Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 1 –
Basis of Presentation
The accompanying consolidated balance sheets and statements of capitalization of Aqua America, Inc. and subsidiaries (the “Company”) at
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
include
s
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,
201
7
.
Table of Contents
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
recognize
s
r
evenue as
water and wastewater
service
s
are
provided
to
our
customer
s, which
happen
s
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
t
he
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
ha
s
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.
Table of Contents
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 cell
ular
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 m
arket-based revenues
, which
comp
rises
:
Aqua Infra
structure 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
|
Table of Contents
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
.
Closing
s
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 s
ale 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
|
Table of Contents
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
plan
s
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 secu
rities 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
.
T
he 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
|
Table of Contents
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
c
onsolidated
s
tatements of
n
et
i
ncome on the line item “Other.”
Additionally, the unrealized gain recognized during the three months ended March 31, 2017,
was
reported on the
c
onsolidated
s
tatements of
c
omprehensive
i
ncome.
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 rate
s
. Portions of these non-interest bearing instruments are payable annually through
202
8
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
|
|
|
|
|
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Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
For the three
months ended
March 31, 2018
and
201
7
, 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
,
3,454,9
22
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
|
Table of Contents
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
|
Table of Contents
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
201
7
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 o
ptions 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 gran
t
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
Table of Contents
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
201
7
was
$
33.90
and
$
32.15
, respectively
.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note
9
–
Pension Plans and Other Postretirement Benefits
The Company maintains a qualified defined benefit pension plan (the “Pension Plan”), a nonqualified pension plan
,
and other postretirement benefit plans for certain of its employees. The net periodic benefit cost is based on estimated values and an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover, and medical costs. The following tables provide the components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
812
|
|
$
|
794
|
Interest cost
|
|
|
2,874
|
|
|
3,108
|
Expected return on plan assets
|
|
|
(4,553)
|
|
|
(4,270)
|
Amortization of prior service cost
|
|
|
132
|
|
|
145
|
Amortization of actuarial loss
|
|
|
1,823
|
|
|
2,001
|
Net periodic benefit cost
|
|
$
|
1,088
|
|
$
|
1,778
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Postretirement Benefits
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
262
|
|
$
|
255
|
Interest cost
|
|
|
708
|
|
|
737
|
Expected return on plan assets
|
|
|
(677)
|
|
|
(647)
|
Amortization of prior service cost
|
|
|
(127)
|
|
|
(127)
|
Amortization of actuarial loss
|
|
|
296
|
|
|
291
|
Net periodic benefit cost
|
|
$
|
462
|
|
$
|
509
|
The components of net periodic benefit cost other than service cost are presented on the
c
onsolidated
s
tatements of
n
et
i
ncome on the line item “Other
.
”
The Company made cash contributions of
$
5,198
to its Pension Plan during the first
three
months of
201
8
,
and intends to make additional cash contributions of $7,286 to the Pension Plan during the remainder of 2018
.
Note
10
–
Water and Wastewater Rates
During the first
three
months of
201
8
, the Company’s operating divisions in
Illinois
and
Ohio
were granted base rate increases designed to increase total operating revenues on an annual basis by
$
8,640
.
On April 6, 2018, the base rate case in Illinois was petitioned for a rehearing
;
however, this petition was
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
denied on April 19, 2018
.
The other parties to the case have thirty days to file an appeal.
The approved rates
, for which we have billed
$300
to date in March 2018
,
are in effect, but could be subject to refund
if an appeal is granted
.
Further, during the first
three
months of
201
8
, the Company’s operating divisions in
Pennsylvania
and North Carolina
received
approval to bill
infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by
$
9,731
.
As of February
10,
2018,
the Company has been billing
interim rate
s
in Virginia, which has a
base
rate case filing in progress. As of March 31, 2018,
$
821
of billings
is
subject to refund pending the conclusion of the rate case.
Note
11
–
Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
Property
|
|
$
|
6,749
|
|
$
|
6,785
|
Gross receipts, excise and franchise
|
|
|
3,265
|
|
|
3,175
|
Payroll
|
|
|
3,275
|
|
|
3,124
|
Regulatory assessments
|
|
|
627
|
|
|
629
|
Pumping fees
|
|
|
991
|
|
|
944
|
Other
|
|
|
60
|
|
|
80
|
Total taxes other than income
|
|
$
|
14,967
|
|
$
|
14,737
|
|
|
|
|
|
|
|
Note
12
–
Segment Information
The Company has
ten
operating segments and
one
reportable segment. The Regulated segment, the Company’s single reportable segment, is comprised of
eight
operating segments representing
its
water and wastewater regulated utility companies which are organized by the states where
the Company
provide
s
water and wastewater services. These operating segments are aggregated into one reportable segment
because
each of these operating segments has the following similarities: economic characteristics, nature of services, production processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment.
Two
operating segments are included within the Other category below. These segments are not quantitatively significant and are comprised of
Aqua Infrastructure
and
Aqua Resources.
Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry.
Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to
its
utility companies’ service territories; and offers, through a third party, water and sewer line repair service and protection solutions to households.
In addition to these segments, Other is comprised of other business activities not included in the reportable segment, including corporate costs that have not been allocated to the Regulated segment and intersegment eliminations.
Corporate costs include general and administrative expenses, and interest expense.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table presents information about the Company’s reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
March 31, 2018
|
|
March 31, 2017
|
|
|
Regulated
|
|
Other
|
|
Consolidated
|
|
Regulated
|
|
Other
|
|
Consolidated
|
Operating revenues
|
|
$
|
193,507
|
|
$
|
840
|
|
$
|
194,347
|
|
$
|
186,349
|
|
$
|
1,438
|
|
$
|
187,787
|
Operations and maintenance expense
|
|
|
71,303
|
|
|
2,643
|
|
|
73,946
|
|
|
66,272
|
|
|
1,618
|
|
|
67,890
|
Depreciation
|
|
|
35,958
|
|
|
9
|
|
|
35,967
|
|
|
33,666
|
|
|
171
|
|
|
33,837
|
Amortization
|
|
|
88
|
|
|
42
|
|
|
130
|
|
|
209
|
|
|
(20)
|
|
|
189
|
Operating income (loss)
|
|
|
72,058
|
|
|
(2,721)
|
|
|
69,337
|
|
|
72,305
|
|
|
(1,171)
|
|
|
71,134
|
Interest expense, net
|
|
|
21,708
|
|
|
1,763
|
|
|
23,471
|
|
|
19,777
|
|
|
1,549
|
|
|
21,326
|
Allowance for funds used during construction
|
|
|
2,867
|
|
|
-
|
|
|
2,867
|
|
|
3,193
|
|
|
-
|
|
|
3,193
|
Income tax expense (benefit)
|
|
|
(643)
|
|
|
(1,488)
|
|
|
(2,131)
|
|
|
3,856
|
|
|
(926)
|
|
|
2,930
|
Net income (loss)
|
|
|
54,027
|
|
|
(3,188)
|
|
|
50,839
|
|
|
50,896
|
|
|
(1,824)
|
|
|
49,072
|
Capital expenditures
|
|
|
105,136
|
|
|
-
|
|
|
105,136
|
|
|
94,409
|
|
|
153
|
|
|
94,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Total assets:
|
|
|
|
|
|
|
Regulated
|
|
$
|
6,321,372
|
|
$
|
6,236,109
|
Other
|
|
|
82,336
|
|
|
96,354
|
Consolidated
|
|
$
|
6,403,708
|
|
$
|
6,332,463
|
|
|
|
|
|
|
|
Note
13
–
Commitments and Contingencies
The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved. As of
March 31, 2018
, the aggregate amount of
$
20,231
is accrued for loss contingencies and is reported in the Company’s consolidated balance sheet as other accrued liabilities and other liabilities. These accruals represent management’s best estimate of probable loss (as defined in the accounting guidance) for loss contingencies or the low end of a range of losses if no single probable loss can be estimated. For some loss contingencies, the Company is unable to estimate the amount of the probable loss or range of probable losses. While the final outcome of these loss contingencies cannot be predicted with certainty, and unfavorable outcomes could negatively impact the Company, at this time in the opinion of management, the final resolution of these matters are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows. Further, the Company has insurance coverage for certain of these loss contingencies, and as of
March 31, 2018
, estimates that approximately
$
8,231
of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported in the Company’s consolidated balance sheet as deferred charges and other assets
, net
.
Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of its properties is
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
the subject that are material or are expected to have a material effect on the Company’s financial position, results of operations, or cash flows.
In addition to the aforementioned loss contingencies, the Company self-insures its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for these claims totaled
$
1,451
at
March 31, 2018
and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.
Note
14
–
Income Taxes
During the
three
months ended
March 31, 2018
, the Company
’s
Federal net operating loss (“NOL”) carryforward
decreased
by
$
6,760
. In addition, during the
three
months ended
March 31, 2018
, the Company’s state NOL carryforward increased by
$
3,866
. As of
March 31, 2018
, the balance of the Company’s Federal NOL was
$
56,542
. The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires
no
valuation allowance. As of
March 31, 2018
, the balance of the Company’s gross state NOL was
$
631,124
, a portion of which is offset by a valuation allowance because the Company does not believe the
state
NOLs are more likely than not to be realized. The Company’s Federal and state NOL carryforwards begin to expire in
2032
and
2023
, respectively.
The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of
$
64,814
and
$
85,380
, respectively. The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were
$
121,356
and
$
716,504
respectively. The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability.
In accordance with a 2012 settlement agreement with the Pennsylvania Public Utility Commission, Aqua Pennsylvania expenses, for tax purposes, qualifying utility asset improvement costs, which results in a substantial reduction in income tax expense and greater net income and cash flows. The Company’s effective income tax rate for the
first
quarter of
2018
and
2017
was
-4.4%
and
5.6%
, respectively.
As of
March 31, 2018
,
the total gross unrecognized tax benefit was
$
18,143
.
As
a result of the regulatory treatment afforded for qualifying infrastructure improvements in
Pennsylvania
,
$24,834
, if recognized, would affect the Company’s effective tax rate
. At December 31,
2017
, the Company had unrecognized tax benefits of
$
17,583
.
Accounting rules for uncertain tax positions specify that tax positions for which the timing of resolution is uncertain should be classified as long-term liabilities. Judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. Although the timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, the Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.
On December 22, 2017, President Trump signed the
“Tax Cuts and Jobs Acts” (the “
TCJA
”)
into law. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Code and the taxation of business entities, and includes specific provisions related to regulated public utilities.
Significant changes that
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
impact the Company included in the TCJA are a reduction in the corporate federal income tax rate from
35%
to
21%
, effective January 1, 2018, and a limitation of the utilization of NOLs arising after December 31, 2017 to 80% of taxable income with an indefinite carryforward. The specific TCJA provisions related to our regulated entities generally allow for the continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain property acquired after September 27, 2017 and the continuation of certain rate normalization requirements for accelerated depreciation benefits. Our market-based companies still qualify for 100% deductibility of qualifying property acquired after September 27, 2017.
In accordance with the FASB’s accounting guidance for income taxes
,
the tax effects of changes in tax laws must be recognized in the period in which the law is enacted, or December 22, 2017 for the TCJA. Additionally, deferred tax assets and liabilities are required to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rate. For our regulated entities, the change in deferred taxes is recorded as either an offset to a regulatory asset or liability and may be subject to refund to customers. In instances where the deferred tax balances are not in ratemaking, such as the Company’s market-based operations, the change in deferred taxes is recorded as an adjustment to our deferred tax provision.
The staff of the SEC has recognized the complexity of reflecting the impacts of the TCJA, and on December 22, 2017 issued guidance, which clarifies accounting for income taxes if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting (the measurement period). The guidance describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform: (1) a company is complete with its
accounting for certain effects of tax reform, (2) a company is able to determine a
reasonable estimate for certain effects of tax reform and records that estimate as a
provisional amount, or (3) a company is not able to determine a reasonable estimate and
therefore continues to apply the FASB’s accounting guidance, based on the provisions of the tax
laws that were in effect immediately prior to the TCJA being enacted.
The Company has completed or has made a reasonable estimate for the measurement and accounting of the effect of the TCJA which
were
reflected in the December 31, 2017 financial statements
, which resulted in
a decrease to the accumulated deferred income tax liability of
$303,320
.
Additionally,
due to the reduction in the Company’
s
corporate
income tax
rate
,
in the first quarter of 2018, the Company reserved
$2,5
3
2
for amounts
expected to be
refundable to
utility
customers.
During the first quarter of 2018, in Illinois and Virginia, the Company’s base rates have been adjusted to reflect the lower corporate income tax rate, and Texas and New Jersey implement
ed
adjusted tariff rates in the second quarter of 2018.
One of our states, Pennsylvania, has not yet issued an accounting or procedural order addressing how the TCJA changes are to be reflected in our utility customer rates. As of
December
31, 201
7
, the Company ha
d
provisionally estimated that
$175,108
of deferred income tax liabilities for our Pennsylvania subsidiary will be a regulatory liability. Additionally, two operating divisions in
Ohio
operate under locally-negotiated contractual rates with their respective counties, and it is expected that negotiations will result in a contract that will
return to customers
the effects of the reduction in the corporate net income tax rate under the TCJA; however, these negotiations have not yet started. As of
December
31, 201
7
, the Company ha
d
provisionally estimated that
$9,419
of deferred income tax liabilities for these two
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
divisions will be a regulatory liability. Overall, the Company has applied a reasonable interpretation of the impact of the TCJA and a reasonable estimate of the regulatory resolution. Further clarification of the TCJA and regulatory resolution may change the amounts estimated of the deferred income tax provision and the accumulated deferred income tax liability.
The Company’s regulated operations accounting for income taxes are impacted by the FASB’s accounting guidance for regulated operations. Reductions in accumulated deferred income tax balances due to the reduction in the Federal corporate income tax rates to 21% under the provisions of the TCJA will result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers, generally through reductions in future rates. The TCJA includes provisions that stipulate how these excess deferred taxes related to certain accelerated tax depreciation deduction benefits are to be passed back to customers. Potential refunds of other deferred taxes will be determined by our state regulators. Our state regulatory commissions have or are in the process of issuing procedural orders directing how the tax law changes are to be reflected in our utility customer rates.
Note
15
–
Recent Accounting Pronouncements
In March 2017, the FASB issued updated accounting guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). Historically, net benefit cost is reported as an employee cost within operating income, net of amounts capitalized. The guidance requires the bifurcation of net benefit cost. The service cost component will be presented with other employee compensation costs in operating income and the other components of net benefit cost will be reported separately outside of operating income, and will not be eligible for capitalization. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period, and is to be applied retrospectively for the presentation of the service cost component and the other components of net benefit cost, and on a prospective basis for the capitalization of only the service cost component of net benefit cost. On January 1, 2018, the Company adopted the updated guidance, which did not have a material impact on its results of operations or financial position
, and resulted in the reclassification, for the three months ended March 31, 2017, of $1,238 for the other components of net benefit cost from operations and maintenance expense to other
in the consolidated statements of net income
.
In February 2016, the FASB issued updated accounting guidance on accounting for leases, which requires lessees to establish a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.
For income statement purposes, leases will be classified as either operating or finance.
Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern.
The updated accounting guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption available.
The Company is evaluating the requirements of the updated guidance to determine the impact of adoption.
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AQUA AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
In January 2016, the FASB issued updated accounting guidance on the recognition and measurement of financial assets and financial liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The updated guidance is effective for interim and annual periods beginning after December 31, 2017. On January 1, 2018, the Company adopted the updated guidance, which did not have a material impact on its results of operations or financial position
, and resulted in the recognition of $860
of previous unrealized gains, which was recorded as an adjustment to beginning retained earnings (refer to the presentation of “cumulative effect of change in accounting principle – financial instruments” on the Company’s consolidated statement of equity)
.
In May 2014, the FASB issued updated accounting guidance on recognizing revenue from contracts with customers, which outlines a single comprehensive model that an entity will apply to determine the measurement of revenue and timing of recognition. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The updated guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. The updated guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the updated guidance in each prior reporting period, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the updated guidance recognized through retained earnings at the date of adoption. In 2016, the Company performed an evaluation of the requirements of the updated guidance and believes that the impact of adoption will not result in a material change in the Company’s measurement of revenue. In 2017, the American Institute of Certified Public Accountants (“AICPA”) power and utility entities revenue recognition task force determined that contributions in aid of construction are not in the scope of the new standard, and submitted its recommendation to the AICPA’s revenue recognition working group for approval. The Company implemented the updated guidance using the modified retrospective approach on January 1, 2018, which did not result in a change in the Company’s measurement of revenue, and reached the following conclusions:
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·
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The Company’s tariff sale contracts, including those with lower credit quality customers, are generally deemed to be probable of collection, and thus the timing of revenue recognition will continue to be concurrent with the delivery of water and wastewater services, consistent with our current practice.
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·
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Contributions in aid of construction are outside of the scope of the standard, and will continue to be accounted for as a noncurrent liability.
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Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among others: the effects of regulation, abnormal weather, changes in capital requirements and funding, acquisitions, changes to the capital markets, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31,
201
7
under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such report. As a result, readers are cautioned not to place undue reliance on any forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
General Information
Aqua America, Inc. (“we”, “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water or wastewater services to what we estimate to be almost three million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, and Virginia. Our largest operating subsidiary, Aqua Pennsylvania, provides water or wastewater services to approximately one-half of the total number of people we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in
27
other counties in Pennsylvania. Our other regulated utility subsidiaries provide similar services in seven other states. In addition, the Company’s market-based activities are conducted through
Aqua Infrastructure, LLC
and
Aqua Resources, Inc.
Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry.
Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to our utility companies’ service territories;
and
offers, through a third party, water and wastewater line repair service and protection solutions to households.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Aqua America, Inc., which prior to its name change in 2004 was known as Philadelphia Suburban Corporation, was formed in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania, formerly known as Philadelphia Suburban Water Company. In the early 1990s, we embarked on a growth-through-acquisition strategy focused on water and wastewater operations. Our most significant transactions to date have been the merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition of American Water Works Company, Inc.’s regulated operations in Ohio in 2012. Since the early 1990s, our business strategy has been primarily directed toward the regulated water and wastewater utility industry, where we have more than quadrupled the number of regulated customers we serve, and has extended our regulated operations from southeastern Pennsylvania to include operations in seven other states. Currently, the Company seeks to acquire businesses in the U.S. regulated sector, which includes water and wastewater utilities and other regulated utilities, and to
opportunistically
pursue growth ventures in
select
market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated businesses.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes.
Financial Condition
During the first
three
months of
201
8
, we had
$105,136
of capital expenditures, expended
$
190
for the acquisition of water and wastewater utility systems, issued
$66,996
of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of
$21,898
. The capital expenditures were related to new and replacement water mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, and other enhancements and improvements. The issuance of long-term debt was comprised principally of the funds borrowed under our revolving credit facility.
At
March 31, 2018
, we had
$3,202
of cash and cash equivalents compared to
$4,204
at December 31,
201
7
. During the first
three
months of
201
8
, we used the proceeds from the issuance of long-term debt and internally generated funds to fund the cash requirements discussed above and to pay dividends.
At
March 31, 2018
, our $250,000 unsecured revolving credit facility, which expires in February 2021, had $
113,189
available for borrowing. At
March 31, 2018
, we had short-term lines of credit of $135,500, of which $
115,158
was available for borrowing. One of our short-term lines of credit is an Aqua Pennsylvania $100,000 364-day unsecured revolving credit facility with four banks, which is used to provide working capital, and as of
March 31, 2018
, $
79,658
was available for borrowing.
Our short-term lines of credit of $135,500 are subject to renewal on an annual basis. Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be.
Table of Contents
AQUA AMERICA, INC.
AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
The Company’s consolidated balance sheet historically has had a negative working capital position whereby routinely our current liabilities exceed our current assets. Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.
Results of Operations
Analysis of
First
Quarter of
201
8
Compared to
First
Quarter of
201
7
Revenues
increased
by
$6,560
or
3.5%
, primarily due to
an increase in customer water consumption,
an increase in water and wastewater rates
and infrastructure rehabilitation surcharges
of $
5,097
, and
additional
water and wastewater
revenues of $
1,
634
associated with a larger customer base due to
organic growth and
utility acquisitions
, offset by a reserve
,
recognized in the first quarter of 2018,
of $2,532 for amounts
expected to be
refundable to
utility
customers associated with the decrease in
the corporate
income tax
rate from 35% to 21%
due to the
TCJA
.
Operations and maintenance expenses
increased
by
$6,056
or
8.9%
,
primarily
due to
an increase in labor expense of $1,559, which included additional overtime expenses for increased maintenance activities,
an increase in postretirement benefits of $1,442,
and
an increase in maintenance expenses of $1,057, mainly resulting from expenses incurred
due to more
severe
winter weather conditions
.
Depreciation expense
increased
by
$2,130
or
6.3%
, primarily due to the utility plant placed in service since
March 31
,
201
7
.
Interest expense
increased
by
$2,145
or
10.1%
, primarily due to an increase in average borrowings
, offset by a decrease in
our effective interest rate
.
Allowance for funds used during construction (“AFUDC”)
decreased
by
$326
, due to a
decrease
in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Equity earnings in joint venture increased by $412 due to an increase in the sale of raw water to firms in the natural gas drilling industry.
Other decreased by $635 primarily due to a decrease in the non-service cost components of our net benefit cost for pension and postretirement benefits.
Our effective income tax rate was
-4.4%
in the
first
quarter of
2018
and
5.6%
in the
first
quarter of
2017
. The effective income tax rate
decreased
due to the
reduction in the corporate income tax rate from 35% to 21%
, and the
effect of
additional
tax deductions recognized in the
first
quarter of
2018
for certain qualifying infrastructure improvements for Aqua Pennsylvania.
A revenue reserve has been recognized in the first quarter of 2018 for the amounts expected to be refundable to utility customers associated with the decrease in the corporate income tax rate from 35% to 21% due to the TCJA
.
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AQUA AMERICA, INC.
AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Net income
increased
by
$1,767
or
3.6%
, primarily as a result of the factors described above.
Impact of Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note
15
,
Recent Accounting Pronouncements
, to the consolidated finan
cial statements in this report.