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 June 30, 2017
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from_______________ to _______________
Commission File Number 1-6659
AQUA AMERICA, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania |
23-1702594 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
|
|
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania |
19010 -3489 |
(Address of principal executive offices) |
(Zip Code) |
|
|
(610) 527-8000 |
|
(Registrant’s telephone number, including area code) |
(Former Name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.:
Large accelerated filer ☒ |
Accelerated filer ☐ |
Non-accelerated filer ☐ (do not check if a smaller reporting company) |
Smaller reporting company ☐ |
Emerging growth company ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of
July 24, 2017: 177,651,543
1
AQUA AMERICA, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
||||||
|
June 30, |
December 31, |
||||
Assets |
2017 |
2016 |
||||
Property, plant and equipment, at cost |
$ |
6,717,832 |
$ |
6,509,117 | ||
Less: accumulated depreciation |
1,558,681 | 1,507,502 | ||||
Net property, plant and equipment |
5,159,151 | 5,001,615 | ||||
Current assets: |
||||||
Cash and cash equivalents |
7,811 | 3,763 | ||||
Accounts receivable and unbilled revenues, net |
98,890 | 97,394 | ||||
Inventory, materials and supplies |
16,838 | 12,961 | ||||
Prepayments and other current assets |
13,009 | 12,804 | ||||
Assets held for sale |
1,543 | 1,728 | ||||
Total current assets |
138,091 | 128,650 | ||||
|
||||||
Regulatory assets |
1,003,808 | 948,647 | ||||
Deferred charges and other assets |
33,597 | 30,845 | ||||
Investment in joint venture |
6,786 | 7,026 | ||||
Goodwill |
42,266 | 42,208 | ||||
Total assets |
$ |
6,383,699 |
$ |
6,158,991 | ||
Liabilities and Equity |
||||||
Stockholders' equity: |
||||||
Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,635,368 and 180,311,345 as of June 30, 2017 and December 31, 2016 |
|
$ |
90,317 |
|
$ |
90,155 |
Capital in excess of par value |
802,799 | 797,513 | ||||
Retained earnings |
1,075,856 | 1,032,844 | ||||
Treasury stock, at cost, 2,984,264 and 2,916,969 shares as of June 30, 2017 and December 31, 2016 |
(73,206) | (71,113) | ||||
Accumulated other comprehensive income |
764 | 669 | ||||
Total stockholders' equity |
1,896,530 | 1,850,068 | ||||
|
||||||
Long-term debt, excluding current portion |
1,844,342 | 1,759,962 | ||||
Less: debt issuance costs |
21,761 | 22,357 | ||||
Long-term debt, excluding current portion, net of debt issuance costs |
1,822,581 | 1,737,605 | ||||
Commitments and contingencies (See Note 13) |
||||||
|
||||||
Current liabilities: |
||||||
Current portion of long-term debt |
143,567 | 150,671 | ||||
Loans payable |
67,456 | 6,535 | ||||
Accounts payable |
46,376 | 59,872 | ||||
Accrued interest |
17,007 | 18,367 | ||||
Accrued taxes |
18,858 | 25,607 | ||||
Other accrued liabilities |
39,283 | 40,484 | ||||
Total current liabilities |
332,547 | 301,536 | ||||
|
||||||
Deferred credits and other liabilities: |
||||||
Deferred income taxes and investment tax credits |
1,339,583 | 1,269,253 | ||||
Customers' advances for construction |
91,131 | 91,843 | ||||
Regulatory liabilities |
244,613 | 250,635 | ||||
Other |
105,051 | 115,583 | ||||
Total deferred credits and other liabilities |
1,780,378 | 1,727,314 | ||||
|
||||||
Contributions in aid of construction |
551,663 | 542,468 | ||||
Total liabilities and equity |
$ |
6,383,699 |
$ |
6,158,991 | ||
|
||||||
See notes to consolidated financial statements beginning on page 9 of this report. |
2
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)
|
Three Months Ended |
|||||
|
June 30, |
|||||
|
2017 |
2016 |
||||
Operating revenues |
$ |
203,418 |
$ |
203,876 | ||
|
||||||
Operating expenses: |
||||||
Operations and maintenance |
70,853 | 73,994 | ||||
Depreciation |
33,407 | 31,619 | ||||
Amortization |
127 | 528 | ||||
Taxes other than income taxes |
14,419 | 14,242 | ||||
Total operating expenses |
118,806 | 120,383 | ||||
|
||||||
Operating income |
84,612 | 83,493 | ||||
|
||||||
Other expense (income): |
||||||
Interest expense, net |
21,387 | 20,115 | ||||
Allowance for funds used during construction |
(3,463) | (1,871) | ||||
Gain on sale of other assets |
(10) | (121) | ||||
Equity loss in joint venture |
161 | 229 | ||||
Income before income taxes |
66,537 | 65,141 | ||||
Provision for income taxes |
5,569 | 5,515 | ||||
Net income |
$ |
60,968 |
$ |
59,626 | ||
|
||||||
Net income per common share: |
||||||
Basic |
$ |
0.34 |
$ |
0.34 | ||
Diluted |
$ |
0.34 |
$ |
0.33 | ||
|
||||||
Average common shares outstanding during the period: |
||||||
Basic |
177,609 | 177,288 | ||||
Diluted |
178,045 | 178,084 | ||||
|
||||||
Cash dividends declared per common share |
$ |
0.1913 |
$ |
0.178 | ||
|
||||||
See notes to consolidated financial statements beginning on page 9 of this report. |
||||||
|
3
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)
|
||||||
|
Six Months Ended |
|||||
|
June 30, |
|||||
|
2017 |
2016 |
||||
Operating revenues |
$ |
391,205 |
$ |
396,483 | ||
|
||||||
Operating expenses: |
||||||
Operations and maintenance |
139,981 | 147,535 | ||||
Depreciation |
67,244 | 63,764 | ||||
Amortization |
316 | 978 | ||||
Taxes other than income taxes |
29,156 | 28,382 | ||||
Total operating expenses |
236,697 | 240,659 | ||||
|
||||||
Operating income |
154,508 | 155,824 | ||||
|
||||||
Other expense (income): |
||||||
Interest expense, net |
42,713 | 39,968 | ||||
Allowance for funds used during construction |
(6,656) | (4,179) | ||||
Gain on sale of other assets |
(279) | (328) | ||||
Equity loss in joint venture |
191 | 478 | ||||
Income before income taxes |
118,539 | 119,885 | ||||
Provision for income taxes |
8,499 | 8,522 | ||||
Net income |
$ |
110,040 |
$ |
111,363 | ||
|
||||||
Net income per common share: |
||||||
Basic |
$ |
0.62 |
$ |
0.63 | ||
Diluted |
$ |
0.62 |
$ |
0.63 | ||
|
||||||
Average common shares outstanding during the period: |
||||||
Basic |
177,545 | 177,196 | ||||
Diluted |
178,042 | 177,920 | ||||
|
||||||
Cash dividends declared per common share |
$ |
0.3826 |
$ |
0.356 | ||
|
||||||
See notes to consolidated financial statements beginning on page 9 of this report. |
4
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
(UNAUDITED)
|
||||||||||||
|
Three Months Ended |
Six Months Ended |
||||||||||
|
June 30, |
June 30, |
||||||||||
|
2017 |
2016 |
2017 |
2016 |
||||||||
Net income |
$ |
60,968 |
$ |
59,626 |
$ |
110,040 |
$ |
111,363 | ||||
Other comprehensive income, net of tax: |
||||||||||||
Unrealized holding gain on investments, net of tax expense of $20 and $7 for the three months, and $51 and $3 for the six months ended June 30, 2017 and 2016, respectively |
|
|
37 |
|
|
12 |
|
|
95 |
|
|
6 |
Reclassification of gain on sale of investment to net income, net of tax of $30 for the six months ended June 30, 2016 (1) |
|
|
- |
|
|
- |
|
|
- |
|
|
(57) |
Comprehensive income |
$ |
61,005 |
$ |
59,638 |
$ |
110,135 |
$ |
111,312 | ||||
|
||||||||||||
(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 six months ended June 30, 2016. |
||||||||||||
|
||||||||||||
See notes to consolidated financial statements beginning on page 9 of this report. |
5
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
|||||||
|
June 30, |
December 31, |
|||||
|
2017 |
2016 |
|||||
Stockholders' equity: |
|||||||
Common stock, $.50 par value |
$ |
90,317 |
$ |
90,155 | |||
Capital in excess of par value |
802,799 | 797,513 | |||||
Retained earnings |
1,075,856 | 1,032,844 | |||||
Treasury stock, at cost |
(73,206) | (71,113) | |||||
Accumulated other comprehensive income |
764 | 669 | |||||
Total stockholders' equity |
1,896,530 | 1,850,068 | |||||
|
|||||||
Long-term debt of subsidiaries (substantially collateralized by utility plant): |
|||||||
Interest Rate Range |
Maturity Date Range |
||||||
0.00% to 0.99% |
2023 to 2033 |
4,339 | 4,661 | ||||
1.00% to 1.99% |
2019 to 2035 |
13,664 | 15,539 | ||||
2.00% to 2.99% |
2024 to 2033 |
20,120 | 19,668 | ||||
3.00% to 3.99% |
2019 to 2056 |
430,600 | 381,944 | ||||
4.00% to 4.99% |
2020 to 2054 |
422,896 | 487,318 | ||||
5.00% to 5.99% |
2019 to 2043 |
205,828 | 213,078 | ||||
6.00% to 6.99% |
2017 to 2036 |
52,995 | 52,985 | ||||
7.00% to 7.99% |
2022 to 2027 |
32,706 | 33,066 | ||||
8.00% to 8.99% |
2021 to 2025 |
6,334 | 6,565 | ||||
9.00% to 9.99% |
2018 to 2026 |
26,400 | 26,400 | ||||
10.00% to 10.99% |
2018 |
6,000 | 6,000 | ||||
|
1,221,882 | 1,247,224 | |||||
|
|||||||
Notes payable to bank under revolving credit agreement, variable rate, due 2021 |
135,000 | 25,000 | |||||
Unsecured notes payable: |
|||||||
Bank notes at 1.921% and 1.975% due 2017 and 2018 |
100,000 | 100,000 | |||||
Notes ranging from 3.01% to 3.59% due 2027 through 2041 |
245,000 | 245,000 | |||||
Notes ranging from 4.62% to 4.87%, due 2017 through 2024 |
133,600 | 133,600 | |||||
Notes ranging from 5.20% to 5.95%, due 2018 through 2037 |
152,427 | 159,809 | |||||
Total long-term debt |
1,987,909 | 1,910,633 | |||||
|
|||||||
Current portion of long-term debt |
143,567 | 150,671 | |||||
Long-term debt, excluding current portion |
1,844,342 | 1,759,962 | |||||
Less: debt issuance costs |
21,761 | 22,357 | |||||
Long-term debt, excluding current portion, net of debt issuance costs |
1,822,581 | 1,737,605 | |||||
|
|||||||
Total capitalization |
$ |
3,719,111 |
$ |
3,587,673 | |||
|
|||||||
See notes to consolidated financial statements beginning on page 9 of this report. |
|||||||
|
6
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, 2016 |
$ |
90,155 |
$ |
797,513 |
$ |
1,032,844 |
$ |
(71,113) |
$ |
669 |
$ |
1,850,068 | ||||||
Net income |
- |
- |
110,040 |
- |
- |
110,040 | ||||||||||||
Other comprehensive income, net of income tax of $51 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
95 |
|
|
95 |
Dividends |
- |
- |
(67,920) |
- |
- |
(67,920) | ||||||||||||
Sale of stock (23,194 shares) |
12 | 703 |
- |
- |
- |
715 | ||||||||||||
Repurchase of stock (67,295 shares) |
- |
- |
- |
(2,093) |
- |
(2,093) | ||||||||||||
Equity compensation plan (160,279 shares) |
80 | (80) |
- |
- |
- |
- |
||||||||||||
Exercise of stock options (140,550 shares) |
70 | 2,257 |
- |
- |
- |
2,327 | ||||||||||||
Stock-based compensation |
- |
2,810 | (90) |
- |
- |
2,720 | ||||||||||||
Cumulative effect of change in accounting principle - windfall tax benefit |
|
|
- |
|
|
- |
|
|
982 |
|
|
- |
|
|
- |
|
|
982 |
Other |
- |
(404) |
- |
- |
- |
(404) | ||||||||||||
Balance at June 30, 2017 |
$ |
90,317 |
$ |
802,799 |
$ |
1,075,856 |
$ |
(73,206) |
$ |
764 |
$ |
1,896,530 | ||||||
|
||||||||||||||||||
Refer to Note 15 - Recent Accounting Pronouncements for a discussion of the cumulative effect of change in accounting principle - windfall tax benefit |
||||||||||||||||||
See notes to consolidated financial statements beginning on page 9 of this report. |
7
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
|
Six Months Ended |
|||||
|
June 30, |
|||||
|
2017 |
2016 |
||||
Cash flows from operating activities: |
||||||
Net income |
$ |
110,040 |
$ |
111,363 | ||
Adjustments to reconcile net income to net cash flows from operating activities: |
||||||
Depreciation and amortization |
67,560 | 64,742 | ||||
Deferred income taxes |
6,299 | 5,051 | ||||
Provision for doubtful accounts |
2,052 | 2,101 | ||||
Stock-based compensation |
2,810 | 2,200 | ||||
Loss (gain) on sale of utility system and market-based business unit |
324 | (1,782) | ||||
Gain on sale of other assets |
(279) | (328) | ||||
Net change in receivables, inventory and prepayments |
(7,417) | (4,130) | ||||
Net change in payables, accrued interest, accrued taxes and other accrued liabilities |
(10,969) | (2,695) | ||||
Postretirement benefit contributions |
(15,421) | (6,787) | ||||
Other |
2,262 | 7,923 | ||||
Net cash flows from operating activities |
157,261 | 177,658 | ||||
Cash flows from investing activities: |
||||||
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $1,543 and $1,097 |
|
|
(208,472) |
|
|
(168,587) |
Acquisitions of utility systems and other, net |
(5,765) | (5,626) | ||||
Net proceeds from the sale of utility system and other assets |
1,102 | 6,439 | ||||
Other |
(144) | (45) | ||||
Net cash flows used in investing activities |
(213,279) | (167,819) | ||||
Cash flows from financing activities: |
||||||
Customers' advances and contributions in aid of construction |
3,629 | 3,205 | ||||
Repayments of customers' advances |
(1,774) | (1,282) | ||||
Net proceeds of short-term debt |
60,921 | 9,518 | ||||
Proceeds from long-term debt |
222,780 | 169,297 | ||||
Repayments of long-term debt |
(145,499) | (112,650) | ||||
Change in cash overdraft position |
(12,616) | (15,338) | ||||
Proceeds from issuing common stock |
715 | 670 | ||||
Proceeds from exercised stock options |
2,327 | 3,569 | ||||
Stock-based compensation windfall tax benefits |
- |
1,198 | ||||
Repurchase of common stock |
(2,093) | (2,859) | ||||
Dividends paid on common stock |
(67,920) | (63,071) | ||||
Other |
(404) | (402) | ||||
Net cash flows from (used in) financing activities |
60,066 | (8,145) | ||||
Net change in cash and cash equivalents |
4,048 | 1,694 | ||||
Cash and cash equivalents at beginning of period |
3,763 | 3,229 | ||||
Cash and cash equivalents at end of period |
$ |
7,811 |
$ |
4,923 | ||
|
||||||
Non-cash investing activities: |
||||||
Property, plant and equipment additions purchased at the period end, but not yet paid for |
$ |
32,770 |
$ |
20,863 | ||
Non-cash customer advances and contributions in aid of construction |
11,488 | 11,199 | ||||
|
||||||
Refer to Note 3 - Acquisitions for a description of non-cash activities |
||||||
See notes to consolidated financial statements beginning on page 9 of this report. |
8
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 June 30, 2017, the consolidated statements of net income and comprehensive income for the three and six months ended June 30, 2017 and 2016 the consolidated statements of cash flow for the six months ended June 30, 2017 and 2016, and the consolidated statement of equity for the six months ended June 30, 2017 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present a fair statement of our consolidated financial position, consolidated changes in equity, consolidated results of operations, and consolidated cash flow for the periods presented. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 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, 2016 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2016 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 postretirement benefit contributions in the consolidated statements of cash flows.
The preparation of financial statements often requires the selection of specific accounting methods and policies. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in our consolidated balance sheets, the revenues and expenses in our consolidated statements of net income, and the information that is contained in our summary of significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that we include currently in our consolidated financial statements, summary of significant accounting policies, and notes.
There have been no changes to the summary of significant accounting policies previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
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, 2016 |
$ |
37,367 |
$ |
4,841 |
$ |
42,208 | |||
Goodwill acquired |
72 |
- |
72 | ||||||
Reclassification to utility plant acquisition adjustment |
(14) |
- |
(14) | ||||||
Balance at June 30, 2017 |
$ |
37,425 |
$ |
4,841 |
$ |
42,266 |
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
9
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
the recovery through customer rates, of goodwill associated with some acquisitions upon achieving specific objectives.
Note 3 – Acquisitions
During the first half of 2017, the Company completed three acquisitions of water and wastewater utility systems in various states adding 1,002 customers. The total purchase price of these utility systems consisted of $5,765 in cash, which resulted in $72 of goodwill being recorded. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.
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 eighteen acquisitions of water and wastewater utility systems in various states adding 2,469 customers. The total purchase price of these utility systems consisted of $5,518 in cash, which resulted in $1,756 of goodwill being recorded. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.
Note 4 – Assets Held for Sale
In the first quarter of 2017, the Company decided to market for sale a water system that serves approximately 265 customers. This water system is reported as assets held for sale in the Company’s consolidated balance sheet.
In the second quarter of 2016, the Company decided to market for sale two business units that are reported within the Company’s market-based subsidiary, Aqua Resources. One business unit installed and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, for which the sale was completed in January 2017. The other business unit repairs and performs maintenance on water and wastewater systems, for which the sale was completed in June 2017.
]
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 July 2017, Aqua Illinois issued $100,000 of first mortgage bonds consisting of the following:
Amount |
Interest Rate |
Maturity |
$25,000 |
3.64% |
2032 |
$6,000 |
3.89% |
2037 |
$15,000 |
3.90% |
2038 |
$10,000 |
4.18% |
2047 |
$22,000 |
4.22% |
2049 |
$22,000 |
4.24% |
2050 |
The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
In July 2017, Aqua Pennsylvania issued $80,000 of first mortgage bonds, of which $40,000 is due in 2055 and $40,000 is due in 2057 with interest rates of 4.04% and 4.06%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
In January 2017, Aqua Pennsylvania issued $50,000 of first mortgage bonds, of which $10,000 is due in 2042 and $40,000 is due in 2044 with interest rates of 3.65% and 3.69%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
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
11
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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 June 30, 2017.
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 June 30, 2017 and December 31, 2016, the carrying amount of the Company’s loans payable was $67,456 and $6,535, respectively, which equates to their estimated fair value. The fair value of mutual funds to fund our deferred compensation plan liability is determined based on quoted market prices from active markets utilizing Level 1 methods and assumptions. As of June 30, 2017 and December 31, 2016, the carrying amount of these securities was $18,000 and $17,072, which equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assets. 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 June 30, 2017 and December 31, 2016, the carrying amounts of the Company's cash and cash equivalents was $7,811 and $3,763, respectively, which equates to their fair value.
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
|
||||||
|
June 30, |
December 31, |
||||
|
2017 |
2016 |
||||
Carrying Amount |
$ |
1,987,909 |
$ |
1,910,633 | ||
Estimated Fair Value |
2,049,090 | 2,018,933 |
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 $91,131 as of June 30, 2017, and $91,843 as of December 31, 2016. 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 2027 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
12
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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 |
Six Months Ended |
||||||
|
June 30, |
June 30, |
||||||
|
2017 |
2016 |
2017 |
2016 |
||||
Average common shares outstanding during the period for basic computation |
|
177,609 |
|
177,288 |
|
177,545 |
|
177,196 |
Dilutive effect of employee stock-based compensation |
|
436 |
|
796 |
|
497 |
|
724 |
Average common shares outstanding during the period for diluted computation |
|
178,045 |
|
178,084 |
|
178,042 |
|
177,920 |
|
For the three and six months ended June 30, 2017 and 2016, 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 to employees and consultants under the 2009 Plan are made by a committee of the Board of Directors of the Company, except that with respect to awards to the Chief Executive Officer, the committee recommends those awards for approval by the non-employee directors of the Board of Directors. In the case of awards to non-employee directors, the Board of Directors makes such awards. At June 30, 2017, 3,741,035 shares were still available for issuance under the 2009 Plan. No further grants may be made under the 2004 Plan.
13
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Performance Share Units – A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the three-year performance period specified in the grant, subject to exceptions through the respective vesting period, generally three years. Each grantee is granted a target award of PSUs, and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals. The following table provides compensation costs for stock-based compensation related to PSUs:
|
||||||||||||
|
Three Months Ended |
Six Months Ended |
||||||||||
|
June 30, |
June 30, |
||||||||||
|
2017 |
2016 |
2017 |
2016 |
||||||||
Stock-based compensation within operations and maintenance expenses |
|
$ |
971 |
|
$ |
967 |
|
$ |
1,841 |
|
$ |
1,492 |
Income tax benefit |
394 | 392 | 747 | 601 |
The following table summarizes the PSU transactions for the six months ended June 30, 2017:
|
||||||
|
Number |
Weighted |
||||
|
of |
Average |
||||
|
Share Units |
Fair Value |
||||
Nonvested share units at beginning of period |
476,896 |
$ |
27.96 | |||
Granted |
125,202 | 30.79 | ||||
Performance criteria adjustment |
(64,034) | 27.75 | ||||
Forfeited |
(12,915) | 28.01 | ||||
Share units vested in prior period and issued in current period |
32,400 | 25.31 | ||||
Share units issued |
(125,999) | 36.37 | ||||
Nonvested share units at end of period |
431,550 |
$ |
26.16 | |||
|
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions. The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied. The per unit weighted-average fair value at the date of grant for PSUs granted during the six months ended June 30, 2017 and 2016 was $30.79 and $28.89, 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.
14
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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. The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense. As the payout of the RSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the RSUs. The following table provides the compensation cost and income tax benefit for stock-based compensation related to RSUs:
|
||||||||||||
|
Three Months Ended |
Six Months Ended |
||||||||||
|
June 30, |
June 30, |
||||||||||
|
2017 |
2016 |
2017 |
2016 |
||||||||
Stock-based compensation within operations and maintenance expenses |
|
$ |
322 |
|
$ |
296 |
|
$ |
603 |
|
$ |
464 |
Income tax benefit |
133 | 122 | 249 | 191 |
The following table summarizes the RSU transactions for the six months ended June 30, 2017:
|
||||||
|
Number |
Weighted |
||||
|
of |
Average |
||||
|
Stock Units |
Fair Value |
||||
Nonvested stock units at beginning of period |
109,273 |
$ |
28.48 | |||
Granted |
41,293 | 30.37 | ||||
Stock units vested and issued |
(26,279) | 26.12 | ||||
Forfeited |
(2,287) | 30.52 | ||||
Nonvested stock units at end of period |
122,000 |
$ |
29.59 |
The per unit weighted-average fair value at the date of grant for RSUs granted during the six months ended June 30, 2017 and 2016 was $30.37 and $32.09, respectively.
15
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Stock Options – A stock option represents the option to purchase a number of shares of common stock of the Company as specified in the stock option grant agreement at the exercise price per share as determined by the closing market price of our common stock on the grant date. Stock options are exercisable in installments of 33% annually, starting one year from the grant date and expire 10 years from the grant date. The fair value of each stock option is amortized into compensation expense using the graded-vesting method, which results in the recognition of compensation costs over the requisite service period for each separately vesting tranche of the stock options as though the stock options were, in substance, multiple stock option grants. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock options:
|
||||||||||||
|
Three Months Ended |
Six Months Ended |
||||||||||
|
June 30, |
June 30, |
||||||||||