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, 2018
☐ 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
April 30, 2018: 177,897,654
1
AQUA AMERICA, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
(UNAUDITED)
|
||||||
|
||||||
|
March 31, |
December 31, |
||||
Assets |
2018 |
2017 |
||||
Property, plant and equipment, at cost |
$ |
7,088,016 |
$ |
7,003,993 | ||
Less: accumulated depreciation |
1,627,797 | 1,604,133 | ||||
Net property, plant and equipment |
5,460,219 | 5,399,860 | ||||
|
||||||
Current assets: |
||||||
Cash and cash equivalents |
3,202 | 4,204 | ||||
Accounts receivable and unbilled revenues, net |
91,818 | 98,596 | ||||
Inventory, materials and supplies |
15,290 | 14,361 | ||||
Prepayments and other current assets |
12,274 | 12,542 | ||||
Assets held for sale |
1,558 | 1,543 | ||||
Total current assets |
124,142 | 131,246 | ||||
|
||||||
Regulatory assets |
731,417 | 713,971 | ||||
Deferred charges and other assets, net |
38,696 | 38,485 | ||||
Investment in joint venture |
7,004 | 6,671 | ||||
Goodwill |
42,230 | 42,230 | ||||
Total assets |
$ |
6,403,708 |
$ |
6,332,463 | ||
Liabilities and Equity |
||||||
Stockholders' equity: |
||||||
Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,955,861 and 180,700,251 as of March 31, 2018 and December 31, 2017 |
|
$ |
90,478 |
|
$ |
90,350 |
Capital in excess of par value |
809,624 | 807,135 | ||||
Retained earnings |
1,147,828 | 1,132,556 | ||||
Treasury stock, at cost, 3,058,248 and 2,986,308 shares as of March 31, 2018 and December 31, 2017 |
(75,771) | (73,280) | ||||
Accumulated other comprehensive income |
- |
860 | ||||
Total stockholders' equity |
1,972,159 | 1,957,621 | ||||
|
||||||
Long-term debt, excluding current portion |
2,084,283 | 2,029,358 | ||||
Less: debt issuance costs |
21,217 | 21,605 | ||||
Long-term debt, excluding current portion, net of debt issuance costs |
2,063,066 | 2,007,753 | ||||
Commitments and contingencies (See Note 14) |
||||||
|
||||||
Current liabilities: |
||||||
Current portion of long-term debt |
103,832 | 113,769 | ||||
Loans payable |
20,342 | 3,650 | ||||
Accounts payable |
40,211 | 59,165 | ||||
Book overdraft |
12,685 | 21,629 | ||||
Accrued interest |
24,624 | 21,359 | ||||
Accrued taxes |
22,971 | 23,764 | ||||
Other accrued liabilities |
34,470 | 41,152 | ||||
Total current liabilities |
259,135 | 284,488 | ||||
|
||||||
Deferred credits and other liabilities: |
||||||
Deferred income taxes and investment tax credits |
786,014 | 769,073 | ||||
Customers' advances for construction |
90,599 | 93,186 | ||||
Regulatory liabilities |
543,449 | 541,910 | ||||
Other |
107,746 | 107,341 | ||||
Total deferred credits and other liabilities |
1,527,808 | 1,511,510 | ||||
|
||||||
Contributions in aid of construction |
581,540 | 571,091 | ||||
Total liabilities and equity |
$ |
6,403,708 |
$ |
6,332,463 | ||
|
||||||
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, |
|||||
|
2018 |
2017 |
||||
Operating revenues |
$ |
194,347 |
$ |
187,787 | ||
|
||||||
Operating expenses: |
||||||
Operations and maintenance |
73,946 | 67,890 | ||||
Depreciation |
35,967 | 33,837 | ||||
Amortization |
130 | 189 | ||||
Taxes other than income taxes |
14,967 | 14,737 | ||||
Total operating expenses |
125,010 | 116,653 | ||||
|
||||||
Operating income |
69,337 | 71,134 | ||||
|
||||||
Other expense (income): |
||||||
Interest expense, net |
23,471 | 21,326 | ||||
Allowance for funds used during construction |
(2,867) | (3,193) | ||||
Gain on sale of other assets |
(196) | (269) | ||||
Equity (earnings) loss in joint venture |
(382) | 30 | ||||
Other |
603 | 1,238 | ||||
Income before income taxes |
48,708 | 52,002 | ||||
Provision for income tax (benefit) expense |
(2,131) | 2,930 | ||||
Net income |
$ |
50,839 |
$ |
49,072 | ||
|
||||||
Net income per common share: |
||||||
Basic |
$ |
0.29 |
$ |
0.28 | ||
Diluted |
$ |
0.29 |
$ |
0.28 | ||
|
||||||
Average common shares outstanding during the period: |
||||||
Basic |
177,801 | 177,479 | ||||
Diluted |
178,238 | 177,969 | ||||
|
||||||
Cash dividends declared per common share |
$ |
0.2047 |
$ |
0.1913 | ||
|
||||||
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, |
||||
|
|
2018 |
|
2017 |
||
Net income |
|
$ |
50,839 |
|
$ |
49,072 |
Other comprehensive income, net of tax: |
|
|
|
|
|
|
Unrealized holding gain on investments, net of tax expense of $31 for the three months ended March 31, 2017 |
|
|
- |
|
|
58 |
Comprehensive income |
|
$ |
50,839 |
|
$ |
49,130 |
|
|
|
|
|
|
|
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, |
|||||
|
2018 |
2017 |
|||||
Stockholders' equity: |
|||||||
Common stock, $.50 par value |
$ |
90,478 |
$ |
90,350 | |||
Capital in excess of par value |
809,624 | 807,135 | |||||
Retained earnings |
1,147,828 | 1,132,556 | |||||
Treasury stock, at cost |
(75,771) | (73,280) | |||||
Accumulated other comprehensive income |
- |
860 | |||||
Total stockholders' equity |
1,972,159 | 1,957,621 | |||||
|
|||||||
Long-term debt of subsidiaries (substantially collateralized by utility plant): |
|||||||
Interest Rate Range |
Maturity Date Range |
||||||
0.00% to 0.99% |
2023 to 2033 |
4,148 | 4,196 | ||||
1.00% to 1.99% |
2019 to 2035 |
12,626 | 12,914 | ||||
2.00% to 2.99% |
2019 to 2033 |
18,817 | 19,254 | ||||
3.00% to 3.99% |
2019 to 2056 |
474,525 | 475,232 | ||||
4.00% to 4.99% |
2020 to 2057 |
631,513 | 631,599 | ||||
5.00% to 5.99% |
2019 to 2043 |
205,445 | 205,578 | ||||
6.00% to 6.99% |
2018 to 2036 |
44,000 | 44,000 | ||||
7.00% to 7.99% |
2022 to 2027 |
32,146 | 32,335 | ||||
8.00% to 8.99% |
2021 to 2025 |
5,968 | 6,092 | ||||
9.00% to 9.99% |
2018 to 2026 |
25,700 | 25,700 | ||||
10.00% to 10.99% |
2018 |
6,000 | 6,000 | ||||
|
1,460,888 | 1,462,900 | |||||
|
|||||||
Notes payable to bank under revolving credit agreement, variable rate, due 2021 |
117,000 | 60,000 | |||||
Unsecured notes payable: |
|||||||
Bank notes at 1.975% and 2.48% due 2018 and 2019 |
100,000 | 100,000 | |||||
Notes at 3.01% and 3.59% due 2027 and 2041 |
245,000 | 245,000 | |||||
Notes ranging from 4.62% to 4.87%, due 2018 through 2024 |
122,800 | 122,800 | |||||
Notes ranging from 5.20% to 5.95%, due 2018 through 2037 |
142,427 | 152,427 | |||||
Total long-term debt |
2,188,115 | 2,143,127 | |||||
|
|||||||
Current portion of long-term debt |
103,832 | 113,769 | |||||
Long-term debt, excluding current portion |
2,084,283 | 2,029,358 | |||||
Less: debt issuance costs |
21,217 | 21,605 | |||||
Long-term debt, excluding current portion, net of debt issuance costs |
2,063,066 | 2,007,753 | |||||
|
|||||||
Total capitalization |
$ |
4,035,225 |
$ |
3,965,374 | |||
|
|||||||
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 |
|
|
|
|||||
|
|
Stock |
|
Par Value |
|
Earnings |
|
Stock |
|
Income |
|
Total |
||||||
Balance at December 31, 2017 |
|
$ |
90,350 |
|
$ |
807,135 |
|
$ |
1,132,556 |
|
$ |
(73,280) |
|
$ |
860 |
|
$ |
1,957,621 |
Net income |
|
|
- |
|
|
- |
|
|
50,839 |
|
|
- |
|
|
- |
|
|
50,839 |
Dividends |
|
|
- |
|
|
- |
|
|
(36,386) |
|
|
- |
|
|
- |
|
|
(36,386) |
Sale of stock (11,252 shares) |
|
|
6 |
|
|
355 |
|
|
- |
|
|
- |
|
|
- |
|
|
361 |
Repurchase of stock (71,940 shares) |
|
|
- |
|
|
- |
|
|
- |
|
|
(2,491) |
|
|
- |
|
|
(2,491) |
Equity compensation plan (181,670 shares) |
|
|
91 |
|
|
(91) |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Exercise of stock options (62,688 shares) |
|
|
31 |
|
|
979 |
|
|
- |
|
|
- |
|
|
- |
|
|
1,010 |
Stock-based compensation |
|
|
- |
|
|
1,443 |
|
|
(41) |
|
|
- |
|
|
- |
|
|
1,402 |
Cumulative effect of change in accounting principle - financial instruments |
|
|
- |
|
|
- |
|
|
860 |
|
|
- |
|
|
(860) |
|
|
- |
Other |
|
|
- |
|
|
(197) |
|
|
- |
|
|
- |
|
|
- |
|
|
(197) |
Balance at March 31, 2018 |
|
$ |
90,478 |
|
$ |
809,624 |
|
$ |
1,147,828 |
|
$ |
(75,771) |
|
$ |
- |
|
$ |
1,972,159 |
|
||||||||||||||||||
Refer to Note 15 - Recent Accounting Pronouncements for a discussion of the cumulative effect of change in accounting principle - financial instruments |
||||||||||||||||||
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, |
|||||
|
2018 |
2017 |
||||
Cash flows from operating activities: |
||||||
Net income |
$ |
50,839 |
$ |
49,072 | ||
Adjustments to reconcile net income to net cash flows from operating activities: |
||||||
Depreciation and amortization |
36,097 | 34,026 | ||||
Deferred income taxes |
(2,849) | 2,681 | ||||
Provision for doubtful accounts |
896 | 1,111 | ||||
Stock-based compensation |
1,444 | 1,312 | ||||
Loss on sale of market-based business unit |
- |
278 | ||||
Gain on sale of other assets |
(196) | (269) | ||||
Net change in receivables, inventory and prepayments |
5,402 | 5,729 | ||||
Net change in payables, accrued interest, accrued taxes and other accrued liabilities |
(996) | (4,519) | ||||
Pension and other postretirement benefits contributions |
(5,217) | (7,711) | ||||
Other |
2,934 | (507) | ||||
Net cash flows from operating activities |
88,354 | 81,203 | ||||
Cash flows from investing activities: |
||||||
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $782 and $721 |
|
|
(105,136) |
|
|
(94,562) |
Acquisitions of utility systems and other, net |
(190) | (220) | ||||
Net proceeds from the sale of market-based business unit and other assets |
174 | 639 | ||||
Other |
(75) | (171) | ||||
Net cash flows used in investing activities |
(105,227) | (94,314) | ||||
Cash flows from financing activities: |
||||||
Customers' advances and contributions in aid of construction |
1,742 | 1,585 | ||||
Repayments of customers' advances |
(1,014) | (511) | ||||
Net proceeds of short-term debt |
16,692 | 21,197 | ||||
Proceeds from long-term debt |
66,996 | 117,879 | ||||
Repayments of long-term debt |
(21,898) | (89,666) | ||||
Change in cash overdraft position |
(8,944) | (2,403) | ||||
Proceeds from issuing common stock |
361 | 360 | ||||
Proceeds from exercised stock options |
1,010 | 1,536 | ||||
Repurchase of common stock |
(2,491) | (2,053) | ||||
Dividends paid on common stock |
(36,386) | (33,945) | ||||
Other |
(197) | (206) | ||||
Net cash flows from financing activities |
15,871 | 13,773 | ||||
Net change in cash and cash equivalents |
(1,002) | 662 | ||||
Cash and cash equivalents at beginning of period |
4,204 | 3,763 | ||||
Cash and cash equivalents at end of period |
$ |
3,202 |
$ |
4,425 | ||
|
||||||
Non-cash investing activities: |
||||||
Property, plant and equipment additions purchased at the period end, but not yet paid for |
$ |
23,629 |
$ |
27,084 | ||
Non-cash customer advances and contributions in aid of construction |
4,979 | 4,282 | ||||
|
||||||
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, 2018, the consolidated statements of net income and comprehensive income for the three months ended March 31, 2018 and 2017 the consolidated statements of cash flow for the three months ended March 31, 2018 and 2017, and the consolidated statement of equity for the three months ended March 31, 2018 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 its 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, 2017. 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, 2017 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2017 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 in the consolidated statements of net income as a result of the adoption, in the first quarter of 2018, of the Financial Accounting Standards Board’s (“FASB”) accounting guidance on the presentation of net periodic pension and postretirement benefit cost (refer to Note 15 – Recent Accounting Pronouncements).
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 its consolidated balance sheets, the revenues and expenses in its consolidated statements of net income, and the information that is contained in its 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 the Company includes currently in its consolidated financial statements, summary of significant accounting policies, and notes.
There have been no changes to the summary of significant accounting policies, other than as described in Note 2 – Revenue Recognition as a result of the adoption of a new accounting pronouncement adopted on January 1, 2018, previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
8
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 2 – Revenue Recognition
The Company recognizes revenue as water and wastewater services are provided to our customers, which happens over time as the service is delivered and the performance obligation is satisfied. The Company’s utility revenues recognized in an accounting period include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the last billing to the end of the accounting period. Unbilled amounts are calculated by deriving estimates based on average usage of the prior month. The Company’s actual results could differ from these estimates, which would result in operating revenues being adjusted in the period that the revision to our estimates is determined. Unbilled amounts are included in accounts receivable and unbilled revenues, net on the consolidated balance sheet.
Generally, payment is due within 30 days once a bill is issued to a customer. Sales tax and other taxes we collect on behalf of government authorities, concurrent with our revenue-producing activities, are primarily excluded from revenue. The Company has determined that its revenue recognition is not materially different under the FASB’s new accounting standard for revenue from contracts with customer, and has not made any changes to our accounting policy. The Company’s revenues are being reported identical to how they were reported under the FASB’s former accounting standard for revenue recognition. The following table presents our revenues disaggregated by major source and customer class:
|
Three Months Ended |
|||||
|
March 31,2018 |
|||||
|
Water Revenues |
Wastewater Revenues |
Other Revenues |
|||
Regulated: |
||||||
Residential |
$ |
113,837 |
$ |
17,532 |
$ |
- |
Commercial |
30,342 | 2,888 |
- |
|||
Fire protection |
7,938 |
- |
- |
|||
Industrial |
6,360 | 463 |
- |
|||
Other water |
11,021 |
- |
- |
|||
Other wastewater |
- |
791 |
- |
|||
Other utility |
- |
- |
2,335 | |||
Regulated segment total |
169,498 | 21,674 | 2,335 | |||
Other and eliminations |
- |
- |
840 | |||
Consolidated |
$ |
169,498 |
$ |
21,674 |
$ |
3,175 |
|
Regulated Segment Revenues – These revenues are composed of three main categories: water, wastewater, and other. Water revenues represent revenues earned for supplying customers with water service. Wastewater revenues represent revenues earned for treating wastewater and releasing it into the water supply. Other revenues are associated fees that relate to the regulated business but are not water and wastewater revenues. See description below for a discussion on the performance obligation for each of these revenue streams.
9
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Tariff Revenues – These revenues are categorized by customer class: residential, commercial, fire protection, industrial, and other water and other wastewater. The rates that generate these revenues are approved by the respective state utility commission, and revenues are billed cyclically and accrued for when unbilled. Other water and other wastewater revenues consist primarily of fines, penalties, surcharges, and availability lot fees. Our performance obligation for tariff revenues is to provide potable water or wastewater treatment service to customers. This performance obligation is satisfied over time as the services are rendered.
Other Utility Revenues – Other utility revenues represent revenues earned primarily from: antenna revenues, which represent fees received from telecommunication operators that have put cellular antennas on our water towers, operation and maintenance and billing contracts, which represent fees earned from municipalities for our operation of their water or wastewater treatment services or performing billing services, and fees earned from developers for accessing our water mains. The performances obligations vary for these revenues, but all are primarily recognized over time as the service is delivered.
Other and Eliminations – Other and eliminations consist of our market-based revenues, which comprises: Aqua Infrastructure and Aqua Resources (described below), and intercompany eliminations for revenue billed between our subsidiaries.
Aqua Infrastructure is the holding company for our 49% investment in a joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale of north central Pennsylvania. The joint venture earns revenues through providing non-utility raw water supply services to companies which enter into a water supply contract in the natural gas drilling industry. The performance obligation is to deliver non-potable water to its customers. Aqua Infrastructure’s share of the revenues recognized by the joint venture is reflected, net, in equity earnings in joint venture on our consolidated statements of net income.
Aqua Resources earns revenues by providing non-regulated water and wastewater services through operating and maintenance contracts, and third party water and sewer line repair service. The performance obligations are performing agreed upon services in the contract, most commonly operation of third party water or wastewater treatment services, or billing services, or allowing the use of our logo to a third party water and sewer line repair service. Revenues are primarily recognized over time as service is delivered.
Note 3 – Goodwill
The following table summarizes the changes in the Company’s goodwill, by business segment:
|
|||||||||
|
Regulated |
||||||||
|
Segment |
Other |
Consolidated |
||||||
Balance at December 31, 2017 |
$ |
37,389 |
$ |
4,841 |
$ |
42,230 | |||
Goodwill acquired |
- |
- |
- |
||||||
Balance at March 31, 2018 |
$ |
37,389 |
$ |
4,841 |
$ |
42,230 |
10
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 4 – Acquisitions
During the first three months of 2018, the Company completed three acquisitions of water and wastewater utility systems in various states adding 448 customers. The total purchase price of these utility systems consisted of $190 in cash. The purchase price allocation for these acquisition consisted primarily of acquired property, plant and equipment. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.
During 2017, the Company completed four acquisitions of water and wastewater utility systems in various states adding 1,003 customers. The total purchase price of these utility systems consisted of $5,860 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.
As part of the Company’s growth-through-acquisition strategy, the Company has entered into purchase agreements to acquire the water or wastewater utility system assets of six municipalities for a total combined purchase price in cash of $150,700, which we plan to finance by the issuance of long-term debt. The purchase price for these pending acquisitions is subject to certain adjustments at closing, and the pending acquisitions are subject to regulatory approvals, including the final determination of the fair value of the rate base acquired. Closings for these acquisitions are expected to occur by the end of 2018, subject to the timing of the regulatory approval process. These acquisitions are expected to add approximately 16,325 customers in two of the states that the Company operates in.
Note 5 – 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.
]
Note 6 –Financial Instruments
The Company follows the FASB’s 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 |
11
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
· |
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, 2018.
Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented. The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments.
The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of March 31, 2018 and December 31, 2017, the carrying amount of the Company’s loans payable was $20,342 and $3,650, respectively, which equates to their estimated fair value. The Company’s assets underlying the deferred compensation and non-qualified pension plans are determined by the fair value of mutual funds, which are based on quoted market prices from active markets utilizing Level 1 methods and assumptions. As of March 31, 2018 and December 31, 2017, the carrying amount of these securities was $21,576 and $21,776, 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 uninvested cash, is determined based on the net asset value per unit utilizing Level 1 methods and assumptions. As of March 31, 2018 and December 31, 2017, the carrying amounts of the Company's cash and cash equivalents was $3,202 and $4,204, respectively, which equates to their fair value.
Unrealized gain and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2018 |
|
Net loss recognized during the period on equity securities |
|
$ |
21 |
Less: net gain / loss recognized during the period on equity securities sold during the period |
|
|
- |
Unrealized loss recognized during the reporting period on equity securities still held at the reporting date |
|
$ |
21 |
12
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The net loss recognized on equity securities is presented on the consolidated statements of net income on the line item “Other.” Additionally, the unrealized gain recognized during the three months ended March 31, 2017, was reported on the consolidated statements of comprehensive income.
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
|
||||||
|
March 31, |
December 31, |
||||
|
2018 |
2017 |
||||
Carrying amount |
$ |
2,188,115 |
$ |
2,143,127 | ||
Estimated fair value |
2,235,447 | 2,262,785 |
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 $90,599 as of March 31, 2018, and $93,186 as of December 31, 2017. 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 rates. Portions of these non-interest bearing instruments are payable annually through 2028 and amounts not paid by the respective contract expiration dates become non-refundable. The fair value of these amounts would, however, be less than their carrying value due to the non-interest bearing feature.
Note 7 – Net Income per Common Share
Basic net income per common share is based on the weighted average number of common shares outstanding. Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share. The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation. The treasury stock method assumes that the proceeds from stock-based compensation are used to purchase the Company’s common stock at the average market price during the period. The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||
|
|
March 31, |
||
|
|
2018 |
|
2017 |
Average common shares outstanding during the period for basic computation |
|
177,801 |
|
177,479 |
Dilutive effect of employee stock-based compensation |
|
437 |
|
490 |
Average common shares outstanding during the period for diluted computation |
|
178,238 |
|
177,969 |
|
|
|
|
|
13
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
For the three months ended March 31, 2018 and 2017, 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. No further grants may be made under the 2004 Plan. 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 March 31, 2018, 3,454,922 shares were still available for issuance under the 2009 Plan.
Performance Share Units – A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the three-year performance period specified in the grant, subject to exceptions through the respective vesting period, generally three years. Each grantee is granted a target award of PSUs, and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals. The following table provides compensation costs for stock-based compensation related to PSUs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||
|
|
March 31, |
||||
|
|
2018 |
|
2017 |
||
Stock-based compensation within operations and maintenance expenses |
|
$ |
859 |
|
$ |
870 |
Income tax benefit |
|
|
241 |
|
|
353 |
14
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes the PSU transactions for the three months ended March 31, 2018:
|
||||||
|
Number |
Weighted |
||||
|
of |
Average |
||||
|
Share Units |
Fair Value |
||||
Nonvested share units at beginning of period |
452,333 |
$ |
26.16 | |||
Granted |
87,593 | 37.65 | ||||
Performance criteria adjustment |
(33,109) | 29.71 | ||||
Forfeited |
(5,522) | 29.59 | ||||
Share units vested in prior period and issued in current period |
9,400 | 26.54 | ||||
Share units issued |
(136,081) | 31.70 | ||||
Nonvested share units at end of period |
374,614 | 26.48 | ||||
|
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions. The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied. The per unit weighted-average fair value at the date of grant for PSUs granted during the three months ended March 31, 2018 and 2017 was $37.65 and $30.79, 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 the Company’s 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. 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 |
||||
|
|
March 31, |
||||
|
|
2018 |
|
2017 |
||
Stock-based compensation within operations and maintenance expenses |
|
$ |
351 |
|
$ |
281 |
Income tax benefit |
|
|
100 |
|
|
116 |
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 the RSU transactions for the three months ended March 31, 2018:
|
||||||
|
Number |
Weighted |
||||
|
of |
Average |
||||
|
Stock Units |
Fair Value |
||||
Nonvested stock units at beginning of period |
116,787 |
$ |
29.46 | |||
Granted |
54,073 | 34.91 | ||||
Stock units vested in prior period and issued in current period |
1,467 | 31.47 | ||||
Stock units vested and issued |
(42,836) | 26.39 | ||||
Forfeited |
- |
- |
||||
Nonvested stock units at end of period |
129,491 | 31.78 |
The per unit weighted-average fair value at the date of grant for RSUs granted during the three months ended March 31, 2018 and 2017 was $34.91 and $30.37, respectively.
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 |
||||
|
|
March 31, |
||||
|
|
2018 |
|
2017 |
||
Stock-based compensation within operations and maintenance expenses |
|
$ |
94 |
|
$ |
30 |
Income tax benefit |
|
|
58 |
|
|
92 |
|
|
|
|
|
|
|
The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model. The following assumptions were used in the application of this valuation model:
|
2018 |
2017 |
Expected term (years) |
5.46 | 5.45 |
Risk-free interest rate |
2.72% | 2.01% |
Expected volatility |
17.2% | 17.7% |
Dividend yield |
2.37% | 2.51% |
Grant date fair value per option |
$ 5.10 |
$ 4.07 |
Historical information was the principal basis for the selection of the expected term and dividend yield. The expected volatility is based on a weighted-average combination of historical and implied volatilities over a time period that approximates the expected term of the option. The risk-free interest rate was
16
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
selected based upon the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.
The following table summarizes stock option transactions for the three months ended March 31, 2018:
|
||||||||||
|
Weighted |
Weighted |
||||||||
|
Average |
Average |
Aggregate |
|||||||
|
Exercise |
Remaining |
Intrinsic |
|||||||
|
Shares |
Price |
Life (years) |
Value |
||||||
Outstanding at beginning of period |
364,932 |
$ |
19.83 | |||||||
Granted |
160,859 | 34.51 | ||||||||
Forfeited |
(2,371) | 30.47 | ||||||||
Expired / Cancelled |
(41) | 30.47 | ||||||||
Exercised |
(62,688) | 16.11 | ||||||||
Outstanding at end of period |
460,691 |
$ |
25.40 | 6.2 |
$ |
4,060 | ||||
|
||||||||||
Exercisable at end of period |
225,594 |
$ |
17.24 | 2.6 |
$ |
3,794 |
Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. The issuance of stock awards results in compensation expense which is equal to the fair market value of the stock on the grant date, and is expensed immediately upon grant. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||
|
|
March 31, |
||||
|
|
2018 |
|
2017 |
||
Stock-based compensation within operations and maintenance expenses |
|
$ |
140 |
|
$ |
131 |
Income tax benefit |
|
|
40 |
|
|
54 |
The following table summarizes stock award transactions for the three months ended March 31, 2018:
|
|||||
|
Number |
Weighted |
|||
|
of |
Average |
|||
|
Stock Awards |
Fair Value |
|||
Nonvested stock awards at beginning of period |
- |
$ |
- |
||
Granted |
4,130 | 33.90 | |||
Vested |
(4,130) | 33.90 | |||
Nonvested stock awards at end of period |
- |
$ |
- |
The per unit weighted-average fair value at the date of grant for stock awards granted during the three months ended March 31, 2018 and 2017 was $33.90 and $32.15, respectively.
17
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)