8f49d87e841c453

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC  20549

FORM 10-Q

(Mark One) 

 QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. 

For the quarterly period ended March 31, 2014 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 

For the transition period from_______________ to _______________

Commission File Number 1-6659 

AQUA AMERICA, INC. 

(Exact name of registrant as specified in its charter) 

 

 

 

 

 

Pennsylvania

23-1702594

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania

19010 -3489

(Address of principal executive offices)

(Zip Code)

 

 

(610) 527-8000

(Registrant’s telephone number, including area code)

 

(Former Name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12(b)-2 of the Exchange Act.:   

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer    (do not check if a  smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   No  

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of  

April 23,  2014:  177,060,756

  

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

 

 

TABLE OF CONTENTS

 

 

 

 

Page

Part I – Financial Information 

 

 

Item 1.  Financial Statements: 

 

 

 

Consolidated Balance Sheets (unaudited) – March 31, 2014 and December 31, 2013 

2

 

 

Consolidated Statements of Net Income (unaudited) -
Three Months Ended March 31, 2014 and 2013
 

3

 

 

Consolidated Statements of Comprehensive Income (unaudited) –
Three Months Ended March 31, 2014 and 2013
 

4

 

 

Consolidated Statements of Capitalization (unaudited) –
March 31, 2014 and December 31, 2013
 

5

 

 

Consolidated Statement of Equity (unaudited) –
Three Months Ended March 31, 2014
 

6

 

 

Consolidated Statements of Cash Flow (unaudited) –
Three Months Ended March 31, 2014 and 2013
 

7

 

 

Notes to Consolidated Financial Statements (unaudited) 

8

 

 

Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations
 

26

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk 

32

 

 

Item 4.  Controls and Procedures 

32

 

Part II – Other Information 

 

 

Item 1.  Legal Proceedings 

32

 

 

Item 1A.  Risk Factors 

34

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 

35

 

 

Item 6.  Exhibits 

36

 

 

Signatures 

37

 

 

Exhibit Index 

38

 

 

 

1

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED BALANCE SHEETS 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

Assets

 

2014

 

2013

Property, plant and equipment, at cost

 

$

5,397,141 

 

$

5,348,195 

Less: accumulated depreciation

 

 

1,237,686 

 

 

1,211,806 

Net property, plant and equipment

 

 

4,159,455 

 

 

4,136,389 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

 

17,508 

 

 

5,058 

Accounts receivable and unbilled revenues, net

 

 

89,892 

 

 

94,704 

Income tax receivable

 

 

1,211 

 

 

7,873 

Deferred income taxes

 

 

49,846 

 

 

40,038 

Inventory, materials and supplies

 

 

11,794 

 

 

11,353 

Prepayments and other current assets

 

 

11,129 

 

 

11,081 

Assets of discontinued operations held for sale

 

 

32,250 

 

 

32,926 

Total current assets

 

 

213,630 

 

 

203,033 

 

 

 

 

 

 

 

Regulatory assets

 

 

599,717 

 

 

585,140 

Deferred charges and other assets, net

 

 

51,253 

 

 

50,290 

Investment in joint venture

 

 

47,666 

 

 

48,695 

Funds restricted for construction activity

 

 

47 

 

 

47 

Goodwill

 

 

27,999 

 

 

28,223 

Total assets

 

$

5,099,767 

 

$

5,051,817 

Liabilities and Equity

 

 

 

 

 

 

Aqua America stockholders' equity:

 

 

 

 

 

 

Common stock at $.50 par value, authorized 300,000,000 shares, issued 178,316,578 and 177,928,922 as of March 31, 2014 and December 31, 2013

 

$

89,158 

 

$

88,964 

Capital in excess of par value

 

 

748,080 

 

 

743,335 

Retained earnings

 

 

745,161 

 

 

729,272 

Treasury stock, at cost, 1,258,279 and 1,178,323 shares in March 31, 2014 and December 31, 2013

 

 

(29,055)

 

 

(27,082)

Accumulated other comprehensive income

 

 

667 

 

 

346 

Total Aqua America stockholders' equity

 

 

1,554,011 

 

 

1,534,835 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

223 

 

 

208 

 

 

 

 

 

 

 

Total equity

 

 

1,554,234 

 

 

1,535,043 

 

 

 

 

 

 

 

Long-term debt, excluding current portion

 

 

1,498,040 

 

 

1,468,583 

Commitments and contingencies (See Note 13)

 

 

 -

 

 

 -

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

 

97,789 

 

 

86,288 

Loans payable

 

 

27,913 

 

 

36,740 

Accounts payable

 

 

31,547 

 

 

65,815 

Accrued interest

 

 

21,175 

 

 

13,615 

Accrued taxes

 

 

13,362 

 

 

14,176 

Other accrued liabilities

 

 

30,419 

 

 

33,596 

Liabilities of discontinued operations held for sale

 

 

29,037 

 

 

29,649 

Total current liabilities

 

 

251,242 

 

 

279,879 

 

 

 

 

 

 

 

Deferred credits and other liabilities:

 

 

 

 

 

 

Deferred income taxes and investment tax credits

 

 

901,391 

 

 

866,211 

Customers' advances for construction

 

 

73,728 

 

 

73,892 

Regulatory liabilities

 

 

278,283 

 

 

281,014 

Other

 

 

75,230 

 

 

81,552 

Total deferred credits and other liabilities

 

 

1,328,632 

 

 

1,302,669 

 

 

 

 

 

 

 

Contributions in aid of construction

 

 

467,619 

 

 

465,643 

Total liabilities and equity

 

$

5,099,767 

 

$

5,051,817 

 

 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 8 of this report.

 

 

  

2

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2014

 

2013

 

 

 

 

 

 

 

Operating revenues

 

$

182,672 

 

$

178,552 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Operations and maintenance

 

 

71,686 

 

 

67,794 

Depreciation

 

 

30,981 

 

 

29,045 

Amortization

 

 

1,133 

 

 

1,377 

Taxes other than income taxes

 

 

12,102 

 

 

13,398 

Total operating expenses

 

 

115,902 

 

 

111,614 

 

 

 

 

 

 

 

Operating income

 

 

66,770 

 

 

66,938 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

Interest expense, net

 

 

19,310 

 

 

19,275 

Allowance for funds used during construction

 

 

(1,167)

 

 

(552)

Loss (gain) on sale of other assets

 

 

348 

 

 

(92)

Equity loss in joint venture

 

 

686 

 

 

656 

Income from continuing operations before income taxes

 

 

47,593 

 

 

47,651 

Provision for income taxes

 

 

5,192 

 

 

6,787 

Income from continuing operations

 

 

42,401 

 

 

40,864 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

 

772 

 

 

8,925 

Provision for income taxes

 

 

314 

 

 

3,224 

Income from discontinued operations

 

 

458 

 

 

5,701 

Net income attributable to common shareholders

 

$

42,859 

 

$

46,565 

 

 

 

 

 

 

 

Income from continuing operations per share:

 

 

 

 

 

 

Basic

 

$

0.24 

 

$

0.23 

Diluted

 

$

0.24 

 

$

0.23 

 

 

 

 

 

 

 

Income from discontinued operations per share:

 

 

 

 

 

 

Basic

 

$

0.00 

 

$

0.03 

Diluted

 

$

0.00 

 

$

0.03 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.24 

 

$

0.27 

Diluted

 

$

0.24 

 

$

0.26 

 

 

 

 

 

 

 

Average common shares outstanding during the period:

 

 

 

 

 

 

Basic

 

 

176,839 

 

 

175,415 

Diluted

 

 

177,810 

 

 

176,499 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.152 

 

$

0.140 

 

 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 8 of this report.

 

 

 

 

 

 

 

 

 

 

3

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(In thousands of dollars) 

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

42,859 

 

$

46,565 

Other comprehensive income, net of tax:

 

 

 

 

 

 

Unrealized holding gain (loss) on investments, net of tax of $38 and $(5) for the three months ended, March 31, respectively

 

 

72 

 

 

(9)

Reclassification adjustment for loss reported in net income, net of tax benefit of $(134) for the three months ended, March 31, 2014 (1)

 

 

249 

 

 

 -

Comprehensive income

 

$

43,180 

 

$

46,556 

 

 

 

 

 

 

 

(1) Amount of pre-tax loss of $383 reclassified from accumulated other comprehensive income to loss on sale of other assets on the consolidated statements of net income for the three months ended March 31, 2014.

 

 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 8 of this report.

 

  

 

 

 

4

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CAPITALIZATION 

(In thousands of dollars, except per share amounts) 

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

Aqua America stockholders' equity:

 

 

 

 

 

 

 

    Common stock, $.50 par value

 

 

$

89,158 

 

$

88,964 

    Capital in excess of par value

 

 

 

748,080 

 

 

743,335 

    Retained earnings

 

 

 

745,161 

 

 

729,272 

    Treasury stock, at cost

 

 

 

(29,055)

 

 

(27,082)

    Accumulated other comprehensive income

 

 

667 

 

 

346 

Total Aqua America stockholders' equity

 

 

 

1,554,011 

 

 

1,534,835 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

223 

 

 

208 

 

 

 

 

 

 

 

 

Total equity

 

 

 

1,554,234 

 

 

1,535,043 

 

 

 

 

 

 

 

 

Long-term debt:

 

 

 

 

 

 

 

Long-term debt of subsidiaries (substantially secured by utility plant):

 

 

 

 

 

 

Interest Rate Range

Maturity Date Range

 

 

 

 

 

 

0.00% to  0.99%

2023 to 2033

 

 

6,093 

 

 

5,035 

1.00% to  1.99%

2014 to 2035

 

 

26,911 

 

 

28,615 

2.00% to  2.99%

2024 to 2031

 

 

15,890 

 

 

14,903 

3.00% to  3.99%

2016 to 2047

 

 

166,794 

 

 

167,365 

4.00% to  4.99%

2020 to 2048

 

 

444,574 

 

 

447,297 

5.00% to  5.99%

2015 to 2043

 

 

256,514 

 

 

284,362 

6.00% to  6.99%

2015 to 2036

 

 

64,929 

 

 

64,923 

7.00% to  7.99%

2022 to 2027

 

 

34,900 

 

 

35,056 

8.00% to  8.99%

2021 to 2025

 

 

19,192 

 

 

19,283 

9.00% to  9.99%

2018 to 2026

 

 

28,500 

 

 

28,500 

10.40%

2018

 

 

6,000 

 

 

6,000 

 

 

 

 

1,070,297 

 

 

1,101,339 

 

 

 

 

 

 

 

 

Notes payable to bank under revolving credit agreement, variable rate, due March 2017

 

 

72,000 

 

 

 -

Unsecured notes payable:

 

 

 

 

 

 

 

Notes at 3.57% due 2027

 

 

 

50,000 

 

 

50,000 

Notes ranging from 4.62% to 4.87%, due 2014 through 2024

 

 

171,400 

 

 

171,400 

Notes ranging from 5.01% to 5.95%, due 2015 through 2037

 

 

232,132 

 

 

232,132 

 

 

 

 

1,595,829 

 

 

1,554,871 

Current portion of long-term debt

 

 

 

97,789 

 

 

86,288 

Long-term debt, excluding current portion

 

 

1,498,040 

 

 

1,468,583 

Total capitalization

 

 

$

3,052,274 

 

$

3,003,626 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 8 of this report.

 

 

 

 

 

 

 

 

 

 

 

  

 

5

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENT OF EQUITY 

(In thousands of dollars)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Common

 

Excess of

 

Retained

 

Treasury

 

Comprehensive

 

Noncontrolling

 

 

 

 

 

Stock

 

Par Value

 

Earnings

 

Stock

 

Income

 

Interest

 

Total

Balance At December 31, 2013

 

$

88,964 

 

$

743,335 

 

$

729,272 

 

$

(27,082)

 

$

346 

 

$

208 

 

$

1,535,043 

Net income

 

 

 -

 

 

 -

 

 

42,859 

 

 

 -

 

 

 -

 

 

15 

 

 

42,874 

Other comprehensive income, net of income tax of $172

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

321 

 

 

 -

 

 

321 

Dividends

 

 

 -

 

 

 -

 

 

(26,873)

 

 

 -

 

 

 -

 

 

 -

 

 

(26,873)

Repurchase of stock (79,961 shares)         

 

 

 -

 

 

 -

 

 

 -

 

 

(1,973)

 

 

 -

 

 

 -

 

 

(1,973)

Equity compensation plan (198,920 shares)

 

 

100 

 

 

(100)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Exercise of stock options (188,736, shares)

 

 

94 

 

 

2,663 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,757 

Stock-based compensation

 

 

 -

 

 

1,322 

 

 

(97)

 

 

 -

 

 

 -

 

 

 -

 

 

1,225 

Employee stock plan tax benefits

 

 

 -

 

 

1,041 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,041 

Other  

 

 

 -

 

 

(181)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(181)

Balance At March 31, 2014

 

$

89,158 

 

$

748,080 

 

$

745,161 

 

$

(29,055)

 

$

667 

 

$

223 

 

$

1,554,234 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 8 of this report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

6

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

CONSOLIDATED STATEMENTS OF CASH FLOW 

(In thousands of dollars) 

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2014

 

2013

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

42,859 

 

$

46,565 

Income from discontinued operations

 

 

458 

 

 

5,701 

Income from continuing operations

 

 

42,401 

 

 

40,864 

Adjustments to reconcile income from continuing operations

 

 

 

 

 

 

to net cash flows from operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

32,114 

 

 

30,422 

Deferred income taxes

 

 

3,692 

 

 

11,189 

Provision for doubtful accounts

 

 

1,508 

 

 

925 

Stock-based compensation

 

 

1,331 

 

 

1,015 

Loss (gain) on sale of other assets

 

 

348 

 

 

(92)

Net increase in receivables, inventory and prepayments

 

 

3,644 

 

 

5,492 

Net increase in payables, accrued interest, accrued taxes and other accrued liabilities

 

 

13,269 

 

 

514 

Other

 

 

(7,833)

 

 

(1,704)

Operating cash flows from continuing operations

 

 

90,474 

 

 

88,625 

Operating cash flows (used in) from discontinued operations, net

 

 

(545)

 

 

361 

Net cash flows from operating activities

 

 

89,929 

 

 

88,986 

Cash flows from investing activities:

 

 

 

 

 

 

Property, plant and equipment additions, including the non-equity component of allowance for funds used during construction of $367 and $472

 

 

(59,819)

 

 

(59,085)

Acquisitions of utility systems and other, net

 

 

(4,045)

 

 

(10,674)

Additions to funds restricted for construction activity

 

 

 -

 

 

(2)

Release of funds previously restricted for construction activity

 

 

 -

 

 

394 

Net proceeds from the sale of utility system and other assets

 

 

133 

 

 

95 

Investment in joint venture

 

 

 -

 

 

(4,900)

Other

 

 

(91)

 

 

(233)

Investing cash flows used in continuing operations

 

 

(63,822)

 

 

(74,405)

Investing cash flows from discontinued operations, net

 

 

39 

 

 

51,312 

Net cash flows used in investing activities

 

 

(63,783)

 

 

(23,093)

Cash flows from financing activities:

 

 

 

 

 

 

Customers' advances and contributions in aid of construction

 

 

1,142 

 

 

794 

Repayments of customers' advances

 

 

(234)

 

 

(577)

Net (repayments) proceeds of short-term debt

 

 

(8,827)

 

 

17,453 

Proceeds from long-term debt

 

 

73,192 

 

 

35,010 

Repayments of long-term debt

 

 

(31,874)

 

 

(77,991)

Change in cash overdraft position

 

 

(21,753)

 

 

(11,881)

Proceeds from issuing common stock

 

 

 -

 

 

3,427 

Proceeds from exercised stock options

 

 

2,757 

 

 

7,901 

Stock-based compensation windfall tax benefits

 

 

964 

 

 

 -

Repurchase of common stock

 

 

(1,973)

 

 

(1,618)

Dividends paid on common stock

 

 

(26,873)

 

 

(24,562)

Other

 

 

(181)

 

 

 -

Financing cash flows used in continuing operations

 

 

(13,660)

 

 

(52,044)

Financing cash flows used in discontinued operations, net

 

 

(36)

 

 

(17)

Net cash flows used in financing activities

 

 

(13,696)

 

 

(52,061)

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

12,450 

 

 

13,832 

Cash and cash equivalents at beginning of period

 

 

5,058 

 

 

5,521 

Cash and cash equivalents at end of period

 

$

17,508 

 

$

19,353 

 

 

 

 

 

 

 

See notes to consolidated financial statements beginning on page 8 of this report.

 

 

 

 

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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, 2014, the consolidated statements of net income and comprehensive income for the three months ended March 31, 2014 and 2013, the consolidated statements of cash flow for the three months ended March 31, 2014 and 2013, and the consolidated statement of equity for the three months ended March 31, 2014 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in equity, the consolidated results of operations, and the consolidated cash flow for the periods presented.  Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  The results of operations for interim periods may not be indicative of the results that may be expected for the entire year.  The December 31, 2013 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2013 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.  All common share, per common share, stock unit, and per stock unit data, for all periods presented, has been adjusted to give effect to the September 1, 2013 five-for-four stock split effected in the form of a 25% stock distribution (see Note 5).  Certain prior period amounts have been reclassified to conform to the reporting of discontinued operations (see Note 4).

   

 

Note 2             Goodwill 

 

The following table summarizes the changes in the Company’s goodwill, by business segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulated

 

 

 

 

 

 

 

 

 

Segment

 

Other

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

24,102 

 

$

4,121 

 

$

28,223 

 

Reclassifications to utility plant acquisition adjustment

 

 

(202)

 

 

 -

 

 

(202)

 

Other

 

 

(22)

 

 

 -

 

 

(22)

 

Balance at March 31, 2014

 

$

23,878 

 

$

4,121 

 

$

27,999 

 

8

 


 

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts) 

(UNAUDITED) 

 

 

The reclassification of goodwill to utility plant acquisition adjustment in the table above results from a mechanism approved by the applicable public utility commission.  The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with certain acquisitions upon achieving certain objectives. 

   

 

 

  

Note 3             Acquisitions

 

In May 2014, the Company entered into an asset purchase agreement for the acquisition of the water and wastewater utility system assets of North Maine Utilities owned by the Village of Glenview, Illinois serving approximately 7,200 customers, for cash at closing of up to $22,000, subject to final adjustment pursuant to the purchase agreement.  Closing of this acquisition is anticipated to occur in mid-year 2015.          

 

In March 2014, the Company acquired the wastewater utility system assets of Penn Township located in Chester County, Pennsylvania serving approximately 800 customers.  The total purchase price consisted of $3,668 in cash. 

 

In March 2013, the Company acquired the water and wastewater utility system assets of Total Environmental Solutions, Inc. located in Clearfield County, Pennsylvania serving approximately 4,200 customers.  The total purchase price consisted of $10,350 in cash. 

 

Note 4             Discontinued Operations and Other Disposition 

 

Discontinued Operations – In September 2012, the Company began to market for sale its water and wastewater operations in Florida, which served approximately 38,000 customers, and the Company’s wastewater treatment facility in Georgia.    In March, April, and December 2013, through five separate sales transactions, the Company completed the sale of its water and wastewater utility systems in Florida, which concluded its regulated operations in Florida.  The Company received total net proceeds from these sales of $88,934 and recognized a gain on sale of $21,178 ($13,766 after-tax), including a first quarter 2013 gain on sale of $6,451 ($4,193 after-tax).  One of the Company’s sales in Florida, which was completed in March 2013, and represented approximately 8% of its customers served in Florida, remains subject to customary regulatory review, for which the Company expects to receive the regulator’s decision by midyear 2014.  If the regulator does not approve this sale, the purchase price would be refunded and the assets sold would revert back to the Company.  On March 12, 2014, the Company completed the sale of its wastewater treatment facility in Georgia.     

 

The City of Fort Wayne, Indiana (the “City”) has authorized the acquisition by eminent domain of the northern portion of the utility system of one of the Company’s operating subsidiaries in Indiana (the “Northern Assets”).  In January 2008, the Company reached a settlement with the City to transition the Northern Assets in February 2008 upon receipt

9

 


 

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AQUA AMERICA, INC. AND SUBSIDIARIES 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts) 

(UNAUDITED) 

 

of the City’s initial valuation payment of $16,911.  The settlement agreement specifically stated that the final valuation of the Northern Assets will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation.  On February 12, 2008, the Company turned over the Northern Assets to the City upon receipt of the initial valuation payment.  The proceeds received by the Company are in excess of the book value of the assets relinquished.  No gain has been recognized due to the contingency over the final valuation of the assets.  The net book value of the Northern Assets has been removed from the consolidated balance sheet and the difference between the net book value and the initial payment received has been deferred and is recorded in other accrued liabilities on the Company’s consolidated balance sheet.  Once the contingency is resolved and the asset valuation is finalized, through the finalization of the litigation between the Company and the City, the amounts deferred will be recognized in the Company’s consolidated statement of net income.  On March 16, 2009, oral argument was held on certain procedural aspects with respect to the valuation evidence that may be presented and whether the Company is entitled to a jury trial.  On October 12, 2010, the Wells County Indiana Circuit Court ruled that the Company is not entitled to a jury trial, and that the Wells County judge should review the City of Fort Wayne Board of Public Works’ assessment based upon a “capricious, arbitrary or an abuse of discretion” standard.  The Company disagreed with the Court’s decision and appealed the Wells County Indiana Circuit Court’s decision to the Indiana Court of Appeals.  On January 13, 2012, the Indiana Court of Appeals reached a decision upholding the Wells County Indiana Circuit Court decision.  On February 10, 2012, the Company filed a petition for transfer requesting that the Indiana Supreme Court review the matter.  On April 11, 2013, the Indiana Supreme Court ruled that the statute at issue gives the Company the right to a full evidentiary hearing before a jury regarding the value of the assets and remanded the case to the trial court for a proceeding consistent with that ruling.  The Company continues to evaluate its legal options with respect to this decision.  Depending upon the outcome of all of the legal proceedings, including the planned transaction below, which would resolve this litigation, the Company may be required to refund a portion of the initial valuation payment, or may receive additional proceeds.  The Northern Assets relinquished represent approximately 0.4% of the Company’s total assets. 

 

In addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public convenience and necessity” to acquire certain of the Company's water utility system assets located in the southwest section of the City and in Allen County (the “Southern Assets”), and if negotiations with Fort Wayne officials were to fail, to condemn the Southern Assets.  The first public hearing on the ordinance was held on January 22, 2013 and a subsequent hearing scheduled for February 5, 2013 was not held due to ongoing settlement discussions between the parties.  On July 2, 2013, the Company’s operating subsidiary and the City signed a letter of intent, which among other items, addresses many of the terms by which the City would purchase the Company’s Southern Assets, will resolve the litigation between the Company and the City with respect to the Northern Assets, and will establish the terms by which the Company’s operating

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AQUA AMERICA, INC. AND SUBSIDIARIES 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts) 

(UNAUDITED) 

 

subsidiary will treat wastewater sent to it by the City.  The letter of intent states that the City agrees to pay the Company $50,100 for the Northern Assets and Southern Assets in addition to the $16,911 paid to the Company by the City in 2008 as an initial valuation payment for the Northern Assets (for a total payment of $67,011).  The letter of intent is conditioned on the Company’s Board of Directors and City Council approving the final terms of the possible transaction, and the Company and the City entering into several definitive agreements that cover the subject matter of the letter of intent.  On February 27, 2014, the Company’s Board of Directors authorized management to enter into agreements with the City on terms and conditions that are consistent with the July 2, 2013 letter of intent, for among other items, the sale of the Company’s Northern Assets and Southern Assets to the City.  Further, the completion of the transaction is subject to regulatory requirements and approval.  The planned sale of these operations is accounted for as businesses held for sale beginning in the first quarter of 2014.  If this transaction is consummated, the Company will expand its sewer customer base by accepting new wastewater from the City.  The completion of the transaction is not expected to close until the fourth quarter of 2014.  The Company continues to evaluate its legal and operational options on an ongoing basis.

 

The operating results, cash flows, and financial position of the Company’s operations named above, during the periods owned, have been presented in the Company’s consolidated statements of net income, consolidated statements of cash flow, and consolidated balance sheets as discontinued operations.  These operations were included in the Company’s “Regulated” segment.     

 

A summary of discontinued operations presented in the consolidated statements of net income include the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

Operating revenues

 

$

1,579 

 

$

7,493 

 

Total operating expenses

 

 

673 

 

 

5,020 

 

Operating income

 

 

906 

 

 

2,473 

 

Other (income) expense:

 

 

 

 

 

 

 

Loss (gain) on sale

 

 

134 

 

 

(6,451)

 

Other, net

 

 

 -

 

 

(1)

 

Income from discontinued operations before income taxes

 

 

772 

 

 

8,925 

 

Provision for income taxes

 

 

314 

 

 

3,224 

 

Income from discontinued operations

 

$

458 

 

$

5,701 

 

 

 

 

 

 

11

 


 

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AQUA AMERICA, INC. AND SUBSIDIARIES 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts) 

(UNAUDITED) 

 

The assets and liabilities of discontinued operations presented in the consolidated balance sheets include the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

$

39,747 

 

$

39,976 

 

Less: accumulated depreciation

 

 

8,753 

 

 

8,872 

 

Net property, plant and equipment

 

 

30,994 

 

 

31,104 

 

Current assets

 

 

814 

 

 

1,362 

 

Regulatory assets

 

 

442 

 

 

460 

 

Assets of discontinued operations held for sale

 

 

32,250 

 

 

32,926 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

15,209 

 

 

16,212 

 

Deferred income taxes and investment tax credits

 

 

1,725 

 

 

1,308 

 

Contributions in aid of construction

 

 

10,935 

 

 

10,935 

 

Other liabilities

 

 

1,168 

 

 

1,194 

 

Liabilities of discontinued operations held for sale

 

 

29,037 

 

 

29,649 

 

 

 

 

 

 

 

 

 

Net assets

 

$

3,213 

 

$

3,277 

 

 

 

 

 

 

 

 

 

]

 

Note 5             Capitalization

 

In May 2013, the Board of Directors of the Company approved a five-for-four stock split to be effected in the form of a 25% stock distribution to shareholders of record on August 16, 2013.  Common shares outstanding do not include shares held by the Company in treasury.  The new shares were distributed on September 1, 2013.  Aqua America’s par value of $0.50 per share did not change as a result of the common stock distribution, and $17,655 was transferred from capital in excess of par value to common stock to record the stock split.  All common share, per common share, stock unit, and per stock unit data, for all periods presented, has been adjusted to give effect to the stock split.   

 

Note 6             Fair Value of Financial Instruments 

 

The Company follows the Financial Accounting Standards Board’s (“FASB”) accounting guidance for fair value measurements and disclosures, which defines fair value and establishes a framework for using fair value to measure assets and liabilities.  That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques

12

 


 

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AQUA AMERICA, INC. AND SUBSIDIARIES 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts) 

(UNAUDITED) 

 

used to measure fair value.  The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are as follows: 

 

·

Level 1:  unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access; 

 

·

Level 2:  inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in non-active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or 

 

·

Level 3:  inputs that are unobservable and significant to the fair value measurement. 

 

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  There have been no changes in the valuation techniques used to measure fair value or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended March 31, 2014

 

Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented.  The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments. 

 

The fair value of funds restricted for construction activity and loans payable are determined based on their carrying amount and utilizing Level 1 methods and assumptions.  As of March 31, 2014 and December 31, 2013, the carrying amount of the Company’s funds restricted for construction activity was $47 and $47,  respectively, which equates to their estimated fair value.  As of March 31, 2014 and December 31, 2013, the carrying amount of the Company’s loans payable was $27,913 and $36,740, respectively, which equates to their estimated fair value.  The fair value of cash and cash equivalents, which is comprised of a money market fund, is determined based on the net asset value per unit utilizing Level 2 methods and assumptions.  As of March 31, 2014 and December 31, 2013, the carrying amounts of the Company's cash and cash equivalents was $17,508 and $5,058,  respectively, which equates to their fair value.   

 

 

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AQUA AMERICA, INC. AND SUBSIDIARIES 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts) 

(UNAUDITED) 

 

The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

Carrying Amount

 

$

1,595,829 

 

$

1,554,871 

 

Estimated Fair Value

 

 

1,622,265 

 

 

1,540,296 

 

 

The fair value of long-term debt has been determined by discounting the future cash flows using current market interest rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions.  The Company’s customers’ advances for construction have a carrying value of $73,728 as of March 31, 2014, and $73,892 as of December 31, 2013.   Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rate increases.  Portions of these non-interest bearing instruments are payable annually through 2029 and amounts not paid by the respective contract expiration dates become non-refundable.  The fair value of these amounts would, however, be less than their carrying value due to the non-interest bearing feature.

 

 

Note 7             Net Income per Common Share 

 

Basic net income per common share is based on the weighted average number of common shares outstanding.  Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares.  The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share.  The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.  The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

Average common shares outstanding during the period for basic computation

 

176,839 

 

175,415 

 

Dilutive effect of employee stock-based compensation

 

971 

 

1,084 

 

Average common shares outstanding during the period for diluted computation

 

177,810 

 

176,499 

 

 

 

 

 

 

 

For the three months ended March 31, 2014, all of the Company’s employee stock options were included in the calculations of diluted net income per share as the calculated cost to

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AQUA AMERICA, INC. AND SUBSIDIARIES 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts) 

(UNAUDITED) 

 

exercise the stock options was less than the average market price of the Company’s common stock during these periods.  For the three months ended March 31, 2013, employee stock options to purchase 494,156 shares of common stock, were excluded from the calculations of diluted net income per share as the calculated cost to exercise the stock options was greater than the average market price of the Company’s common stock during these periods. 

 

 

 

 

 

 

Note 8              Stock-based Compensation 

 

Under the Company’s 2009 Omnibus Equity Compensation Plan (the “2009 Plan”), as approved by the Company’s shareholders to replace the 2004 Equity Compensation Plan (the “2004 Plan”), stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors.  The 2009 Plan authorizes 6,250,000 shares for issuance under the plan.  A maximum of 50% of the shares available for issuance under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards and the maximum number of shares that may be subject to grants under the 2009 Plan to any one individual in any one year is 250,000.  Awards under the 2009 Plan are made by a committee of the Board of Directors.  At March 31, 2014, 4,483,011 shares underlying stock-based compensation awards were still available for grants under the 2009 Plan.  No further grants may be made under the 2004 Plan.   

 

Performance Share Units – A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the three year performance period specified in the grant, subject to certain exceptions through the respective vesting period, generally three years.  Each grantee is granted a target award of PSUs, and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals.  The following table provides compensation costs for stock-based compensation related to performance share units: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

Stock-based compensation for performance share units within operations and maintenance expenses

 

$

1,002 

 

$

715 

 

Income tax benefit

 

 

410 

 

 

291 

 

15

 


 

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 nonvested PSU transactions for the three months ended March 31, 2014:   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

Weighted

 

 

 

 

of

 

Average

 

 

 

 

Share Units

 

Fair Value

 

 

 

 

 

 

 

 

 

Nonvested share units at beginning of period

 

 

528,092 

 

$

21.25 

 

Granted

 

 

143,630 

 

 

25.31 

 

Performance criteria adjustment

 

 

16,927 

 

 

19.45 

 

Forfeited

 

 

(3,939)

 

 

22.23 

 

Share units vested in prior period and issued in current period

 

 

18,000 

 

 

19.51 

 

Share units issued