on sale of other assets |
(169) | 348 | ||||
Net change in receivables, inventory and prepayments |
191 | 3,644 | ||||
Net change in payables, accrued interest, accrued taxes and other accrued liabilities |
11,460 | 13,269 | ||||
Other |
(6,321) | (7,833) | ||||
Operating cash flows from continuing operations |
90,020 | 90,474 | ||||
Operating cash flows used in discontinued operations, net |
- |
(545) | ||||
Net cash flows from operating activities |
90,020 | 89,929 | ||||
Cash flows from investing activities: |
||||||
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $296 and $367 |
(70,284) | (59,819) | ||||
Acquisitions of utility systems and other, net |
(788) | (4,045) | ||||
Release of funds previously restricted for construction activity |
32 |
- |
||||
Net proceeds from the sale of utility system and other assets |
232 | 133 | ||||
Other |
(1,180) | (91) | ||||
Investing cash flows used in continuing operations |
(71,988) | (63,822) | ||||
Investing cash flows from discontinued operations, net |
- |
39 | ||||
Net cash flows used in investing activities |
(71,988) | (63,783) | ||||
Cash flows from financing activities: |
||||||
Customers' advances and contributions in aid of construction |
1,193 | 1,142 | ||||
Repayments of customers' advances |
(1,040) | (234) | ||||
Net proceeds (repayments) of short-term debt |
14,664 | (8,827) | ||||
Proceeds from long-term debt |
52,629 | 73,192 | ||||
Repayments of long-term debt |
(29,800) | (31,874) | ||||
Change in cash overdraft position |
(21,431) | (21,753) | ||||
Proceeds from exercised stock options |
2,852 | 2,757 | ||||
Stock-based compensation windfall tax benefits |
1,230 | 964 | ||||
Repurchase of common stock |
(3,754) | (1,973) | ||||
Dividends paid on common stock |
(29,176) | (26,873) | ||||
Other |
(263) | (181) | ||||
Financing cash flows used in continuing operations |
(12,896) | (13,660) | ||||
Financing cash flows used in discontinued operations, net |
- |
(36) | ||||
Net cash flows used in financing activities |
(12,896) | (13,696) | ||||
Net change in cash and cash equivalents |
5,136 | 12,450 | ||||
Cash and cash equivalents at beginning of period |
4,138 | 5,058 | ||||
Cash and cash equivalents at end of period |
$ |
9,274 |
$ |
17,508 | ||
Non-cash investing activity: |
||||||
Property, plant and equipment additions purchased at the period end, but not yet paid for |
$ |
20,158 |
$ |
18,550 | ||
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)
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, 2015, the consolidated statements of net income and comprehensive income for the three months ended March 31, 2015 and 2014, the consolidated statements of cash flow for the three months ended March 31, 2015 and 2014, and the consolidated statement of equity for the three months ended March 31, 2015 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, 2014. 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, 2014 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2014 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.
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, 2014 |
$ |
24,564 |
$ |
6,620 |
$ |
31,184 | |||
Goodwill acquired |
- |
12 | 12 | ||||||
Reclassifications (to) from utility plant acquisition adjustment, net |
2,758 |
- |
2,758 | ||||||
Balance at March 31, 2015 |
$ |
27,322 |
$ |
6,632 |
$ |
33,954 |
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 December 2014, the Company acquired the water utility system assets of Lake Mohawk and Lake Tomahawk utilities located in Northeastern Ohio serving approximately 1,250 customers. The total purchase price consisted of $1,770 in cash.
In December 2014, the Company acquired a non-regulated business that specializes in providing water distribution system services to prevent the contamination of potable water, including training to waterworks operators. The total purchase price consisted of $1,800, of which $700 was paid in the first quarter of 2015.
In September 2014, the Company acquired the water and wastewater utility system assets of Texas H2O, Inc. located in Mansfield, Texas serving approximately 1,100 customers. The total purchase price consisted of $2,796 in cash.
In September 2014, the Company acquired the water utility system assets of Lake Caroline Water Co. located in Caroline County, Virginia serving approximately 1,040 customers. The total purchase price consisted of $1,377 in cash.
In August 2014, the Company acquired a non-regulated business that specializes in the inspection, cleaning and repair of storm and sanitary sewer lines. The total purchase price consisted of $3,010, of which a total of $810 is contingent upon satisfying certain annual performance targets over a three-year period.
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 $22,000. On April 1, 2015, the Illinois Commerce Commission approved this transaction, and on April 30, 2015, we completed this acquisition. As of the date of issuance of the financial statements, the initial accounting of the purchase price allocation for this acquisition is incomplete.
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.
Note 4 – Discontinued Operations
In December 2014, we completed the sale of our water utility system in southwest Allen County, Indiana to the City of Fort Wayne, Indiana. The completion of this sale settled the dispute concerning the City of Fort Wayne’s valuation of the northern portion of our water and wastewater utility systems, which were
9
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
acquired by the City of Fort Wayne in February 2008, by eminent domain. In addition, as a result of this transaction, Aqua Indiana will expand its sewer customer base by accepting new wastewater flows from the City of Fort Wayne.
In March 2014, we completed the sale of our wastewater treatment facility in Georgia.
The operating results and cash flows of the Company’s operations named above, during the periods owned, have been presented in the Company’s consolidated statements of net income and consolidated statements of cash flow 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 |
||||
Operating revenues |
$ |
1,579 | ||
Total operating expenses |
673 | |||
Operating income |
906 | |||
Other expense: |
||||
Loss on sale |
134 | |||
Income from discontinued operations before income taxes |
772 | |||
Provision for income taxes |
314 | |||
Income from discontinued operations |
$ |
458 |
As of March 31, 2015 and December 31, 2014, there were no assets or liabilities associated with the Company’s discontinued operations.
]
10
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 2015, the Company renewed its universal shelf registration, which had expired in February 2015, through a filing with the Securities and Exchange Commission (“SEC”) to allow for the potential future sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities and other securities specified therein at indeterminate prices.
In February 2015, the Company filed a registration statement with the SEC to update an existing filing which permits the offering, from time to time, of an aggregate of $500,000 in shares of common stock and shares of preferred stock in connection with acquisitions. The form and terms of any securities issued under these shelf registration statements will be determined at the time of issuance.
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, 2015.
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, 2015 and December 31,
11
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
2014, the carrying amount of the Company’s funds restricted for construction activity was $15 and $47, respectively, which equates to their estimated fair value. As of March 31, 2015 and December 31, 2014, the carrying amount of the Company’s loans payable was $33,062 and $18,398, 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, 2015 and December 31, 2014, the carrying amounts of the Company's cash and cash equivalents was $9,274 and $4,138, 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, |
|||||
2015 |
2014 |
|||||
Carrying Amount |
$ |
1,642,022 |
$ |
1,619,270 | ||
Estimated Fair Value |
1,682,623 | 1,694,424 |
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 $75,833 as of March 31, 2015, and $78,301 as of December 31, 2014. 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 2025 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.
12
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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, |
|||||
2015 |
2014 |
||||
Average common shares outstanding during the period for basic computation |
176,888 | 176,839 | |||
Dilutive effect of employee stock-based compensation |
904 | 971 | |||
Average common shares outstanding during the period for diluted computation |
177,792 | 177,810 | |||
For the three months ended March 31, 2015 and 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 exercise the stock options was less than the average market price of the Company’s common stock during these periods.
Note 8 – Stock-based Compensation
Under the Company’s 2009 Omnibus Equity Compensation Plan, as amended as of February 27, 2014, (the “2009 Plan”), as approved by the Company’s shareholders to replace the 2004 Equity Compensation Plan (the “2004 Plan”), stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors. The 2009 Plan authorizes 6,250,000 shares for issuance under the plan. A maximum of 3,125,000 shares under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the 2009 Plan. During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the 2009 Plan. Awards under the 2009 Plan are made by a committee of the Board of Directors of the Company, or in the case of awards to non-employee directors, by the Board of Directors of the Company. At March 31, 2015, 4,252,788 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
13
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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, |
|||||||
2015 |
2014 |
||||||
Stock-based compensation within operations and maintenance expenses |
$ |
1,078 |
$ |
1,002 | |||
Income tax benefit |
439 | 410 |
The following table summarizes nonvested PSU transactions for the three months ended March 31, 2015:
Number |
Weighted |
|||||
of |
Average |
|||||
Share Units |
Fair Value |
|||||
Nonvested share units at beginning of period |
582,644 |
$ |
22.98 | |||
Granted |
123,820 | 26.54 | ||||
Performance criteria adjustment |
5,114 | 25.59 | ||||
Forfeited |
(3,713) | 25.69 | ||||
Share units vested |
(34,500) | 26.88 | ||||
Share units issued |
(217,014) | 18.49 | ||||
Nonvested share units at end of period |
456,351 |
$ |
25.79 | |||
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions associated with the PSUs using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions. The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied. The per unit weighted-average fair value at the date of grant for PSUs granted during the three months ended March 31, 2015 and 2014 was $26.54 and $25.31, 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 Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock. RSUs are eligible to be earned at the end of a specified restricted period, generally three years, beginning on the date of grant. In some cases the right to receive the shares is subject to certain performance goals established at the time the grant is made. The Company assumes that forfeitures
14
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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, |
|||||||
2015 |
2014 |
||||||
Stock-based compensation within operations and maintenance expenses |
$ |
263 |
$ |
236 | |||
Income tax benefit |
109 | 98 |
The following table summarizes nonvested RSU transactions for the three months ended March 31, 2015:
Number |
Weighted |
|||||
of |
Average |
|||||
Stock Units |
Fair Value |
|||||
Nonvested stock units at beginning of period |
122,565 |
$ |
22.29 | |||
Granted |
37,650 | 26.26 | ||||
Stock units vested but not paid |
11,500 | 17.99 | ||||
Stock units vested and paid |
(63,387) | 19.44 | ||||
Forfeited |
- |
- |
||||
Nonvested stock units at end of period |
108,328 |
$ |
24.88 |
The per unit weighted-average fair value at the date of grant for RSUs granted during the three months ended March 31, 2015 and 2014 was $26.26 and $24.80, respectively.
15
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, |
|||||||
2015 |
2014 |
||||||
Income tax benefit |
$ |