Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, Pennsylvania 19010
877.987.2782
AquaAmerica.com
NYSE: WTR
2016
Annual Report
Aqua America, Inc.
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Fulfilling Our Mission
With Dedication.
Aqua America continued to fulfill its mission to protect and
provide Earth’s most essential resource by making meaningful
advancements in the areas of service delivery, growth
opportunities, stakeholder education, community outreach and
workforce diversity in 2016.
Aqua America’s customers continued to see improvements in
water and service reliability delivered by the company. Progressive
legislation in Pennsylvania set the stage for additional opportunities
for Aqua America to bring its expertise to new communities. The
company worked cooperatively with environmental regulators to
maintain water quality compliance, using its engineering, operations
and technical expertise to address challenges in troubled systems.
Aqua America continued its environmental stewardship by
volunteering and financially supporting various activities, like
stream cleanups, to ensure clean water for everyone. All of these
efforts are being accomplished with a professional workforce,
which Aqua America is continuing to develop and grow, with the
goal of sustaining excellent quality and service, and achieving a
level of diversity that reflects the customers we serve.
Corporate Information
Non-executive Chairman and former
President and Chief Executive Officer
President and Chief Executive Officer
Executive Vice President, Business Operations
Founder, Chairman and Chief Executive Officer
Robert A. Rubin
Officers
Christopher H. Franklin
Richard S. Fox
Executive Vice President and Chief Operating
Officer, Regulated Operations
Karen M. Heisler
Senior Vice President and
Chief Human Resources Officer
Christopher P. Luning
Senior Vice President, General Counsel and
Secretary
William C. Ross
Senior Vice President
Engineering and Environmental Affairs
Senior Vice President
Controller and Chief Accounting Officer
Daniel J. Schuller, PhD.
Executive Vice President
Corporate Development and Strategy
David P. Smeltzer
Executive Vice President
Chairman, President and Chief Executive Officer
Chief Financial Officer
Board Of Directors
Nicholas DeBenedictis
Chief Executive Officer
Aqua America, Inc.
Director since 1992
Christopher H. Franklin
Aqua America, Inc.
Director since 2015
Carolyn J. Burke
and Systems
Dynegy, Inc.
Director since 2016
Richard H. Glanton
Elected Face, Inc.
Director since 1995
Lon R. Greenberg
Chairman Emeritus
UGI Corporation
Director since 2005
William P. Hankowsky
Liberty Property Trust
Director since 2004
Wendell F. Holland, Esq.
Partner
CFSD Group, LLC.
Director since 2011
Ellen T. Ruff
Partner
McGuireWoods, LLP.
Director since 2006
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Financial Highlights
in thousands of dollars, except per-share amounts
AQUA AMERICA 2016 ANNUAL REPORT | 2
Operating revenues
Regulated segment
Operating revenues
Operating and maintenance expense
Net Income
Diluted net income per common share
Exclude:
Joint venture impairment charge
Tax effect
Adjusted income (a)
(Non-GAAP financial measure)
Adjusted income per common share (a)
(Non-GAAP financial measure)
Annualized dividend rate
per common share (12/31)
Total assets
Number of utility customers served (c)
2016
2015
% Change
$819,875
$814,204
0.7%
$800,107
$285,347
$234,182
$1.32
$779,613
$282,866
$201,790
$1.14
2.6%
0.9%
16.1%
15.8%
-
-
$32,975
($11,542)
$234,182
$223,223
4.9%
$1.32
$0.77
$1.26
4.8%
$0.71
7.8%
$6,158,991
$5,717,873
972,265
956,983
7.7%
1.6%
$1.32
$1.26
$1.20
$1.15
$1.04
Adjusted
Income from
Continuing
Operations
per Share
(diluted) (b)
Weighted
Average Cost
of Long-term
Fixed-rate
Debt
5.06%
5.00%
4.85%
4.57%
4.26%
’ 12
’ 13
’ 14
’ 15
’ 16
’ 12
’ 13
’ 14
’ 15
’ 16
972,265
956,983
Utility
Customer
Connections
(continuing
operations)
(c)
940,119
928,200
917,986
$0.765
$0.712
$0.660
Dividend
per Share
(annualized)
$0.608
$0.560
’ 12
’ 13
’ 14
’ 15
’ 16
’ 12
’ 13
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’ 15
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(a) The GAAP financial measures are net income and net income per share. Please see our investor relations page of AquaAmerica.com for a reconciliation of the GAAP to non-GAAP
financial measures.
(b) 2015 Income from Continuing Operations adjusted for Joint Venture Impairment Charge (a Non-GAAP Financial Measure). 2015 Income from Continuing Operations per Share was $1.14.
(c) 2015 excludes 883 customers associated with utility systems disposed of during 2016.
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A Letter From the
Chairman and the
President & CEO.
Nicholas DeBenedictis
Chairman
Christopher H. Franklin
President and
Chief Executive Officer
We celebrated Aqua America’s rich history
in 2016 when the company reached the
important milestone of becoming 130 years
old. The company was founded in 1886 in
Springfield, Pennsylvania and has since
grown into the second largest publicly
traded water utility in the nation. In 2016,
we also celebrated the formation of the
company’s strong new leadership team
that is responsible for the future success of
the company. Our founders laid the strong
foundation on which we are building the future
by investing record levels of capital to replace
aging infrastructure. This investment will be
key to providing sustainable quality water and
wastewater service to our customers.
Throughout the year, our operating team
continued to uphold our well-known standard
of operational excellence. Additionally, we
focused on growing our customer base and
bringing our quality service to an even larger
group of customers. In fact, we developed
a revised and more focused approach to
growth, which yielded strong customer
growth. Focusing our efforts on the right
initiatives is critical and that’s the reason we
exited some non-core businesses that were
not scalable and had become distractions to
our management team.
Corporate culture development was also at
the center of our activity as we continued
to make safety, integrity and respect central
threads in the fabric of our culture. We spend
valuable time to select and retain employees
who share our values and engage in our
important mission.
Our nation faced real challenges in water
treatment in 2016. The incident in Flint,
Michigan was the most prominent, but it
seems that similar stories are in the news
almost daily.
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AQUA AMERICA 2016 ANNUAL REPORT | 4
us in the water and wastewater space are more numerous
than either of us has seen during our long tenures at the
company. While as a nation we might struggle with aging
infrastructure, rebuilding is at the core of what we do and
we continue to believe that we can play an increasing role
in helping to solve the country’s water and wastewater
problems.
While we are committed to growing this great company,
we understand and believe in the importance of our
quarterly cash dividends to our shareholders. In August
2016, Aqua America’s board of directors increased the
quarterly cash dividend for the 26th time in the past 25
years. The dividend was raised 7.5 percent to $0.1913
per-share, effective September 1, 2016. To date, Aqua
In 2016 alone, we invested at a record level
(nearly $400 million) in infrastructure to support
this mission and we are committed to investing
$1.2 billion over the next three years.
America has paid consecutive quarterly dividends to
its shareholders for 72 years. The board’s decision to
increase the quarterly dividend reflects our confidence in
the company’s ability to continue delivering strong results
based on its strategy for future performance.
The success we achieved in 2016 was a result of our
employees who remain customer-focused as they fulfill
our mission to protect and provide Earth’s most essential
resource every day. On behalf of the board and the entire
senior leadership team, we thank each and every one of
them for all they have done to ensure another great year
for our company. We also thank you, our shareholders,
for their confidence and support, which enables us to
execute our mission successfully.
Lastly, I invite you to visit AquaAmerica.com to learn
more about our great company and stay abreast of the
latest news about the company.
Sincerely,
Christopher H. Franklin
President and CEO
Nicholas DeBenedictis
Chairman of the Board
Our mission is clear at Aqua America: protecting and
providing Earth’s most essential resource. In 2016 alone,
we invested a record level (nearly $400 million) in
infrastructure rehabilitation to support this mission and
we are committed to investing $1.2 billion over the next
three years. Aqua America’s nearly 1,600 dedicated utility
professionals come to work every day to ensure that we
provide quality water and wastewater service to the 3
million people who rely on us for these life sustaining
services.
Growing our customer base is important for shareholders
and our existing customers. Economies of scale are
critical in the utility business as we work to spread the
large fixed cost of plants and water pipes over a growing
base of customers – to keep costs
and rates down while improving
returns for shareholders. Last year,
we invested more than $22 million to
acquire 13 water and six wastewater
systems. Coupled with organic
growth, the company increased its
customer base by 1.6 percent for
the year. We think it is important
to note that the majority of these
acquisitions do not yet reflect the new size range that we
have strategically targeted -- 2,500 to 25,000 customers.
The majority of the 2016 acquisitions were initiated
before we refocused our strategy on larger opportunities,
but the work that we began in 2015 and continues today,
will focus our efforts on larger opportunities. We believe
this refocused strategy is already making a difference.
One of the efforts that really started to generate
momentum in 2016 was legislation that has now passed
in Illinois and Pennsylvania, which allows companies like
ours to acquire municipal water and wastewater systems
at their fair market value, rather than the system’s
depreciated original cost. We see this as an opportunity
to provide a solution for some of the municipal utilities
that are struggling to meet regulatory standards and
cannot raise the capital associated with infrastructure
replacement.
To put the increased activity in perspective -- we
currently have agreements in place to acquire the assets
of four municipal systems in 2017. Collectively, these
agreements are valued at more than $100 million. While
the opportunities are exciting, we want to assure you
that our investment committee maintains strict discipline
based on a framework that we believe provides value to
both customers and shareholders.
As we look to the future, we are as optimistic as ever
about this company. The opportunities we see in front of
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“
Improving Infrastructure
Improves Quality of Life.
Rick Fox
Executive Vice President and Chief Operating Officer
Our nation’s water and wastewater
wastewater infrastructure, including
infrastructure requires significant
the pipes that carry wastewater to
investment for rehabilitation and
treatment plants and the technology
expansion. Aqua America’s operating
that treats the wastewater. In 2013,
subsidiaries are uniquely qualified to
it was estimated that $384 billion in
provide solutions. The most recent
improvements was needed for the
surveys from the U.S. Environmental
nation’s drinking water infrastructure
Protection Agency (EPA) show that
through 2030, to address countless
$271 billion is needed within five years
miles of transmission and distribution
(of January 2016) to maintain and
pipes and thousands of treatment
“
improve the
nation’s
plants and storage tanks, which are all
vital to public health and the economy.
Often, municipalities are faced with
competing priorities. When Aqua
America purchases these systems, it
brings to bear the capital, engineering,
and technical expertise to address
municipal water and wastewater
challenges, so that finite tax dollars
can be used for other local
government needs.
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Iron and manganese are naturally occurring
Aqua North Carolina is in the second year of a
metals found in the ground in several areas of
multi-year program to install such systems in
the U.S. Neither is considered a public health
communities with the most persistent iron and
issue in drinking water, but left unaddressed,
manganese problems, significantly improving
each can cause drinking water to be discolored
water quality for approximately 8,500 homes
and affect its taste and odor, making it
(25,000 residents) in Wake, Surry, Catawba, and
unpalatable to customers.
Gaston counties.
Without a treatment removal system, water
Similarly, Aqua Illinois installed a new iron
companies generally use a chemical process
pressure filter as part of a major overhaul of the
that reduces the ability for the metals to move
McHenry Shores water system that reduced
freely in the pipes, reducing the potential for
iron levels in that community by 75 percent.
discoloration. When coupled with routine
flushing, this option can be effective in some
situations. In many areas, however, treatment
removal systems are required.
Chris Johnson
Customer, McHenry Shores, IL
“
“
I’ve seen a drastic reduction in the red iron in my home
water. … I want to just thank you for the investment in the
McHenry Shores water system. … great job and continue
doing what you guys have been doing to improve our water.
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AQUA AMERICA 2016 ANNUAL REPORT | 6
Working With
Community Leaders to
Benefit the Environment.
“
Our water and wastewater operations
are directly impacted by local, state
and federal regulations and legislation.
We maintain consistent, open and
transparent communications with
regulators and legislators. This approach
ensures these key stakeholders are
educated and prepared to make
informed, solution-oriented decisions
about our operations that complement
our charge to provide safe and reliable
service to more customers.
Kimberly Joyce
Vice President, Regulatory,
Government and External Affairs
“
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In each case, the municipalities received a fair
price for their assets, and customers have enjoyed
the benefits of more than $4 million in needed
infrastructure improvements...
In April 2016, Pennsylvania became the fourth
A similar law was passed in Illinois in 2013,
state in the Aqua America footprint to have water
enabling Aqua Illinois to acquire four municipal
and wastewater fair market valuation legislation
systems—North Maine Utilities in 2015 and Crystal
when Governor Tom Wolf signed Act 12, “fair
Clear Water Company, Eastwood Manor Water
market legislation,” into law. As municipalities and
Company and Nunda Utilities in 2016. In each case,
authorities face looming infrastructure upgrades to
the municipalities received a fair price for their
comply with environmental regulations and other
assets, and customers have enjoyed the benefits
financial challenges, many are looking to divest
of more than $4 million in needed infrastructure
their water and wastewater assets. The legislation
improvements, including the replacement of
sets streamlined guidelines for these governmental
aging water mains, service lines, hydrants and
entities to sell their systems to regulated water and
meters. These improvements enable Aqua America
wastewater companies if they choose. Customers
subsidiaries to provide better service for customers
benefit from having a professional water or
and conserve water by replacing aged, and often
wastewater provider with the capital and industry
leaking, water mains.
expertise to address infrastructure needs and
environmental compliance, the latter of which is
becoming more of a challenge with increasingly
stringent regulations. The municipality or authority
is able to refocus its attention—and proceeds if
necessary—on other community priorities like
schools, public safety and economic development.
Fair market valuation legislation is a new tool in
the toolbox of local governments. For those who
choose to use it, this mechanism can provide a
direct benefit for their communities, creating a
win-win for customers, the environment and Aqua
America.
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AQUA AMERICA 2016 ANNUAL REPORT | 8
Collaborating to Ensure Our
Water Is Protected.
Chris Crockett
Vice President and Chief Environmental Officer
“
Routine communications with
environmental regulators and public
on a variety of local, regional and
national regulatory policies and
interest organizations is crucial
environmental issues, and share
to ensuring that we understand
scientific information with them to
their expectations and that our
augment their body of knowledge
counterparts
understand our
perspectives.
We collaborate
with stakeholders
about drinking water and wastewater.
These relationships often result
in partnerships that benefit both
customers and the environment.
“
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The U.S. Environmental Protection Agency’s
source of supply for its Pickering treatment
(EPA) Partnership for Safe Water is a voluntary
plant, the company’s largest surface water
cooperative effort between the EPA, the American
facility. Employees also participate in watershed
Water Works Association and other drinking
protection efforts such as tree planting, watershed
water organizations, representing more than 200
monitoring, educational events, and cleanups
surface water utilities throughout the United
along regional waterways that provide water to
States. The objective of the organization is to
three of its large surface water treatment plants.
encourage water suppliers to minimize the risk to
their consumers through continuous improvement
in surface water treatment plant performance.
There are four levels of distinction to be reached
via a process that
the EPA describes
as “an arduous
and difficult self-
assessment.” Aqua
America has a total
Roaring Creek Plant wins the
Phase IV President’s Award in
November 2016.
of 17 plants participating throughout its four states
with surface water: Pennsylvania, Ohio, Illinois and
Virginia. The highest level of distinction earns the
participant the prestigious Excellence in Water
Treatment Award. Aqua Pennsylvania’s Roaring
Creek plant is just one level away, having achieved
the organization’s second-highest award—the
Phase IV President’s Award in November 2016.
From left to right: Gary Hampton, Dan Ogden, Terry Weidner,
Rich Kotwica. Not pictured: Jeremy Nicodemus, Bryan Yagel,
Aaron Tom and Mike Budwash.
Aqua Illinois has been as a member of the
Kankakee River Basin Commission for decades
Aqua Pennsylvania is also a partner to the
and now has permanent representation on its
Schuylkill Action Network, a source water
board. Aqua Illinois Regional Environmental
protection organization dedicated to the
Compliance Manager Kevin Culver is currently
protection of the Schuylkill River—a primary
board secretary for the organization. He also
serves as vice chairman of the Illinois State
American Water Works Association source water
protection committee and was appointed vice
chairman of the Northeastern Illinois Regional
Kevin Culver - Aqua Illinois
Regional Environmental
Compliance Manager
Groundwater
Protection
and Planning
Committee by the
Illinois EPA. Aqua
Illinois is also a
member of the statewide Nutrient Loss Reduction
Strategy Workgroup, which plays a significant
role in reducing the impact of farming activity
on Illinois’ rivers among other things. In addition,
Aqua Illinois employees are active participants in
the Northern Illinois Anglers Association’s adopt-
the-river cleanups.
AQUA AMERICA 2016 ANNUAL REPORT | 10
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Forging A Stronger, More
Diverse Workforce.
“
Aqua America nearly quadrupled its
customer base in the last 25 years,
bringing our services to larger, more
diverse populations throughout eight
states. Maintaining this growth trend
requires continued excellence from a
workforce that reflects the diversity
of the communities we serve. Our
aspirational goal is to be an industry
leader in workforce diversity and inclusion
by attracting, engaging, developing and
retaining high-potential diverse talent
across all levels of the organization.
“
Karen Heisler
Senior Vice President and Chief Human Resources Officer
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Carolyn Stout
Facility Operator I
“
When I first started four years ago, I worked as if I had
something to prove. I didn’t want the men to believe I got
the job because I was female. I wanted to be sure they
knew I was as qualified as they were. I could tell they
were not used to working with women. It actually took
about two years for them to loosen up and realize that
they could be themselves around me. I’ve never been
mistreated and no one has ever said anything to make me
feel uncomfortable. Honestly, I don’t think they needed
to behave any differently for me. I have the pleasure of
working with a group of very nice and polite men.
“
“
Tori Murry
Facility Operator I
I have a great role model in my mother who still works
in the male-dominated gas sector of a major energy
company. It took her five years to become comfortable
working in a predominantly male workplace. I’ve always
been treated fairly and have learned a lot from my male
coworkers. But working in industries that are traditionally
dominated by the opposite gender inherently leads to
some level of discomfort for men and women alike. I
don’t believe that’s always a bad thing—it helps us learn
about one another. Women bring a different and valuable
perspective to the traditionally male workplace. I’m glad
that Aqua understands that benefit and is working to
increase diversity throughout the organization.
“
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AQUA AMERICA 2016 ANNUAL REPORT | 12
2016
Financial Data
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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)
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report (the “Annual Report”) are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are made based
upon, among other things, our current assumptions, expectations, plans, and beliefs concerning future events and their
potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are
outside our control that may cause our actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you
can identify forward-looking statements 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.
Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these forward-looking statements, including but not limited
to:
•
•
•
changes in general economic, business, credit and financial market conditions;
changes in governmental laws, regulations and policies, including those dealing with taxation, the
environment, health and water quality, and public utility regulation;
changes to the rules or our assumptions underlying our determination of what qualifies for an income tax
deduction for qualifying utility asset improvements;
the decisions of governmental and regulatory bodies, including decisions on rate increase requests;
the extent to which we are able to develop and market new and improved services;
the effect of the loss of major customers;
abnormal weather conditions, including those that result in water use restrictions;
changes in, or unanticipated, capital requirements;
changes in our credit rating or the market price of our common stock;
changes in valuation of strategic ventures;
•
• our ability to file rate cases on a timely basis to minimize regulatory lag;
•
•
•
•
• our ability to integrate businesses, technologies or services which we may acquire;
• our ability to manage the expansion of our business;
• our ability to treat and supply water or collect and treat wastewater;
•
•
• our ability to retain the services of key personnel and to hire qualified personnel as we expand;
•
•
•
•
•
•
labor disputes;
increasing difficulties in obtaining insurance and increased cost of insurance;
cost overruns relating to improvements to, or the expansion of, our operations;
increases in the costs of goods and services;
civil disturbance or terroristic threats or acts;
the continuous and reliable operation of our information technology systems, including the impact of cyber
security attacks or other cyber-related events;
changes in accounting pronouncements;
litigation and claims; and
changes in environmental conditions, including the effects of climate change.
•
•
•
1
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)
Given these risks and uncertainties, you should not place undue reliance on any forward-looking statements. You should
read this Annual Report completely and with the understanding that our actual future results, performance and
achievements may be materially different from what we expect. These forward-looking statements represent assumptions,
expectations, plans, and beliefs only as of the date of this Annual Report. Except for our ongoing obligations to disclose
certain information under the federal securities laws, we are not obligated, and assume no obligation, to update these
forward-looking statements, even though our situation may change in the future. For further information or other factors
which could affect our financial results and such forward-looking statements, see Risk Factors included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2016.
OVERVIEW
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 included in this Annual Report. This discussion contains forward-
looking statements that are based on management’s current expectations, estimates and projections about our business,
operations and financial performance. All dollar amounts are in thousands of dollars, except per share amounts.
The Company
Aqua America, Inc., (referred to as “Aqua America”, the “Company”, “we”, “us”, or “our”), 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 is Aqua Pennsylvania, Inc., which accounted for approximately 52% of our operating
revenues and approximately 74% of our net income for 2016. As of December 31, 2016, Aqua Pennsylvania provided
water or wastewater services to approximately one-half of the total number of people we serve. Aqua Pennsylvania’s
service territory is 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 Resources, Inc. and Aqua Infrastructure,
LLC. 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 sewer line repair service and protection solutions to households.
In 2016, the Company sold the following business units of Aqua Resources, which were reported as assets held for sale in
the Company’s consolidated balance sheets:
•
•
a business unit which provided liquid waste hauling and disposal services; and
a business unit which inspected, cleaned and repaired storm and sanitary wastewater lines.
Additionally, in 2016, the Company decided to market for sale a business unit within Aqua Resources, which installs and
tests devices that prevent the contamination of potable water, for which the sale was completed in January 2017, and a
business unit that repairs and performs maintenance on water and wastewater systems. These business units are reported
as assets held for sale in the Company’s consolidated balance sheets. Aqua Infrastructure provides non-utility raw water
supply services for firms in the natural gas drilling industry.
Industry Mission
The mission of the investor-owned water utility industry is to provide quality and reliable water service at reasonable rates
to customers, while earning a fair return for shareholders. A number of challenges face the industry, including:
• strict environmental, health and safety standards;
• aging utility infrastructure and the need for substantial capital investment;
• economic regulation by state, and/or, in some cases, local government;
• declining consumption per customer as a result of conservation;
• lawsuits and the need for insurance; and
2
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 impact of weather and sporadic drought conditions on water sales demand.
Economic Regulation
Most of our water and wastewater utility operations are subject to regulation by their respective state utility commissions,
which have broad administrative power and authority to regulate billing rates, determine franchise areas and conditions of
service, approve acquisitions, and authorize the issuance of securities. The utility commissions also generally establish
uniform systems of accounts and approve the terms of contracts with affiliates and customers, business combinations with
other utility systems, and loans and other financings. The policies of the utility commissions often differ from state to
state, and may change over time. A small number of our operations are subject to rate regulation by county or city
government. Over time, the regulatory party in a particular state may change, as was the case for our Texas operations
where, in 2014, economic regulation changed from the Texas Commission on Environmental Quality to the Texas Public
Utility Commission. The profitability of our utility operations is influenced to a great extent by the timeliness and
adequacy of rate allowances in the various states in which we operate. One consideration we may undertake in evaluating
which states to focus our growth and investment strategy is whether a state provides for consolidated rates, a surcharge for
replacing and rehabilitating infrastructure and other systems, and other regulatory policies that promote infrastructure
investment and efficiency in processing rate cases.
Rate Case Management Capability – We strive to achieve the industry’s mission by effective planning, efficient
investments, and productive use of our resources. We maintain a rate case management capability to pursue timely and
adequate returns on the capital investments that we make in improving our distribution system, treatment plants,
information technology systems, and other infrastructure. This capital investment creates assets that are used and useful
in providing utility service, and is commonly referred to as rate base. Timely, adequate rate relief is important to our
continued profitability and in providing a fair return to our shareholders, and thus providing access to capital markets to
help fund these investments. Accordingly, the objective of our rate case management strategy is to provide that the rates
of our utility operations reflect, to the extent practicable, the timely recovery of increases in costs of operations (primarily
labor and employee benefits, electricity, chemicals, transportation, maintenance expenses, insurance and claims costs, and
costs to comply with environmental regulations), capital, and taxes. In pursuing our rate case strategy, we consider the
amount of net utility plant additions and replacements made since the previous rate decision, the changes in the cost of
capital, changes in our capital structure, and changes in operating and other costs. Based on these assessments, our utility
operations periodically file rate increase requests with their respective state utility commissions or local regulatory
authorities. In general, as a regulated enterprise, our water and wastewater rates are established to provide full recovery of
utility operating costs, taxes, interest on debt used to finance capital investments, and a return on equity used to finance
capital investments. Our ability to recover our expenses in a timely manner and earn a return on equity employed in the
business helps determine the profitability of the Company. As of December 31, 2016, the Company’s rate base is
estimated to be $3,750,000, which is comprised of:
• $2,873,000 filed with respective state utility commissions or local regulatory authorities; and
• $877,000 not yet filed with respective state utility commissions or local regulatory authorities.
Our water and wastewater operations are composed of 53 rate divisions, each of which requires a separate rate filing for
the evaluation of the cost of service and recovery of investments in connection with the establishment of tariff rates for
that rate division. When feasible and beneficial to our utility customers, we have sought approval from the applicable
state utility commission to consolidate rate divisions to achieve a more even distribution of costs over a larger customer
base. All of the eight states in which we operate currently permit us to file a revenue requirement using some form of
consolidated rates for some or all of the rate divisions in that state.
Revenue Surcharges – Six states in which we operate water utilities, and five states in which we operate wastewater
utilities, permit us to add a surcharge to water or wastewater bills to offset the additional depreciation and capital costs
associated with capital expenditures related to replacing and rehabilitating infrastructure systems. In all other states, water
and wastewater utilities absorb all of the depreciation and capital costs of these projects between base rate increases
without the benefit of additional revenues. The gap between the time that a capital project is completed and the recovery
of its costs in rates is known as regulatory lag. This surcharge is intended to substantially reduce regulatory lag, which
3
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)
often acts as a disincentive to water and wastewater utilities to rehabilitate their infrastructure. In addition, some states
permit our subsidiaries to use a surcharge or credit on their bills to reflect allowable changes in costs, such as changes in
state tax rates, other taxes and purchased water costs, until such time as the new costs are fully incorporated in base rates.
Effects of Inflation – Recovery of the effects of inflation through higher water and wastewater rates is dependent upon
receiving adequate and timely rate increases. However, rate increases are not retroactive and often lag increases in costs
caused by inflation. On occasion, our regulated utility companies may enter into rate settlement agreements, which
require us to wait for a period of time to file the next base rate increase request. These agreements may result in
regulatory lag whereby inflationary increases in expenses may not yet be reflected in rates, or a gap may exist between
when a capital project is completed and the start of its recovery in rates. Even during periods of moderate inflation, the
effects of inflation can have a negative impact on our operating results.
Growth-Through-Acquisition Strategy
Part of our strategy to meet the industry challenges is to actively explore opportunities to expand our utility operations
through acquisitions of water and wastewater utilities either in areas adjacent to our existing service areas or in new
service areas, and to explore acquiring market-based businesses that are complementary to our regulated water and
wastewater operations. To complement our growth strategy, we routinely evaluate the operating performance of our
individual utility systems, and in instances where limited economic growth opportunities exist or where we are unable to
achieve favorable operating results or a return on equity that we consider acceptable, we will seek to sell the utility system
and reinvest the proceeds in other utility systems. Consistent with this strategy, we are focusing our acquisitions and
resources in states where we have critical mass of operations in an effort to achieve economies of scale and increased
efficiency. Our growth-through-acquisition strategy allows us to operate more efficiently by sharing operating expenses
over more utility customers and provides new locations for possible future growth. Another element of our growth
strategy is the consideration of opportunities to expand by acquiring other utilities, including those that may be in a new
state if they provide promising economic growth opportunities and a return on equity that we consider acceptable. The
ability to successfully execute this strategy and meet the industry challenges is largely due to our core competencies,
financial position, and our qualified and trained workforce, which we strive to retain by treating employees fairly and
providing our employees with development and growth opportunities.
During 2016, we completed 19 acquisitions, which along with the organic growth in our existing systems, represents
15,282 new customers. During 2015, we completed 16 acquisitions, which along with the organic growth in our existing
systems, represents 17,747 new customers. During 2014, we completed 16 acquisitions, which along with the organic
growth in our existing systems, represents 12,120 new customers.
In addition to acquisitions, from time to time, we sell utility systems or relinquish ownership in systems through
condemnation. Consistent with our strategy to evaluate future growth opportunities and the financial performance of our
individual utility systems, we divested our wastewater treatment facility in Georgia in March 2014. In addition, in
December 2014, we sold our water utility systems in Fort Wayne, Indiana.
The operating results, cash flows, and financial position of the Company’s water utility systems in Fort Wayne, Indiana
and Georgia were presented in the Company’s consolidated financial statements as discontinued operations.
We believe that utility acquisitions, organic growth, and expansion of our market-based business will continue to be the
primary sources of growth for us. With approximately 53,000 community water systems in the U.S., 82% of which serve
less than 3,300 customers, the water industry is the most fragmented of the major utility industries (telephone, natural gas,
electric, water and wastewater). In the states where we operate regulated utilities, we believe there are approximately
14,500 community water systems of widely-varying size, with the majority of the population being served by
government-owned water systems.
Although not as fragmented as the water industry, the wastewater industry in the U.S. also presents opportunities for
consolidation. According to the U.S. Environmental Protection Agency’s (“EPA”) most recent survey of wastewater
treatment facilities (which includes both government-owned and privately-owned facilities) in 2012, there are
4
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)
approximately 15,000 such facilities in the nation serving approximately 76% of the U.S. population. The remaining
population represents individual homeowners with their own treatment facilities; for example, community on-lot disposal
systems and septic tank systems. The vast majority of wastewater facilities are government-owned rather than privately-
owned. The EPA survey also indicated that there are approximately 4,000 wastewater facilities in operation in the states
where we operate regulated utilities.
Because of the fragmented nature of the water and wastewater utility industries, we believe that there are many potential
water and wastewater system acquisition candidates throughout the United States. We believe the factors driving the
consolidation of these systems are:
• the benefits of economies of scale;
• the increasing cost and complexity of environmental regulations;
• the need for substantial capital investment;
• the need for technological and managerial expertise;
• the desire to improve water quality and service;
• limited access to cost-effective financing;
• the monetizing of public assets to support, in some cases, the declining financial condition of municipalities; and
• the use of system sale proceeds by a municipality to accomplish other public purposes.
We are actively exploring opportunities to expand our water and wastewater utility operations through regulated utility
acquisitions or otherwise, including the management of publicly-owned facilities in a public-private partnership. We
intend to continue to pursue acquisitions of government-owned and privately-owned water and wastewater utility systems
that provide services in areas near our existing service territories or in new service areas. It is our intention to focus on
growth opportunities in states where we have critical mass, which allows us to improve economies of scale through
spreading our fixed costs over more customers – this cost efficiency should enable us to reduce the size of future rate
increases. 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 pursue growth ventures in market-based activities, such as
infrastructure opportunities that are supplementary and complementary to our regulated businesses.
Sendout
Sendout represents the quantity of treated water delivered to our distribution systems. We use sendout as an indicator of
customer demand. Weather conditions tend to impact water consumption, particularly during the late spring, summer, and
early fall when discretionary and recreational use of water is at its highest. Consequently, a higher proportion of annual
operating revenues are realized in the second and third quarters. In general, during this period, an extended period of hot
and dry weather increases water consumption, while above-average rainfall and cool weather decreases water
consumption. Conservation efforts, construction codes that require the use of low-flow plumbing fixtures, as well as
mandated water use restrictions in response to drought conditions can reduce water consumption. We believe an increase
in conservation awareness by our customers, including the increased use of more efficient plumbing fixtures and
appliances, may continue to result in a long-term structural trend of declining water usage per customer. These gradual
long-term changes are normally taken into account by the utility commissions in setting rates, whereas significant short-
term changes in water usage, resulting from drought warnings, water use restrictions, or extreme weather conditions, may
not be fully reflected in the rates we charge between rate proceedings.
On occasion, drought warnings and water use restrictions are issued by governmental authorities for portions of our
service territories in response to extended periods of dry weather conditions, regardless of our ability to meet unrestricted
customer water demands. The timing and duration of the warnings and restrictions can have an impact on our water
revenues and net income. In general, water consumption in the summer months is affected by drought warnings and
restrictions to a higher degree because discretionary and recreational use of water is highest during the summer months,
particularly in our northern service territories. At other times of the year, warnings and restrictions generally have less of
an effect on water consumption. Currently, portions of our Pennsylvania (four counties), New Jersey, and Texas service
areas are under drought warnings. The entire Pennsylvania and New Jersey service areas are under drought watch.
5
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)
Portions of our northern and central Texas service areas have conservation water restrictions. Drought warnings and
watches result in the public being asked to voluntarily reduce water consumption.
The geographic diversity of our utility customer base reduces the effect of our exposure to extreme or unusual weather
conditions in any one area of the country. During the year ended December 31, 2016, our operating revenues were
derived principally from the following states: approximately 52% in Pennsylvania, 13% in Ohio, 9% in Texas, 8% in
Illinois, and 7% in North Carolina.
Performance Measures Considered by Management
We consider the following financial measures (and the period to period changes in these financial measures) to be the
fundamental basis by which we evaluate our operating results:
•
earnings per share;
• operating revenues;
•
•
•
• net income; and
•
the dividend rate on common stock.
income from continuing operations;
earnings before interest, taxes, and depreciation (“EBITD”);
earnings before income taxes as compared to our operating budget;
In addition, we consider other key measures in evaluating our utility business performance within our Regulated segment:
• our number of utility customers;
•
the ratio of operations and maintenance expense compared to operating revenues (this percentage is termed
“operating expense ratio”);
return on revenues (income from continuing operations divided by operating revenues);
rate base growth;
return on equity (net income divided by stockholders’ equity); and
the ratio of capital expenditures to depreciation expense.
•
•
•
•
Furthermore, we review the measure of earnings before unusual items that are noncash and not directly related to our core
business, such as the measure of adjusted earnings to remove the joint venture impairment charge, which was recognized
in the fourth quarter of 2015. Refer to Note 1 – Summary of Significant Accounting Policies – Investment in Joint Venture
in this Annual Report for information regarding the impairment charge. We review these measurements regularly and
compare them to historical periods, to our operating budget as approved by our Board of Directors, and to other publicly-
traded water utilities.
Our operating expense ratio is one measure that we use to evaluate our operating efficiency and management effectiveness
of our regulated operations. Our operating expense ratio is affected by a number of factors, including the following:
• Regulatory lag – Our rate filings are designed to provide for the recovery of increases in costs of operations
(primarily labor and employee benefits, electricity, chemicals, transportation, maintenance expenses, insurance and
claim costs, and costs to comply with environmental regulations), capital, and taxes. The revenue portion of the
operating expense ratio can be impacted by the timeliness of recovery of, and the return on capital investments.
The operating expense ratio is further influenced by regulatory lag (increases in operations and maintenance
expenses not yet recovered in rates or a gap between the time that a capital project is completed and the start of its
cost recovery in rates). The operating expense ratio is also influenced by decreases in operating revenues without a
commensurate decrease in operations and maintenance expense, such as changes in customer water consumption as
impacted by adverse weather conditions, conservation trends, or as a result of utility rates incorporating the effects
of income tax benefits derived from deducting qualifying utility asset improvements for tax purposes that are
capitalized for book purposes in Aqua Pennsylvania and consequently forgoing operating revenue increases.
6
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)
During periods of inflation, our operations and maintenance expenses may increase, impacting the operating
expense ratio, as a result of regulatory lag, since our rate cases may not be filed timely and are not retroactive.
• Acquisitions – In general, acquisitions of smaller undercapitalized utility systems in some areas may initially
increase our operating expense ratio if the operating revenues generated by these operations are accompanied by a
higher ratio of operations and maintenance expenses as compared to other operational areas of the company that are
more densely populated and have integrated operations. In these cases, the acquired operations are characterized as
having relatively higher operating costs to fixed capital costs, in contrast to the majority of our operations, which
generally consist of larger, interconnected systems, with higher fixed capital costs (utility plant investment) and
lower operating costs per customer. In addition, we operate market-based subsidiary companies, Aqua Resources
and Aqua Infrastructure. The cost-structure of these market-based companies differs from our utility companies in
that, although they may generate free cash flow, these companies have a much higher ratio of operations and
maintenance expenses to operating revenues and a lower capital investment and, consequently, a lower ratio of
fixed capital costs versus operating revenues in contrast to our regulated operations. As a result, the operating
expense ratio is not comparable between the businesses. These market-based subsidiary companies are not a
component of our Regulated segment.
We continue to evaluate initiatives to help control operating costs and improve efficiencies.
7
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)
Consolidated Selected Financial and Operating Statistics
Our selected five-year consolidated financial and operating statistics follow:
Years ended December 31,
2016
2015
2014
2013
2012
Utility customers:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Total utility customers
Operating revenues:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Other utility
Regulated segment total
Other and eliminations
Consolidated operating revenues
Operations and maintenance expense
Joint venture impairment charge (1)
Income from continuing operations
Net income
Capital expenditures
Operating Statistics
Selected operating results as a
percentage of operating revenues:
Operations and maintenance
Depreciation and amortization
Taxes other than income taxes
Interest expense, net
Income from continuing operations
Return on Aqua America stockholders' equity
Ratio of capital expenditures to depreciation expense
Effective tax rate (2)
801,190
791,404
779,665
771,660
766,121
40,582
1,349
19,036
110,108
972,265
40,151
1,353
17,420
107,538
957,866
39,614
1,357
17,412
102,071
39,237
1,368
17,230
98,705
38,805
1,373
16,643
95,044
940,119
928,200
917,986
$
484,901 $
477,773
$
460,013 $
457,404 $
441,240
131,170
126,677
122,795
121,178
117,559
27,916
62,983
82,780
10,357
800,107
19,768
28,021
56,997
79,399
10,746
779,613
34,591
27,369
59,474
76,472
9,934
756,057
23,846
25,263
57,446
73,062
10,174
744,527
17,366
24,822
70,693
68,225
10,416
732,955
17,730
$
$
$
$
$
$
819,875 $
814,204
304,897 $
309,310
- $
21,433
234,182 $
201,790
234,182 $
201,790
382,996 $
364,689
$
$
$
$
$
$
779,903 $
761,893 $
750,685
288,556 $
283,561 $
270,042
- $
- $
-
213,884 $
202,871 $
181,837
233,239 $
221,300 $
196,563
328,605 $
307,908 $
347,098
37.2%
16.2%
6.9%
9.8%
28.6%
12.7%
2.9
8.2%
38.0%
15.8%
6.8%
9.4%
24.8%
11.7%
2.9
6.9%
37.0%
16.2%
6.5%
9.8%
27.4%
14.1%
2.7
10.5%
37.2%
16.3%
6.9%
10.1%
26.6%
14.4%
2.6
9.5%
36.0%
15.5%
6.2%
10.4%
24.2%
14.2%
3.1
26.4%
(1) Represents a $21,433 ($32,975 pre-tax) joint venture impairment charge. This amount represents our share of the
impairment charge recognized by our joint venture that operates a private pipeline to supply raw water to firms with
natural gas well drilling operations.
(2) See Results of Operations – Income Taxes for a discussion of the effective tax rate change that commenced in 2012.
8
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)
RESULTS OF OPERATIONS
Our income from continuing operations has grown at an annual compound rate of approximately 10.9% and our net
income has grown at an annual compound rate of approximately 10.4% during the five-year period ended December 31,
2016. During the past five years, operating revenues grew at a compound rate of 3.8% and operating expenses grew at a
compound rate of 4.2%.
Operating Segments
We have identified ten operating segments and we have one reportable segment based on the following:
• Eight segments are composed of our water and wastewater regulated utility operations in the eight states where we
provide these services. These operating segments are aggregated into one reportable segment since each of these
operating segments has the following similarities: economic characteristics, nature of services, production
processes, customers, water distribution and/or wastewater collection methods, and the nature of the regulatory
environment. Our single reportable segment is named the Regulated segment.
• Two segments are not quantitatively significant to be reportable and are composed of Aqua Resources and Aqua
Infrastructure. These segments are included as a component of “Other,” in addition to corporate costs that have not
been allocated to the Regulated segment and intersegment eliminations. Corporate costs include general and
administrative expenses, and interest expense.
9
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)
Unless specifically noted, the following discussion and analysis provides information on our consolidated results of
continuing operations. The following table provides the Regulated segment and consolidated information for the years
ended December 31, 2016, 2015, and 2014:
Operating revenues
Operations and maintenance expense
Taxes other than income taxes
2016
2015
Regulated
Other and
Eliminations Consolidated
Regulated
Other and
Eliminations Consolidated
$ 800,107 $
19,768 $
819,875
$ 779,613 $
34,591 $ 814,204
285,347
19,550
304,897
282,866
26,444
309,310
53,916
2,469
56,385
52,361
2,696
55,057
Earnings (loss) before interest, taxes, depreciation and amortization
$ 460,844 $
(2,251)
458,593
$ 444,386 $
5,451
449,837
Depreciation and amortization
Operating income
Other expense (income):
Interest expense, net
Allowance for funds used during construction
Gain on sale of other assets
Gain on extinguishment of debt
Equity (income) loss in joint venture
Provision for income taxes
Net income
Operating revenues
Operations and maintenance expense
Taxes other than income taxes
133,008
325,585
80,594
(8,815)
(378)
-
(976)
20,978
128,737
321,100
76,536
(6,219)
(468)
(678)
35,177
14,962
$
234,182
$ 201,790
2014
Regulated
Other and
Eliminations Consolidated
$ 756,057 $
23,846 $
779,903
274,754
13,802
288,556
48,218
2,235
50,453
Earnings before interest, taxes, depreciation and amortization
$ 433,085 $
7,809
440,894
Depreciation and amortization
Operating income
Other expense (income):
Interest expense, net
Allowance for funds used during construction
Loss on sale of other assets
Equity loss in joint venture
Provision for income taxes
Income from continuing operations
Income from discontinued operations, net of income taxes of $12,800
Net income
126,535
314,359
76,397
(5,134)
4
3,989
25,219
213,884
19,355
$
233,239
10
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)
Consolidated Results
Operating Revenues – Operating revenues totaled $819,875 in 2016, $814,204 in 2015, and $779,903 in 2014. The
growth in revenues over the past three years is a result of increases in our customer base and our water and wastewater
rates. The number of customers increased at an annual compound rate of 1.4% over the past three years due to
acquisitions and organic growth, adjusted to exclude customers associated with utility system dispositions. Acquisitions
in our Regulated segment have provided additional water and wastewater revenues of $8,201 in 2016, $8,900, in 2015,
and $2,732 in 2014. Rate increases implemented during the past three years have provided additional operating revenues
of $4,319 in 2016, $8,503 in 2015, and $5,250 in 2014.
On June 7, 2012, Aqua Pennsylvania reached a settlement agreement in its last rate filing with the Pennsylvania Public
Utility Commission, which in addition to a water rate increase, provided for a reduction in current income tax expense as
a result of the recognition of qualifying income tax benefits upon Aqua Pennsylvania changing its tax accounting method
to permit the expensing of qualifying utility asset improvement costs that historically had been capitalized and depreciated
for book and tax purposes. In December 2012, Aqua Pennsylvania implemented this change which provides for the flow-
through of income tax benefits that resulted in a substantial reduction in income tax expense and greater net income and
cash flow. As a result, Aqua Pennsylvania was able to suspend its water Distribution System Improvement Charges in
2013 and lengthen the amount of time until the next Aqua Pennsylvania rate case is filed. During 2016, 2015, and 2014,
the income tax accounting change resulted in income tax benefits of $78,530, $72,944, and $69,048 that reduced the
Company’ current income tax expense and increased net income. The Company recognized a tax deduction on its 2012
Federal tax return of $380,000 for qualifying capital expenditures made prior to 2012, and based on the settlement
agreement, beginning in 2013, the Company began to amortize 1/10th of these expenditures, or $38,000 annually, which
reduced income tax expense and increased the Company’s net income by $16,734, which is included in the income tax
benefits noted in the previous sentence. In accordance with the settlement agreement, this amortization is expected to
reduce income tax expense during periods when qualifying parameters are met. Aqua Pennsylvania expects to file an
infrastructure investment surcharge in 2017 and expects to file a rate case in 2018, with resolution of the rate case
expected in 2019.
Our operating subsidiaries received rate increases representing estimated annualized revenues of $3,589 in 2016 resulting
from seven rate decisions, $3,347 in 2015 resulting from four rate decisions, and $9,886 in 2014 resulting from twelve
rate decisions,. Revenues from these increases realized in the year of grant were $1,801 in 2016, $2,887 in 2015, and
$5,375 in 2014. As of December 31, 2016, our operating subsidiaries have filed two rate requests, which are being
reviewed by the state utility commissions, proposing an aggregate increase of $7,976 in annual revenues. During 2017,
we intend to file three additional rate requests proposing an aggregate of approximately $13,425 of increased annual
revenues; the timing and extent to which our rate increase requests may be granted will vary by state.
Currently, Pennsylvania, Illinois, Ohio, Indiana, New Jersey, and North Carolina allow for the use of a surcharge for
replacing and rehabilitating infrastructure systems. The rate increases under this surcharge typically adjust periodically
based on additional qualified capital expenditures completed or anticipated in a future period. This surcharge is capped as
a percentage of base rates, generally at 5% to 12.75% of base rates, and is reset to zero when new base rates that reflect
the costs of those additions become effective or when a utility’s earnings exceed a regulatory benchmark. These
surcharges provided revenues of $7,379 in 2016, $3,261 in 2015, and $4,598 in 2014.
Our Regulated segment also includes operating revenues of $10,357 in 2016, $10,746 in 2015, and $9,934 in 2014
associated with contract operations that are integrated into the regulated utility business and operations. These amounts
vary over time according to the level of activity associated with the utility contract operations.
In addition to the Regulated segment operating revenues, we recognized market-based revenues that are associated with
Aqua Resources and Aqua Infrastructure of $20,091 in 2016, $34,909 in 2015, and $24,189 in 2014. The decrease in
revenues in 2016 is due to the disposition of business units within Aqua Resources.
Operations and Maintenance Expenses – Operations and maintenance expenses totaled $304,897 in 2016, $309,310 in
2015, and $288,556 in 2014. Most elements of operating costs are subject to the effects of inflation and changes in the
11
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)
number of customers served. Several elements are subject to the effects of changes in water consumption, weather, and
the degree of water treatment required due to variations in the quality of the raw water. The principal elements of
operating costs are labor and employee benefits, electricity, chemicals, transportation, maintenance expenses, insurance
and claims costs, and costs to comply with environmental regulations. Electricity and chemical expenses vary in
relationship to water consumption, raw water quality, and price changes. Maintenance expenses are sensitive to extremely
cold weather, which can cause water mains to rupture, resulting in additional costs to repair the affected main.
Operations and maintenance expenses decreased in 2016 as compared to 2015 by $4,413 or 1.4%, primarily due to:
• decreases in market-based activities expenses of $10,393;
•
•
a decrease in water production costs of $3,156;
the effects of the recognition in 2015 of leadership transition expenses of $2,510, the recording of a reserve of
$1,862 for water rights held for future use, and the recording of a legal contingency reserve of $1,580;
•
the reversal of a reserve for a legal contingency of $1,580;
• offset by an increase in postretirement benefits of $5,554; and
•
additional operating costs associated with acquisitions of $4,538.
Operations and maintenance expenses increased in 2015 as compared to 2014 by $20,754 or 7.2%, primarily due to:
•
additional operating costs associated with acquisitions, consisting of market-based activities of $8,313 and utility
systems of $6,823;
an increase in water productions costs of $3,401;
leadership transition expenses of $2,510;
the recording of a reserve of $1,862 for water rights held for future use;
the recording of a legal contingency reserve of $1,580;
the effect of the favorable recognition of a regulatory asset in 2014 of $1,575;
an increase in legal fees of $1,420; and
•
•
•
•
•
•
• offset by a decrease in postretirement benefits expense of $4,447.
The increase in water production costs of $3,401 was impacted by an increase in energy costs resulting from the extreme
cold temperatures experienced in many of our service territories in the first quarter of 2015.
Depreciation and Amortization Expenses – Depreciation expense was $130,987 in 2016, $125,290 in 2015, and
$123,054 in 2014, and has increased principally as a result of the significant capital expenditures made to expand and
improve our utility facilities, and our acquisitions of new utility systems. The increase for 2015 was impacted by the
absence of a credit recognized in 2014 for the effect of decreased depreciation rates implemented in our Texas operating
subsidiary, offset by a decrease in depreciation rates, implemented in 2015, for Aqua Pennsylvania.
Amortization expense was $2,021 in 2016, $3,447 in 2015, and $3,481 in 2014, and has decreased primarily due to the
completion of the recovery of our costs associated with various rate filings. Expenses associated with filing rate cases are
deferred and amortized over periods that generally range from one to three years.
Taxes Other than Income Taxes – Taxes other than income taxes totaled $56,385 in 2016, $55,057 in 2015, and $50,453
in 2014. The increase in 2016 was primarily due to an increase of $578 for pumping fees in Texas due to higher water
production, a rate increase, and the addition of two water systems, and an increase in gross receipts, excise and franchise
taxes of $502. The increase in 2015 was primarily due to an increase in property taxes of $2,412 largely due to the effect
of a non-recurring credit realized in 2014 that resulted in a reduction in property taxes for our Ohio operating subsidiary.
Interest Expense, net – Net interest expense was $80,594 in 2016, $76,536 in 2015, and $76,397 in 2014. Interest income
of $217 in 2016, $272 in 2015, and $316 in 2014 was netted against interest expense. Net interest expense increased in
2016 due to an increase in average short-term borrowings of $9,808 at higher short-term interest rates and an increase in
average outstanding fixed rate long-term debt of $98,006 partially offset by a decline in long-term interest rates. Net
12
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)
interest expense increased in 2015 due to an increase in average short-term borrowings of $13,977 and an increase in
average outstanding fixed rate long-term debt of $91,785, partially offset by a decline in long-term interest rates. Interest
income decreased in 2015 due to lower investment rates. The weighted average cost of fixed rate long-term debt was
4.26% at December 31, 2016, 4.57% at December 31, 2015, and 4.85% at December 31, 2014. The weighted average
cost of fixed and variable rate long-term debt was 4.23% at December 31, 2016, 4.44% at December 31, 2015, and 4.65%
at December 31, 2014.
Allowance for Funds Used During Construction – The allowance for funds used during construction (“AFUDC”) was
$8,815 in 2016, $6,219 in 2015, and $5,134 in 2014, and varies as a result of changes in the average balance of utility
plant construction work in progress, to which AFUDC is applied, changes in the AFUDC rate which is based
predominantly on short-term interest rates, changes in the balance of short-debt, changes in the amount of AFUDC related
to equity, and changes in the average balance of the proceeds held from tax-exempt bond issuances that are restricted to
funding specific capital projects. The increase in 2016 and 2015 is primarily due to an increase in the AFUDC rate as a
result of an increase in the amount of AFUDC related to equity and in 2016 and 2015 an increase in the average balance
of utility plant construction work in progress, to which AFUDC is applied. The amount of AFUDC related to equity was
$6,561 in 2016, $4,621 in 2015, and $3,640 in 2014.
(Gain) Loss on Sale of Other Assets – (Gain) loss on sale of other assets totaled $(378) in 2016, $(468) in 2015, and $4 in
2014, and consists of the sales of property, plant and equipment and marketable securities.
Gain on Extinguishment of Debt – The gain on extinguishment of debt of $678 in 2015 results from the recognition of
the unamortized issuance premium for the early redemption of $95,985 of tax-exempt bonds at 5.00% that were originally
maturing between 2035 and 2038.
Equity (Earnings) Loss in Joint Venture – Equity (earnings) loss in joint venture totaled $(976) in 2016, $35,177 in
2015, and $3,989 in 2014. The equity earnings in 2016 resulted from the recognition of a connection fee earned by the
joint venture in 2016 for which our share was $1,831 and a reduction in depreciation expense resulting from the noncash
impairment charge recognized by the joint venture on its long-lived assets in 2015. The increase in equity loss in joint
venture in 2015 of $31,188 is primarily due to a noncash impairment charge recognized by the joint venture on its long-
lived assets for which our share was $32,975, partially offset by a decrease in depreciation expense resulting from the
2015 increase in depreciable life for the joint venture’s pipeline assets. The impairment charge was recognized in the
fourth quarter of 2015 as a result of a determination that the long-lived assets, primarily consisting of a pipeline and pump
station, had become impaired due to a marked decline in natural gas prices in 2015, and in particular a further decline in
the fourth quarter of 2015, a distinguishable reduction in the volume of water sales by the joint venture which led to a
lowered forecast in the fourth quarter of 2015 on future water sales volumes by the joint venture, as well as changes in the
natural gas industry and market conditions. These market conditions were largely associated with natural gas prices,
which sharply declined in the fourth quarter and this downturn no longer appeared to be temporary and instead may be a
long-term condition.
Income Taxes – Our effective income tax rate was 8.2% in 2016, 6.9% in 2015, and 10.5% in 2014. The effective
income tax rate for 2016, 2015, and 2014 was affected by the 2012 income tax accounting change for qualifying utility
asset improvements at Aqua Pennsylvania which resulted in a $78,530, $72,944, and $69,048 net reduction to the
Company’s 2016, 2015, and 2014 Federal and state income tax expense, respectively. As of December 31, 2016, the
Company has an unrecognized tax benefit related to the Company’s change in its tax accounting method for qualifying
utility asset improvement costs, of which $20,674 of these tax benefits would further reduce the Company’s effective
income tax rate in the event the Company does sustain all, or a portion, of its tax position in the period this information is
determined.
13
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)
Summary –
Operating income
Income from continuing operations
Income from discontinued operations
Net income
Diluted income from continuing operations per share
Diluted income from discontinued operations per share
Diluted net income per share
$
$
$
$
Years ended December 31,
2015
2014
2016
325,585 $
321,100 $
314,359
234,182 $
201,790 $
-
-
234,182 $
201,790 $
213,884
19,355
233,239
1.32 $
-
1.32
1.14 $
-
1.14
1.20
0.11
1.31
The changes in the per share income from continuing operations in 2016 and 2015 over the previous years were due to the
aforementioned changes.
Although we have experienced increased income in the recent past, continued adequate rate increases reflecting increased
operating costs and new capital investments, as well as a continuation of income tax benefits related to eligible utility
asset improvement costs are important to the future realization of improved profitability.
14
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)
Fourth Quarter Results – The following table provides our fourth quarter results:
Operating revenues
Operations and maintenance
Depreciation
Amortization
Taxes other than income taxes
Operating income
Other expense (income):
Interest expense, net
Allowance for funds used during construction
Loss (gain) on sale of other assets
Gain on extinguishment of debt
Equity loss in joint venture
Income before income taxes
Provision for income taxes
Net income
Three Months Ended
December 31,
2016
196,799 $
2015
197,067
$
77,550
33,342
654
13,291
124,837
77,856
31,760
858
11,978
122,452
71,962
74,615
20,458
(2,369)
12
-
167
53,694
4,045
49,649 $
19,732
(2,289)
(130)
(678)
33,681
24,299
(4,135)
28,434
$
The decrease in operating revenues of $268 was primarily due to a decrease in market-based activities revenue of $4,945
due to dispositions, offset by an increase in customer water consumption, additional revenues of $1,235 associated with a
larger customer base due to utility acquisitions, and an increase in water and wastewater rates of $1,124.
The decrease in operations and maintenance expense of $306 is due primarily to a decrease in market-based activities
expenses of $4,169, and a decrease in the Company’s self-insured employee medical benefit program expense of $1,229,
partially offset by an increase in postretirement benefits expense of $1,533, and additional operating costs associated with
acquisitions of $500.
Depreciation expense increased by $1,582 primarily due to the utility plant placed in service since December 31, 2015.
The increase in other taxes of $1,313 is primarily due to an increase in property taxes of $900.
Interest expense increased by $726 due to an increase in the average outstanding debt balance.
The gain on extinguishment of debt recognized in 2015 is due to the recognition of the unamortized premium associated
with the early redemption of long-term debt.
The decrease in equity loss in joint venture of $33,514 is primarily due to the effect of the noncash impairment charge
recognized in 2015 by the joint venture (discussed below under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Consolidated Cash Flow and Capital Expenditures – Joint Venture”) for which our
share was $32,975.
The provision for income taxes increased by $8,180 primarily as a result of the change in income before income taxes.
15
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)
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flow and Capital Expenditures
Net operating cash flows from continuing operations, dividends paid on common stock, capital expenditures used in
continuing operations, including allowances for funds used during construction, and expenditures for acquiring water and
wastewater systems for our continuing operations for the five years ended December 31, 2016 were as follows:
Net Operating Cash
Flows
Dividends
Capital Expenditures
Acquisitions
2012
2013
2014
2015
2016
375,823
365,409
364,888
370,794
395,788
1,872,702
$
93,423
102,889
112,106
121,248
130,923
560,589
$
347,098
307,908
328,605
364,689
382,996
1,731,296
121,248
14,997
14,616
28,989
9,423
189,273
$
$
Included in capital expenditures for the five-year period are: expenditures for the rehabilitation of existing water and
wastewater systems, the expansion of our water and wastewater systems, modernization and replacement of existing
treatment facilities, water meters, office facilities, information technology, vehicles, and equipment. During this five-year
period, we received $31,166 of customer advances and contributions in aid of construction to finance new water mains
and related facilities that are not included in the capital expenditures presented in the above table. In addition, during this
period, we have made repayments of debt of $914,684, and have refunded $22,029 of customers’ advances for
construction. Dividends increased during the past five years as a result of annual increases in the dividends declared and
paid and increases in the number of shares outstanding.
Our planned 2017 capital program, exclusive of the costs of new mains financed by advances and contributions in aid of
construction, is estimated to be more than $450,000 in infrastructure improvements for the communities we serve. The
2017 capital program is expected to include $206,900 for infrastructure rehabilitation surcharge qualified projects, of
which $175,800 is for Aqua Pennsylvania. On January 1, 2013, Aqua Pennsylvania reset its water infrastructure
rehabilitation surcharge to zero resulting from the change in its tax method of accounting for qualifying utility asset
improvements as described below. Although we were not eligible to use an infrastructure rehabilitation surcharge with
our Aqua Pennsylvania water customers since 2012, we were able to use the income tax savings derived from the
qualifying utility asset improvements to continue to maintain a similar capital investment program as 2012. Our planned
2017 capital program in Pennsylvania is estimated to be approximately $304,000 a portion of which is expected to be
eligible as a deduction for qualifying utility asset improvements for Federal income tax purposes. Our overall 2017
capital program, along with $150,671 of debt repayments, and $200,395 of other contractual cash obligations, as reported
in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Contractual Obligations”, has been, or is expected to be, financed through internally-generated funds, our revolving credit
facilities, and the issuance of long-term debt.
Future utility construction in the period 2018 through 2019, including recurring programs, such as the ongoing
replacement or rehabilitation of water meters, water mains, water treatment plant upgrades, storage facility renovations,
and additional transmission mains to meet customer demands, exclusive of the costs of new mains financed by advances
and contributions in aid of construction, is estimated to require aggregate expenditures of approximately $826,000. We
anticipate that less than one-half of these expenditures will require external financing. We expect to refinance $193,532
of long-term debt during this period as they become due with new issues of long-term debt, internally-generated funds,
and our revolving credit facilities. The estimates discussed above do not include any amounts for possible future
acquisitions of water and wastewater systems or the financing necessary to support them.
16
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)
Our primary sources of liquidity are cash flows from operations (including the allowed deferral of Federal income tax
payments), borrowings under various short-term lines of credit and other credit facilities, and customer advances and
contributions in aid of construction. Our cash flow from operations, or internally-generated funds, is impacted by the
timing of rate relief, water consumption, and changes in Federal tax laws with respect to accelerated tax depreciation or
deductions for utility construction projects. We fund our capital and typical acquisitions through internally-generated
funds, supplemented by short-term lines of credit. Over time, we partially repay or pay-down our short-term lines of
credit with long-term debt. The ability to finance our future construction programs, as well as our acquisition activities,
depends on our ability to attract the necessary external financing and maintain internally-generated funds. Rate orders
permitting compensatory rates of return on invested capital and timely rate adjustments will be required by our operating
subsidiaries to achieve an adequate level of earnings and cash flow to enable them to secure the capital they will need to
operate and to maintain satisfactory debt coverage ratios.
On June 7, 2012, Aqua Pennsylvania reached a settlement agreement in its rate filing with the Pennsylvania Public Utility
Commission, which in addition to a water rate increase, provided for a reduction in current income tax expense as a result
of the recognition of qualifying income tax benefits upon Aqua Pennsylvania changing its tax accounting method to
permit the expensing of qualifying utility asset improvement costs that have historically been capitalized and depreciated
for book and tax purposes. In December 2012, Aqua Pennsylvania implemented this change, which resulted in a
substantial reduction in income tax expense and greater net income and cash flow, and as a result allowed Aqua
Pennsylvania to suspend its water Distribution System Improvement Charges in 2013 and lengthen the amount of time
until the next Aqua Pennsylvania rate case is filed. As a result of the Pennsylvania rate order, income tax benefits reduced
the Company’s current income tax expense and increased net income by $69,048 in 2014, $72,944 in 2015, and $78,530
in 2016. The Company recognized a tax deduction on its 2012 Federal tax return of $380,000 for qualifying capital
expenditures made prior to 2012, and based on the settlement agreement, beginning in 2013, the Company began to
amortize 1/10th of these expenditures or $38,000 annually, which reduced income tax expense and increased the
Company’s net income by $16,734. In accordance with the settlement agreement, this amortization is expected to reduce
income tax expense during periods when qualifying parameters are met. During 2013, our Ohio and North Carolina
operating divisions implemented this change in tax accounting method. These divisions currently do not employ a
method of accounting that provides for a reduction in current income taxes as a result of the recognition of income tax
benefits, and as such the change in the Company’s tax method of accounting in these operating divisions has no impact on
our effective income tax rate.
The deduction for qualifying utility asset improvements is anticipated to continue in 2017 and beyond. Our 2017 earnings
will be impacted by the following factors in Aqua Pennsylvania: the deduction for qualifying utility asset improvements
in 2017 is expected to reduce current income tax expense and the ten year amortization of the qualifying capital
expenditures made prior to 2012 is also expected to reduce current income tax expense; offset by the effect of regulatory
lag.
Acquisitions
During the past five years, we have expended cash of $189,273 and issued 439,943 shares of common stock, valued at
$12,845 at the time of acquisition, related to the acquisition of utility systems, both water and wastewater utilities, as well
as investments in supplying raw water to the natural gas drilling industry.
In January 2016, we acquired the water and wastewater utility system assets of Superior Water Company, Inc., which
provided public water service to approximately 3,900 customers in portions of Berks, Chester, and Montgomery counties
in Pennsylvania. The total purchase price for the utility system was $16,750, which consisted of the issuance of 439,943
shares of the Company’s common stock and $3,905 in cash. Additionally, during 2016, we completed 18 acquisitions of
water and wastewater utility systems for $5,518 in cash in eight of the states in which we operate in.
In April 2015, we acquired the water and wastewater utility system assets of North Maine Utilities, located in the Village
of Glenview, Illinois. The total purchase price consisted of $23,079 in cash. Additionally, during 2015, we completed 14
acquisitions of water and wastewater utility systems for $5,210 in cash in six of the states in which we operate.
17
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)
During 2014, we completed 16 acquisitions of water and wastewater utility systems for $10,530 in cash in seven of the
states in which we operate. Further, in 2014, we acquired two market-based businesses that specialized in inspecting,
cleaning and repairing storm and sanitary sewer lines, as well as providing water distribution system services and training
to waterworks operators. The total purchase price in aggregate was $4,810 and both these businesses were subsequently
sold in November 2016 and January 2017.
During 2013, we completed 15 acquisitions of water and wastewater utility systems for $14,997 in cash in four of the
states in which we operate.
As part of the Company’s growth-through-acquisition strategy, in July 2011, the Company entered into a definitive
agreement with American Water to purchase all of the stock of the subsidiary that held American Water’s regulated water
and wastewater operations in Ohio. American Water’s Ohio operations served approximately 59,000 customers. On May
1, 2012, the Company completed its acquisition of American Water’s water and wastewater operations in Ohio. The total
purchase price at closing consisted of $102,154 in cash plus specific assumed liabilities, including debt of $14,281, as
adjusted pursuant to the purchase agreement based on book value at closing. The transaction has been accounted for as a
business combination. The Ohio acquisition was financed primarily from the proceeds from the January 1, 2012 sale of
our Maine subsidiary, the May 1, 2012 sale of our New York subsidiary, and by the issuance of long-term and/or short-
term debt. In addition to our Ohio acquisition, during 2012, we completed 16 acquisitions of water and wastewater utility
systems for $19,094 in cash in six of the states in which we operate. We included the operating results of these
acquisitions in our consolidated financial statements beginning on the respective acquisition dates.
We continue to pursue the acquisition of water and wastewater utility systems, and explore other utility acquisitions that
may be in a new state. Our typical acquisitions are expected to be financed with short-term debt with subsequent
repayment from the proceeds of long-term debt, retained earnings, or equity issuances.
Joint Venture
In September 2011, one of our subsidiaries entered into a joint venture with a firm that operates natural gas pipelines and
processing plants for the construction and operation of a private pipeline system to supply raw water to natural gas well
drilling operations in the Marcellus Shale in north-central Pennsylvania (the “Joint Venture”). We own 49% of the Joint
Venture. The initial 18-mile pipeline commenced operations in 2012. The initial pipeline system was expanded for an
additional 38 miles with a permitted intake on the Susquehanna River, which extended the pipeline to additional drillers.
The total cost of this pipeline was $109,000. The Joint Venture has entered into water supply contracts with natural gas
drilling companies. As of December 31, 2016, our capital contributions since inception totaled $53,643 in cash. This
investment has been financed through the issuance of long-term debt. Our 49% investment in the Joint Venture is as an
unconsolidated affiliate and is accounted for under the equity method of accounting. Our investment is carried at cost,
including capital contributions or distributions and our equity in earnings and losses since the commencement of the
system’s operations. In the fourth quarter of 2015 an impairment charge was recognized by the joint venture on its long-
lived assets, of which the Company’s share totaled $32,975 ($21,433 after-tax), representing our share of the noncash
impairment charge as further described in Note 1 – Summary of Significant Accounting Policies – Investment in Joint
Venture in this Annual Report.
Dispositions
We routinely review and evaluate areas of our business and operating divisions and, over time, may sell utility systems or
portions of systems. In 2016, the Company sold two business units within Aqua Resources, which resulted in total
proceeds of $4,459, and recognized a net loss of $543. In 2013 and 2012, in accordance with our strategy to focus our
resources on states where we have critical mass to improve our economies of scale and expect future economic growth,
we sold water and wastewater systems in the following states: Florida, New York, and Maine. With respect to the sale of
our systems in New York and the sale of our systems in Missouri to American Water, we acquired additional utility
systems from American Water in Ohio and in Texas. Additionally, in March, 2014, we completed the sale of our
wastewater treatment facility in Georgia.
18
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)
In December 2014, we completed the sale of our water utility system in southwest Allen County Indiana to the City of
Fort Wayne, Indiana for $67,011, which is comprised of $50,100 in addition to $16,911 the city initially paid the
Company towards its water and wastewater system assets in the northern part of Fort Wayne in 2008. We recognized a
gain on sale of $29,210 ($17,611 after-tax) in the fourth quarter of 2014. In addition, as a result of this transaction, Aqua
Indiana will expand its sewer customer base by accepting new wastewater flows from the City. Refer to Note 3 –
Discontinued Operations and Other Disposition in this Annual Report for further information on this sale.
In March, April, and December 2013, through five separate sales transactions, we completed the sale of our water and
wastewater utility systems in Florida, which concluded our 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).
In June 2013, the Company sold a water and wastewater utility system in Texas for net proceeds of $3,400. The sale
resulted in the recognition of a gain on sale of these assets, net of expenses, of $1,025 ($615 after-tax). The utility system
represented approximately 0.04% of the Company’s total assets.
In July 2011, the Company entered into a definitive agreement with American Water to sell its operations in New York
for its book value at closing plus specific assumed liabilities, including debt of approximately $23,000. On May 1, 2012,
the Company completed the sale for net proceeds of $36,688 in cash as adjusted pursuant to the sale agreement based on
book value at closing. The Company’s New York operations served approximately 51,000 customers. The sale of our
New York operations concluded our regulated operations in New York. The proceeds were used to finance a portion of
our acquisition of American Water’s Ohio subsidiary, pay-down a portion of our short-term debt, and other general
corporate purposes.
In July 2011, the Company entered into a definitive agreement with Connecticut Water Service, Inc. to sell its operations
in Maine, which served approximately 16,000 customers, for cash at closing plus specific assumed liabilities, including
debt of $17,364. On January 1, 2012, we completed the sale for net proceeds of $36,870, and recognized a gain on sale of
$17,699 ($10,821 after-tax). The sale of our Maine operations concluded our regulated operations in Maine. The
proceeds were used to finance a portion of our acquisition of American Water’s Ohio subsidiary, pay-down a portion of
our short-term debt, and other general corporate purposes.
Despite these transactions, one of our primary strategies continues to be to acquire additional utility systems, to maintain
our existing systems where there is a strategic business benefit, and to actively oppose unilateral efforts by municipal
governments to acquire any of our operations.
Sources of Capital
Since net operating cash flow plus advances and contributions in aid of construction have not been sufficient to fully fund
cash requirements, we issued $1,335,239 of long-term debt and obtained other short-term borrowings during the past five
years. At December 31, 2016, we have a $250,000 long-term revolving credit facility that expires in February 2021, of
which $17,561 was designated for letter of credit usage, $207,439 was available for borrowing and $25,000 of borrowings
were outstanding at December 31, 2016. In addition, we have short-term lines of credit of $135,500, of which $128,965
was available as of December 31, 2016. These short-term lines of credit 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.
Our 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.
Our loan and debt agreements require us to comply with certain financial covenants, which among other things, subject to
specific exceptions, limit the Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and
require a minimum level of earnings coverage over interest expense. During 2016, we were in compliance with our debt
covenants under our credit facilities. Failure to comply with our debt covenants could result in an event of default, which
19
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)
could result in us being required to repay or finance our borrowings before their due date, possibly limiting our future
borrowings, and increasing our borrowing costs.
The Company has a universal shelf registration statement, which was filed with the Securities and Exchange Commission,
(“SEC”) on February 27, 2015, which allows for the potential future offer and sale by us, from time to time, in one or
more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities, and other
securities specified therein at indeterminate prices. The Company’s Board of Directors has authorized the Company to
issue up to $500,000 of our common stock, preferred stock, debt securities, and other securities specified therein under
this universal shelf registration statement. The Company has not issued any securities to date under this universal shelf
registration statement.
In addition, we have a shelf registration statement, which was filed with the SEC on February 27, 2015, to permit the
offering from time to time of an aggregate of $500,000 of our common stock and shares of preferred stock in connection
with acquisitions. During 2016, we issued 439,943 shares of common stock totaling $12,845 to acquire a water system.
The balance remaining available for use under the acquisition shelf registration as of December 31, 2016 is $487,155.
We will determine the form and terms of any securities issued under the universal shelf registration statement and the
acquisition shelf registration statement at the time of issuance.
We offer a Dividend Reinvestment and Direct Stock Purchase Plan (the “Plan”) that provides a convenient and
economical way to purchase shares of the Company. Under the direct stock purchase portion of the Plan, shares are
issued throughout the year. The dividend reinvestment portion of the Plan offers a five percent discount on the purchase
of shares of common stock with reinvested dividends. As of the December 2016 dividend payment, holders of 10.7% of
the common shares outstanding participated in the dividend reinvestment portion of the Plan. The shares issued under the
Plan are either original issue shares or shares purchased by the Company’s transfer agent in the open-market. During the
past five years, we have sold 1,218,407 original issue shares of common stock for net proceeds of $25,093 through the
dividend reinvestment portion of the Plan, and we used the proceeds to invest in our operating subsidiaries, to repay short-
term debt, and for general corporate purposes. In 2016, 2015, and 2014, 484,645, 535,439, and 558,317 shares of
common stock were purchased under the dividend reinvestment portion of the Plan by the Company’s transfer agent in the
open-market for $14,916, $14,380, and $14,148, respectively.
The Company’s Board of Directors has authorized us to repurchase our common stock, from time to time, in the open
market or through privately negotiated transactions. In 2014, we repurchased 560,000 shares of our common stock in the
open market for $13,280. In December 2014, the Company’s Board of Directors authorized a share buyback program of
up to 1,000,000 shares to minimize share dilution through timely and orderly share repurchases. In December 2015, the
Company’s Board of Directors added 400,000 shares to this program. In 2016, we did not repurchase any shares of our
common stock in the open market under this program. In 2015, we repurchased 805,000 shares of our common stock in
the open market for $20,502. This program expired on December 31, 2016.
Off-Balance Sheet Financing Arrangements
We do not engage in any off-balance sheet financing arrangements. We do not have any interest in entities referred to as
variable interest entities, which includes special purpose entities and other structured finance entities.
20
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)
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2016:
Payments Due By Period
Long-term debt
Interest on fixed-rate, long-term debt (1)
Operating leases (2)
Unconditional purchase obligations (3)
Other purchase obligations (4)
Pension plan obligation (5)
Other obligations (6)
Total
$
$
Total
1,910,633 $
1,392,112
20,610
38,964
72,572
15,421
33,880
3,484,192 $
Less than 1
year
150,671 $
80,878
1,713
7,658
72,572
15,421
22,153
351,066 $
1 - 3 years
3 - 5 years
More than 5
years
1,455,167
1,029,654
13,515
13,587
-
-
7,327
2,519,250
111,263 $
132,477
2,460
8,026
-
-
2,199
256,425 $
193,532 $
149,103
2,922
9,693
-
-
2,201
357,451 $
(1) Represents interest payable on fixed rate, long-term debt. Amounts reported may differ from actual due to future
refinancing of debt.
(2) Represents operating leases that are noncancelable, before expiration, for the lease of motor vehicles, buildings, land
and other equipment.
(3) Represents our commitment to purchase minimum quantities of water as stipulated in agreements with other water
purveyors. We use purchased water to supplement our water supply, particularly during periods of peak customer
demand. Our actual purchases may exceed the minimum required levels.
(4) Represents an approximation of the open purchase orders for goods and services purchased in the ordinary course of
business.
(5) Represents contributions to be made to pension plan.
(6) Represents expenditures estimated to be required under legal and binding contractual obligations.
In addition to these obligations, we pay refunds on customers’ advances for construction over a specific period of time
based on operating revenues related to developer-installed water mains or as new customers are connected to and take
service from such mains. After all refunds are paid, any remaining balance is transferred to contributions in aid of
construction. The refund amounts are not included in the above table because the refund amounts and timing are
dependent upon several variables, including new customer connections, customer consumption levels and future rate
increases, which cannot be accurately estimated. Portions of these refund amounts are payable annually through 2026 and
amounts not paid by the contract expiration dates become non-refundable.
In addition to the obligations disclosed in the contractual obligations table above, we have uncertain tax positions of
$28,099. Although we believe our tax positions comply with applicable law, we have made judgments as to the
sustainability of each uncertain tax position based on its technical merits. Due to the uncertainty of future cash outflows,
if any, associated with our uncertain tax positions, we are unable to make a reasonable estimate of the timing or amounts
that may be paid. See Note 7 – Income Taxes in this Annual Report for further information on our uncertain tax positions.
We will fund these contractual obligations with cash flows from operations and liquidity sources held by or available to
us.
21
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 is routinely involved in legal matters, including both asserted and unasserted legal claims, during the
ordinary course of business. See Note 9 – Commitments and Contingencies in this Annual Report for a discussion of the
Company’s legal matters. It is not always possible for management to make a meaningful estimate of the potential loss or
range of loss associated with such litigation. Also, unanticipated changes in circumstances and/or revisions to the
assessed probability of the outcomes of legal matters could result in expenses being incurred in future periods as well as
an increase in actual cash required to resolve the legal matter.
Capitalization
The following table summarizes our capitalization during the past five years:
December 31,
Long-term debt (1)
Aqua America stockholders' equity
2016
2015
2014
2013
2012
50.8%
49.2%
100.0%
50.8%
49.2%
100.0%
49.4%
50.6%
100.0%
50.3%
49.7%
100.0%
53.4%
46.6%
100.0%
(1) Includes current portion, as well as our borrowings under a variable rate revolving credit agreement of
$25,000 at December 31, 2016, $60,000 at December 31, 2015, $72,000 at December 31, 2014, $0 at
December 31, 2013, and $100,000 at December 31, 2012.
Over the past five years, the changes in the capitalization ratios primarily resulted from the issuance of common stock, the
issuance of debt to finance our acquisitions and capital program, growth in net income, and the declaration of dividends.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial condition and results of operations are impacted by the methods, assumptions, and estimates used in the
application of critical accounting policies. The following accounting policies are particularly important to our financial
condition or results of operations, and require estimates or other judgments of matters of uncertainty. Changes in the
estimates or other judgments included within these accounting policies could result in a significant change to the financial
statements. We believe our most critical accounting policies include revenue recognition, the use of regulatory assets and
liabilities, the valuation of our long-lived assets, which consist primarily of utility plant in service, regulatory assets, and
goodwill, our accounting for post-retirement benefits, and our accounting for income taxes. We have discussed the
selection and development of our critical accounting policies and estimates with the Audit Committee of the Board of
Directors.
Revenue Recognition ─ Our 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. The
estimated usage is based on our judgment and assumptions; our 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.
In Virginia, we commence the billing of our utility customers, under new rates, upon authorization from the respective
utility commission and before the final commission rate order is issued. The revenue recognized reflects an estimate
based on our judgment of the final outcome of the commission’s ruling. We monitor the applicable facts and
circumstances regularly, and revise the estimate as required. The revenue billed and collected prior to the final ruling is
subject to refund based on the commission’s final ruling.
Regulatory Assets and Liabilities ─ We defer costs and credits on the balance sheet as regulatory assets and liabilities
when it is probable that these costs and credits will be recognized in the rate-making process in a period different from
when the costs and credits were incurred. These deferred amounts, both assets and liabilities, are then recognized in the
income statement in the same period that they are reflected in our rates charged for water or wastewater service. In the
event that our assessment as to the probability of the inclusion in the rate-making process is incorrect, the associated
regulatory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval.
22
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)
Valuation of Long-Lived Assets, Goodwill and Intangible Assets ─ We review our long-lived assets for impairment,
including utility plant in service and investment in joint venture. We also review regulatory assets for the continued
application of the Financial Accounting Standards Board’s (“FASB”) accounting guidance for regulated operations. Our
review determines whether there have been changes in circumstances or events, such as regulatory disallowances, or
abandonments, that have occurred that require adjustments to the carrying value of these assets. Adjustments to the
carrying value of these assets would be made in instances where their inclusion in the rate-making process is unlikely.
For utility plant in service, we would recognize an impairment loss for any amount disallowed by the respective utility
commission. For our equity method investment in joint venture, the Company evaluates whether it has experienced a
decline in the value of its investment that is other than temporary in nature. We would recognize an impairment loss if the
fair value of our investment is less than the carrying amount of the investment, and the decline in value is considered other
than temporary. Additionally, the Company would recognize its share of an impairment loss if the joint venture
determines that the carrying amount of the joint venture’s assets exceeds the sum of the joint venture’s undiscounted
estimated cash flows.
Our long-lived assets, which consist primarily of utility plant in service, regulatory assets and investment in joint venture,
are reviewed for impairment when changes in circumstances or events occur. These circumstances or events could
include a decline in the market value or physical condition of a long-lived asset, an adverse change in the manner in which
long-lived assets are used or planned to be used, a change in historical trends, operating cash flows associated with the
long-lived assets, changes in macroeconomic conditions, industry and market conditions, or overall financial performance.
When these circumstances or events occur, we determine whether it is more likely than not that the fair value of those
assets is less than their carrying amount. If we determine that it is more likely than not (that is, the likelihood of more
than 50 percent), we would recognize an impairment charge if it is determined that the carrying amount of an asset
exceeds the sum of the undiscounted estimated cash flows. In this circumstance, we would recognize an impairment
charge equal to the difference between the carrying amount and the fair value of the asset. Fair value is estimated to be
the present value of future net cash flows associated with the asset, discounted using a discount rate commensurate with
the risk and remaining life of the asset. This assessment requires significant management judgment and estimates that are
based on budgets, general strategic business plans, historical trends and other data and relevant factors. These estimates
include significant inherent uncertainties, since they involve forecasting future events. If changes in circumstances or
events occur, or estimates and assumptions that were used in this review are changed, we may be required to record an
impairment charge on our long-lived assets.
We have an investment in a joint venture, for which we own 49%, and use the equity method of accounting to account for
this joint venture. The joint venture operates a private pipeline system to supply raw water to natural gas well drilling
operations in the Marcellus Shale in north central Pennsylvania. In the fourth quarter of 2015, the joint venture
recognized an impairment charge on its long-lived assets, of which the Company’s share totaled $32,975 ($21,433 after-
tax), representing our share of the noncash impairment charge. Refer to Note 1 – Summary of Significant Accounting
Policies – Property, Plant and Equipment and Depreciation, and Investment in Joint Venture in this Annual Report for
additional information regarding the review of long-lived assets for impairment. See also Consolidated Results – Equity
(Earnings) Loss in Joint Venture above in this Annual Report.
We test the goodwill attributable for each of our reporting units for impairment at least annually on July 31, or more often,
if circumstances indicate a possible impairment may exist. When testing goodwill for impairment, we may assess
qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall
financial performance, and entity specific events, for some or all of our reporting units to determine whether it’s more
likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, we may bypass this
qualitative assessment for some of our reporting units and perform a quantitative goodwill impairment test by determining
the fair value of a reporting unit based on a discounted cash flow analysis. If we perform a quantitative test and determine
that the fair value of a reporting unit is less than its carrying amount, we would determine the reporting unit’s implied fair
value of its goodwill and compare it with the carrying amount of its goodwill to measure such impairment. The
assessment requires significant management judgment and estimates that are based on budgets, general strategic business
plans, historical trends and other data and relevant factors. If changes in circumstances or events occur, or estimates and
23
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)
assumptions that were used in our impairment test change, we may be required to record an impairment charge for
goodwill. Refer to Note 1 – Summary of Significant Accounting Policies – Goodwill in this Annual Report for
information regarding the results of our annual impairment test.
Accounting for Post-Retirement Benefits ─ We maintain a qualified defined benefit pension plan and plans that provide
for post-retirement benefits other than pensions. Accounting for pension and other post-retirement benefits requires an
extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation
increases received by our employees, mortality, turnover and medical costs. Each assumption is reviewed annually with
assistance from our actuarial consultant, who provides guidance in establishing the assumptions. The assumptions are
selected to represent the average expected experience over time and may differ in any one year from actual experience due
to changes in capital markets and the overall economy. These differences will impact the amount of pension and other
post-retirement benefits expense that we recognize.
Our discount rate assumption, which is used to calculate the present value of the projected benefit payments of our post-
retirement benefits, was determined by selecting a hypothetical portfolio of high quality corporate bonds appropriate to
match the projected benefit payments of the plans. The selected bond portfolio was derived from a universe of Aa-graded
corporate bonds, all of which were noncallable (or callable with make-whole provisions), and have at least $50,000 in
outstanding value. The discount rate was then developed as the rate that equates the market value of the bonds purchased
to the discounted value of the projected benefit payments of the plans. A decrease in the discount rate would increase our
post-retirement benefits expense and benefit obligation. After reviewing the hypothetical portfolio of bonds, we selected
a discount rate of 4.13% for our pension plan and 4.25% for our other post-retirement benefit plans as of December 31,
2016, which represent a 35 basis-point decrease as compared to the discount rates selected at December 31, 2015,
respectively. Our post-retirement benefits expense under these plans is determined using the discount rate as of the
beginning of the year, which was 4.48% for our pension plan and 4.60% for our other-postretirement benefit plans for
2016, and will be 4.13% for our pension plan and 4.25% for our other post-retirement benefit plans for 2017.
Our expected return on plan assets is determined by evaluating the asset class return expectations with our advisors as
well as actual, long-term, historical results of our asset returns. The Company’s market-related value of plan assets is
equal to the fair value of the plans’ assets as of the last day of its fiscal year, and is a determinant for the expected return
on plan assets, which is a component of post-retirement benefits expense. The allocation of our plans’ assets impacts our
expected return on plan assets. The expected return on plan assets is based on a targeted allocation of 25% to 75%
domestic equities, 0% to 10% international equities, 25% to 50% fixed income, 0% to 5% alternative investments, and 0%
to 20% cash and cash equivalents. Our post-retirement benefits expense increases as the expected return on plan assets
decreases. We believe that our actual long-term asset allocations on average will approximate our targeted allocations.
Our targeted allocations are driven by our investment strategy to earn a reasonable rate of return while maintaining risk at
acceptable levels through the diversification of investments across and within various asset categories. For 2016, we used
a 7.25% expected return on plan assets assumption which will decrease to 7.00% for 2017.
In October 2014, the Society of Actuaries issued an updated set of mortality tables and a mortality improvement scale.
The updated mortality tables extend the assumed life expectancy of participants in defined benefit plans, and the updated
mortality improvement scale projects how mortality rates will improve into the future based on anticipated medical
innovations and a reduction in unhealthy behaviors. We considered the mortality data at the December 31, 2014
measurement of our post-retirement benefit obligations in relation to our plans’ participant population experience and
adopted the updated mortality table and mortality improvement scale. Because mortality is a key assumption in
developing actuarial estimates, the impact of adopting the mortality data was, an increase in our post-retirement benefit
obligation as of December 31, 2014 of $14,400 and an increase in our 2015 net periodic benefit costs of $2,500, of which
approximately $900 had an impact on our 2015 post-retirement benefits expense, due to the regulatory treatment of our
net periodic benefit costs.
Funding requirements for qualified defined benefit pension plans are determined by government regulations and not by
accounting pronouncements. In accordance with funding rules and our funding policy, during 2017 our pension
contribution is expected to be $15,421. Future years’ contributions will be subject to economic conditions, plan
24
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)
participant data and the funding rules in effect at such time as the funding calculations are performed, though we expect
future changes in the amount of contributions and expense recognized to be generally included in customer rates.
Accounting for Income Taxes ─ We estimate the amount of income tax payable or refundable for the current year and the
deferred income tax liabilities and assets that results from estimating temporary differences resulting from the treatment of
specific items, such as depreciation, for tax and financial statement reporting. Generally, these differences result in the
recognition of a deferred tax asset or liability on our consolidated balance sheet and require us to make judgments
regarding the probability of the ultimate tax impact of the various transactions we enter into. Based on these judgments,
we may record tax reserves or adjustments to valuation allowances on deferred tax assets to reflect the expected
realization of future tax benefits. Actual income taxes could vary from these estimates and changes in these estimates can
increase income tax expense in the period that these changes in estimates occur.
Our determination of what qualifies as a capital cost versus a tax deduction, for qualifying utility asset improvements, as it
relates to our income tax accounting method change beginning in 2012, is subject to subsequent adjustment as well as IRS
audits, changes in income tax laws, including regulations regarding tax-basis depreciation as it applies to our capital
expenditures, or qualifying utility asset improvements, the expiration of a statute of limitations, or other unforeseen matters
could impact the tax benefits that have already been recognized. We establish reserves for uncertain tax positions based
upon management’s judgment as to the sustainability of these positions. These accounting estimates related to the
uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on
its technical merits. We believe our tax positions comply with applicable law and that we have adequately recorded
reserves as required. However, to the extent the final tax outcome of these matters is different than our estimates
recorded, we would then need to adjust our tax reserves which could result in additional income tax expense or benefits in
the period that this information is known.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
We describe the impact of recent accounting pronouncements in Note 1 – Summary of Significant Accounting Policies in
this Annual Report.
25
AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Report On Internal Control Over Financial Reporting
Management of Aqua America, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. The Company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In assessing the effectiveness of internal control over financial reporting, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework (2013). As a result of management’s assessment and based on the criteria in the framework, management has
concluded that, as of December 31, 2016, the Company’s internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included
herein.
Christopher H. Franklin
President and Chief Executive Officer
David P. Smeltzer
Executive Vice President and Chief Financial Officer
February 24, 2017
26
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Aqua America, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of net income, of
comprehensive income, of capitalization, of equity and of cash flows present fairly, in all material respects, the financial
position of Aqua America, Inc. and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2016 based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these financial statements, and on the Company's internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Philadelphia, Pennsylvania
February 24, 2017
27
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 2016 and 2015
Assets
Property, plant and equipment, at cost
Less: accumulated depreciation
Net property, plant and equipment
Current assets:
Cash and cash equivalents
Accounts receivable and unbilled revenues, net
Inventory, materials and supplies
Prepayments and other current assets
Assets held for sale
Total current assets
Regulatory assets
Deferred charges and other assets, net
Investment in joint venture
Goodwill
Total assets
Aqua America stockholders' equity:
Liabilities and Equity
Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,311,345 and 179,363,660 in 2016 and 2015
Capital in excess of par value
Retained earnings
Treasury stock, at cost, 2,916,969 and 2,819,569 shares in 2016 and 2015
Accumulated other comprehensive income
Total stockholders' equity
Long-term debt, excluding current portion
Less: debt issuance costs
Long-term debt, excluding current portion, net of debt issuance costs
Commitments and contingencies (See Note 9)
Current liabilities:
Current portion of long-term debt
Loans payable
Accounts payable
Accrued interest
Accrued taxes
Other accrued liabilities
Total current liabilities
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits
Customers' advances for construction
Regulatory liabilities
Other
Total deferred credits and other liabilities
Contributions in aid of construction
Total liabilities and equity
See accompanying notes to consolidated financial statements.
28
2016
2015
$
6,509,117 $
1,507,502
5,001,615
6,088,011
1,399,086
4,688,925
$
$
3,763
97,394
12,961
12,804
1,728
128,650
948,647
30,845
7,026
42,208
6,158,991 $
90,155 $
797,513
1,032,844
(71,113)
669
1,850,068
1,759,962
22,357
1,737,605
-
150,671
6,535
59,872
18,367
25,607
40,484
301,536
1,269,253
91,843
250,635
115,583
1,727,314
3,229
99,146
12,414
11,802
1,779
128,370
830,118
28,878
7,716
33,866
5,717,873
89,682
773,585
930,061
(68,085)
687
1,725,930
1,743,612
23,165
1,720,447
-
35,593
16,721
56,452
12,651
21,887
49,895
193,199
1,118,923
86,934
259,507
100,498
1,565,862
542,468
6,158,991 $
512,435
5,717,873
$
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
Years ended December 31, 2016, 2015, and 2014
Operating revenues
Operating costs and expenses:
Operations and maintenance
Depreciation
Amortization
Taxes other than income taxes
Total operating expenses
Operating income
Other expense (income):
Interest expense, net
Allowance for funds used during construction
(Gain) loss on sale of other assets
Gain on extinguishment of debt
Equity (earnings) loss in joint venture
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Discontinued operations:
Income from discontinued operations before income taxes
Provision for income taxes
Income from discontinued operations
Net income
Income from continuing operations per share:
Basic
Diluted
Income from discontinued operations per share:
Basic
Diluted
Net income per common share:
Basic
Diluted
2016
2015
2014
$
819,875 $
814,204 $
779,903
304,897
130,987
2,021
56,385
494,290
309,310
125,290
3,447
55,057
493,104
288,556
123,054
3,481
50,453
465,544
325,585
321,100
314,359
80,594
(8,815)
(378)
-
(976)
255,160
20,978
234,182
-
-
-
76,536
(6,219)
(468)
(678)
35,177
216,752
14,962
201,790
-
-
-
$
$
$
$
$
$
$
234,182 $
201,790 $
1.32 $
1.32 $
1.14 $
1.14 $
- $
- $
- $
- $
1.32 $
1.32 $
1.14 $
1.14 $
76,397
(5,134)
4
-
3,989
239,103
25,219
213,884
32,155
12,800
19,355
233,239
1.21
1.20
0.11
0.11
1.32
1.31
Average common shares outstanding during the period:
Basic
Diluted
177,273
177,846
176,788
177,517
176,864
177,763
Cash dividends declared per common share
$
0.7386 $
0.686 $
0.634
See accompanying notes to consolidated financial statements.
29
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
Years ended December 31, 2016, 2015, and 2014
Net income
Other comprehensive income, net of tax:
2016
234,182 $
2015
201,790 $
2014
233,239
$
Unrealized holding (loss) gain on investments, net of tax (benefit) expense of $21,
$(53), and $104 for the years ended December 31, 2016, 2015, and 2014, respectively
Reclassification adjustment for loss (gain) reported in net income, net of tax (benefit)
expense of $30 and $(134) for the twelve months ended December 31, 2016 and 2014,
respectively (1)
Comprehensive income
39
(101)
193
(57)
234,164 $
-
201,689 $
249
233,681
$
See accompanying notes to consolidated financial statements.
(1) Amount of pre-tax loss (gain) of $(87) and $383 reclassified from accumulated other comprehensive income to loss
(gain) on sale of other assets on the consolidated statements of net income for the years ended December 31, 2016 and
2014, respectively.
30
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 2016 and 2015
Aqua America stockholders' equity:
Common stock, $.50 par value
Capital in excess of par value
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income
Total stockholders' equity
Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range
0.00% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%
8.00% to 8.99%
9.00% to 9.99%
10.00% to 10.99%
Maturity Date Range
2023 to 2033
2019 to 2035
2024 to 2031
2019 to 2056
2020 to 2054
2017 to 2043
2017 to 2036
2022 to 2027
2021 to 2025
2018 to 2026
2018
Notes payable to bank under revolving credit agreement, variable rate, due 2021
Unsecured notes payable:
Bank notes at 1.921% and 1.975% due 2017 and 2018
Notes at 3.57% and 3.59% due 2027 and 2041
Notes ranging from 4.62% to 4.87%, due 2017 through 2024
Notes ranging from 5.20% to 5.95%, due 2017 through 2037
Total long-term debt
Current portion of long-term debt
Long-term debt, excluding current portion
Less: debt issuance costs
Long-term debt, excluding current portion,
2016
2015
$
90,155 $
797,513
1,032,844
(71,113)
669
1,850,068
89,682
773,585
930,061
(68,085)
687
1,725,930
4,661
15,539
19,668
381,944
487,318
213,078
52,985
33,066
6,565
26,400
6,000
1,247,224
25,000
100,000
245,000
133,600
159,809
1,910,633
150,671
1,759,962
22,357
1,737,605
5,148
20,811
19,167
297,275
487,093
221,435
52,964
33,762
14,502
27,100
6,000
1,185,257
60,000
100,000
120,000
144,400
169,548
1,779,205
35,593
1,743,612
23,165
1,720,447
Total capitalization
$
3,587,673 $
3,446,377
See accompanying notes to consolidated financial statements.
31
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars)
Retained
earnings
Treasury
stock
Accumulated
Other
Comprehensive
Income
Noncontrolling
Interest
Total
729,272 $ (27,082) $
233,239
-
346 $
-
208 $
40
1,535,043
233,279
Balance at December 31, 2013
Net income
Purchase of subsidiary shares from
noncontrolling interest
Other comprehensive income, net of income
tax of $238
Dividends
Repurchase of stock (659,666 shares)
Equity compensation plan (212,920 shares)
Exercise of stock options (449,412 shares)
Stock-based compensation
Employee stock plan tax benefits
Other
Balance at December 31, 2014
Net income
Other comprehensive loss, net of income tax
benefit of $53
Dividends
Sale of stock (26,295 shares)
Repurchase of stock (981,585 shares)
Equity compensation plan (321,402 shares)
Exercise of stock options (424,709 shares)
Stock-based compensation
Employee stock plan tax benefits
Other
Balance at December 31, 2015
Net income
Other comprehensive loss, net of income tax
benefit of $9
Dividends
Stock issued for acquisition (439,943 shares)
Sale of stock (47,478 shares)
Repurchase of stock (97,400 shares)
Equity compensation plan (231,502 shares)
Exercise of stock options (228,762 shares)
Stock-based compensation
Employee stock plan tax benefits
Other
Balance at December 31, 2016
Capital in
excess of
par value
Common
stock
88,964 $ 743,335 $
$
-
-
-
-
-
107
225
-
-
-
-
-
-
-
(107)
7,071
6,811
1,828
-
-
(112,106)
-
-
-
-
-
(15,756)
-
-
(453)
-
-
-
-
-
89,296
-
(793)
758,145
-
-
849,952
201,790
-
(42,838)
-
-
-
13
-
161
212
-
-
-
-
(121,248)
-
-
664
-
(161)
7,328
5,860
-
-
-
-
(433)
-
(25,247)
-
-
-
-
-
89,682
-
2,602
(853)
773,585
-
-
-
930,061
234,182
-
-
(68,085)
-
-
-
220
24
-
115
114
-
-
-
-
-
-
(130,923)
12,625
1,364
-
(115)
4,146
5,390
1,329
(811)
-
-
-
-
-
(476)
-
-
-
-
-
(3,028)
-
-
-
-
-
$
90,155 $ 797,513 $ 1,032,844 $ (71,113) $
See accompanying notes to consolidated financial statements.
32
-
(208)
(208)
442
-
-
-
-
-
-
-
788
-
(101)
-
-
-
-
-
-
-
-
687
-
(18)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
442
(112,106)
(15,756)
-
7,296
6,358
1,828
-
40
-
(793)
1,655,383
201,790
-
-
-
-
-
-
-
-
(40)
-
-
-
-
-
-
-
-
-
-
-
(101)
(121,248)
677
(25,247)
-
7,540
5,427
2,602
(893)
1,725,930
234,182
(18)
(130,923)
12,845
1,388
(3,028)
-
4,260
4,914
1,329
-
669 $
-
- $
(811)
1,850,068
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years ended December 31, 2016, 2015, and 2014
Cash flows from operating activities:
Net income
Income from discontinued operations
Income from continuing operations
Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
Depreciation and amortization
Deferred income taxes
Provision for doubtful accounts
Share-based compensation
Gain on sale of utility system and market-based business unit
(Gain) loss on sale of other assets
Gain on extinguishment of debt
Equity (earnings) loss in joint venture
Net change in receivables, inventory and prepayments
Net change in payables, accrued interest, accrued taxes and other accrued liabilities
Change in income tax receivable
Other
Operating cash flows from continuing operations
Operating cash flows used in discontinued operations, net
Net cash flows from operating activities
Cash flows from investing activities:
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $2,220, $1,598,
and $1,494
Acquisitions of utility systems and other, net
Release of funds previously restricted for construction activity
Net proceeds from the sale of utility systems and other assets
Other
Investing cash flows used in continuing operations
Investing cash flows from discontinued operations, net
Net cash flows used in investing activities
Cash flows from financing activities:
Customers' advances and contributions in aid of construction
Repayments of customers' advances
Net repayments of short-term debt
Proceeds from long-term debt
Repayments of long-term debt
Change in cash overdraft position
Proceeds from issuing common stock
Proceeds from exercised stock options
Share-based compensation windfall tax benefits
Repurchase of common stock
Dividends paid on common stock
Other
Financing cash flows (used in) from continuing operations
Financing cash flows used in discontinued operations, net
Net cash flows (used in) from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash paid during the year for:
Interest, net of amounts capitalized
Income taxes
Non-cash investing activities:
Property, plant and equipment additions purchased at the period end, but not yet paid
Non-cash customer advances for construction
See accompanying notes to consolidated financial statements.
2016
2015
2014
$
234,182 $
201,790 $
-
234,182
133,008
17,250
5,505
5,390
(744)
(378)
-
(976)
(3,974)
4,756
-
1,769
395,788
-
395,788
(382,996)
(9,423)
-
7,746
1,464
(383,209)
-
(383,209)
7,263
(3,763)
(10,186)
503,586
(373,087)
(8,076)
1,388
4,260
1,332
(3,028)
(130,923)
(811)
(12,045)
-
(12,045)
534
3,229
3,763 $
-
201,790
128,737
16,506
5,765
5,860
-
(468)
(678)
35,177
(6,520)
(3,469)
-
(11,906)
370,794
-
370,794
(364,689)
(28,989)
47
648
(1,079)
(394,062)
-
(394,062)
5,904
(3,977)
(1,677)
560,544
(400,407)
(739)
677
7,540
1,842
(25,247)
(121,248)
(853)
22,359
-
22,359
(909)
4,138
3,229 $
66,067 $
2,739
70,103 $
6,902
35,145 $
26,234
25,612 $
27,992
$
$
$
233,239
19,355
213,884
126,535
31,477
5,838
6,819
-
4
-
3,989
(20,299)
470
7,873
(11,702)
364,888
(1,100)
363,788
(328,605)
(14,616)
-
558
279
(342,384)
49,883
(292,501)
6,064
(4,028)
(18,342)
317,699
(253,192)
(322)
-
7,296
1,422
(15,756)
(112,106)
(793)
(72,058)
(149)
(72,207)
(920)
5,058
4,138
72,441
4,348
31,050
43,642
See Note 2 – Acquisitions, Note 10 – Long-term Debt and Loans Payable, and Note 14 – Employee Stock and Incentive
Plan for a description of non-cash activities.
33
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands of dollars, except per share amounts)
Note 1 – Summary of Significant Accounting Policies
Nature of Operations ─ Aqua America, Inc. (“Aqua America,” the “Company,” “we,” “our”, or “us”) is the
holding company for regulated utilities providing water or wastewater services concentrated in Pennsylvania,
Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, and Virginia. Our largest operating subsidiary is
Aqua Pennsylvania, Inc., which accounted for approximately 52% of our operating revenues and approximately
74% of our net income for 2016. As of December 31, 2016, Aqua Pennsylvania provided water or wastewater
services to approximately one-half of the total number of people we serve. Aqua Pennsylvania’s service territory
is located in the suburban areas north and west of the City of Philadelphia and in 27 other counties in
Pennsylvania. The Company’s other regulated utility subsidiaries provide similar services in seven other states.
In addition, the Company’s market-based activities are conducted through Aqua Resources, Inc. and Aqua
Infrastructure LLC. Aqua Resources provides water and wastewater services through operating and maintenance
contracts with municipal authorities and other parties in close proximity to our utility companies’ service
territories; and offers, through a third party, water and wastewater line repair service and protection solutions to
households. In addition, in 2016, the Company sold the following business units of Aqua Resources, which were
reported as assets held for sale in the Company’s consolidated balance sheets:
•
•
a business unit which provided liquid waste hauling and disposal services; and
a business unit which inspected, cleaned and repaired storm and sanitary wastewater lines.
Additionally, in 2016, the Company decided to market for sale a business unit within Aqua Resources, which
installs and tests devices that prevent the contamination of potable water, for which the sale was completed in
January 2017, and a business unit that repairs and performs maintenance on water and wastewater systems.
Theses business units are reported as assets held for sale in the Company’s consolidated balance sheets. Aqua
Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry.
In December 2014, we completed the sale of our water utility system in southwest Allen County, Indiana, which
served approximately 13,000 customers, to the City of Fort Wayne, Indiana. The completion of this sale settled
the dispute concerning the February 2008 acquisition, by eminent domain, by the City of Fort Wayne, of the
northern portion of our water and wastewater utility systems. The operating results, cash flows, and financial
position of the Company’s water utility system in Fort Wayne, Indiana has been presented in the Company’s
consolidated financial statements as discontinued operations. Unless specifically noted, the financial information
presented in the notes to consolidated financial statements reflects the Company’s continuing operations. Refer to
Note 3 – Discontinued Operations and Other Disposition for further information on this sale.
The company has identified ten operating segments and has one reportable segment named the Regulated
segment. The reportable segment is comprised of eight operating segments for our water and wastewater
regulated utility companies which are organized by the states where we provide these services. These operating
segments are aggregated into one reportable segment since each of the Company’s 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. In addition, Aqua
Resources and Aqua Infrastructure are not quantitatively significant to be reportable and are included as a
component of “Other,” in addition to corporate costs that have not been allocated to the Regulated segment and
intersegment eliminations.
Regulation ─ Most of the operating companies that are regulated public utilities are subject to regulation by the
utility commissions of the states in which they operate. The respective utility commissions have jurisdiction with
respect to rates, service, accounting procedures, issuance of securities, acquisitions and other matters. Some of
the operating companies that are regulated public utilities are subject to rate regulation by county or city
government. Regulated public utilities follow the Financial Accounting Standards Board’s (“FASB”) accounting
guidance for regulated operations, which provides for the recognition of regulatory assets and liabilities as
34
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
allowed by regulators for costs or credits that are reflected in current rates or are considered probable of being
included in future rates. The regulatory assets or liabilities are then relieved as the cost or credit is reflected in
rates.
Use of Estimates in Preparation of Consolidated Financial Statements ─ The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation – The consolidated financial statements include the accounts of the Company and its
subsidiaries. All intercompany accounts and transactions have been eliminated. Certain prior period amounts
have been reclassified to conform to the current period presentation of equity (earnings) loss in joint venture in
the operating cash flows section of the consolidated statements of cash flows, and the presentation of debt
issuance costs on the consolidated balance sheets.
Recognition of Revenues ─ Revenues in our Regulated segment principally include amounts billed to customers
on a cycle basis and unbilled amounts based on estimated usage from the latest billing to the end of the account-
ing period. In addition, the Company’s market-based subsidiary Aqua Resources recognizes revenues when
services are performed or, for construction of water and wastewater systems, based on the percentage of
completion of the project and Aqua Infrastructure recognizes revenues when services are performed. The
Company’s market-based subsidiaries recognized revenues of $20,091 in 2016, $34,909 in 2015, and $24,189 in
2014.
Property, Plant and Equipment and Depreciation ─ Property, plant and equipment consist primarily of utility
plant. The cost of additions includes contracted cost, direct labor and fringe benefits, materials, overheads, and
for additions meeting certain criteria, allowance for funds used during construction. Water systems acquired are
typically recorded at estimated original cost of utility plant when first devoted to utility service and the applicable
depreciation is recorded to accumulated depreciation. The difference between the estimated original cost, less
applicable accumulated depreciation, and the purchase price is recorded as goodwill, or as an acquisition
adjustment within utility plant as permitted by the applicable regulatory jurisdiction. At December 31, 2016,
utility plant includes a net credit acquisition adjustment of $25,683, which is generally being amortized from 2 to
59 years. Amortization of the acquisition adjustments totaled $2,223 in 2016, $2,556 in 2015, and $2,648 in
2014.
Utility expenditures for maintenance and repairs, including major maintenance projects and minor renewals and
betterments, are charged to operating expenses when incurred in accordance with the system of accounts prescri-
bed by the utility commissions of the states in which the company operates. The cost of new units of property and
betterments are capitalized. Utility expenditures for water main cleaning and relining of pipes are deferred and
recorded in net property, plant and equipment in accordance with the FASB’s accounting guidance for regulated
operations. As of December 31, 2016, $16,239 of these costs have been incurred since the last respective rate
proceeding and the Company expects to recover these costs in future rates.
The cost of software upgrades and enhancements are capitalized if they result in added functionality which enable
the software to perform tasks it was previously incapable of performing. Information technology costs associated
with major system installations, conversions and improvements, such as software training, data conversion and
business process reengineering costs, are deferred as a regulatory asset if the Company expects to recover these
costs in future rates. If these costs are not deferred, then these costs are charged to operating expenses when
incurred. As of December 31, 2016, $31,686 of these costs have been deferred since the last respective rate
proceeding as a regulatory asset, and the deferral is reported as a component of net property, plant and equipment.
35
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
When units of utility property are replaced, retired or abandoned, the recorded value thereof is credited to the
asset account and such value, together with the net cost of removal, is charged to accumulated depreciation. To
the extent the Company anticipates recovery of the cost of removal or other retirement costs through rates after
the retirement costs are incurred, a regulatory asset is recorded as those costs are incurred. In some cases, the
Company recovers retirement costs through rates during the life of the associated asset and before the costs are
incurred. These amounts, which are not yet utilized, result in a regulatory liability being reported based on the
amounts previously recovered through customer rates.
The straight-line remaining life method is used to compute depreciation on utility plant. Generally, the straight-
line method is used with respect to transportation and mechanical equipment, office equipment and laboratory
equipment.
Long-lived assets of the Company, which consist primarily of utility plant in service, regulatory assets, and
investment in joint venture, are reviewed for impairment when changes in circumstances or events occur. These
circumstances or events could include a disallowance of utility plant in service or regulatory assets by the
respective utility commission, a decline in the market value or physical condition of a long-lived asset, an adverse
change in the manner in which long-lived assets are used or planned to be used, a change in historical trends,
operating cash flows associated with the long-lived assets, changes in macroeconomic conditions, industry and
market conditions, or overall financial performance. When these circumstances or events occur, the Company
determines whether it is more likely than not that the fair value of those assets is less than their carrying amount.
If the Company determines that it is more likely than not (that is, the likelihood of more than 50 percent), the
Company would recognize an impairment charge if it is determined that the carrying amount of an asset exceeds
the sum of the undiscounted estimated cash flows. In this circumstance, the Company would recognize an
impairment charge equal to the difference between the carrying amount and the fair value of the asset. Fair value
is estimated to be the present value of future net cash flows associated with the asset, discounted using a discount
rate commensurate with the risk and remaining life of the asset. There has been no change in circumstances or
events that have occurred that require adjustments to the carrying values of the Company’s long-lived assets,
except for an impairment charge recognized by the joint venture on its long-lived assets in 2015.
Allowance for Funds Used During Construction ─ The allowance for funds used during construction
(“AFUDC”) represents the capitalized cost of funds used to finance the construction of utility plant. In general,
AFUDC is applied to construction projects requiring more than one month to complete. No AFUDC is applied to
projects funded by customer advances for construction, contributions in aid of construction, or applicable state-
revolving fund loans. AFUDC includes the net cost of borrowed funds and a rate of return on other funds when
used, and is recovered through water rates as the utility plant is depreciated. The amount of AFUDC related to
equity funds in 2016 was $6,561, 2015 was $4,621, and 2014 was $3,640. No interest was capitalized by our
market-based businesses.
Cash and Cash Equivalents ─ The Company considers all highly liquid investments with an original maturity of
three months or less, which are not restricted for construction activity, to be cash equivalents.
The Company had a book overdraft, which represents transactions that have not cleared the bank accounts at the
end of the period, for specific disbursement cash accounts of $12,616 and $20,693 at December 31, 2016 and
2015, respectively. The Company transfers cash on an as-needed basis to fund these items as they clear the bank
in subsequent periods. The balance of the book overdraft is reported as accounts payable and the change in the
book overdraft balance is reported as cash flows from financing activities, due to our ability to fund the overdraft
with the Company’s credit facility.
Funds Restricted for Construction Activity ─ The proceeds received from specific financings for construction
and capital improvement of utility facilities are held in escrow until the designated expenditures are incurred.
These amounts are reported as funds restricted for construction activity and are expected to be released over time
36
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
as the capital projects are funded. As of December 31, 2016 and 2015, the Company did not have any funds
restricted for construction activity.
Accounts Receivable ─ Accounts receivable are recorded at the invoiced amounts, which consists of billed and
unbilled revenues. The allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in our existing accounts receivable, and is determined based on historical write-off
experience and the aging of account balances. The Company reviews the allowance for doubtful accounts
quarterly. Account balances are written off against the allowance when it is probable the receivable will not be
recovered. When utility customers request extended payment terms, credit is extended based on regulatory
guidelines, and collateral is not required.
Inventories, Materials and Supplies ─ Inventories are stated at cost. Cost is determined using the first-in, first-
out method.
Regulatory Assets, Deferred Charges and Other Assets ─ Deferred charges and other assets consist primarily of
assets held to compensate employees in the future who participate in the Company’ deferred compensation plan
and other costs. Other costs, for which the Company has received or expects to receive prospective rate recovery,
are deferred as a regulatory asset and amortized over the period of rate recovery in accordance with the FASB’s
accounting guidance for regulated operations. See Note – 6 Regulatory Assets and Liabilities for further
information regarding the Company’s regulatory assets.
Marketable equity securities are carried on the balance sheet at fair market value, and changes in fair value are
included in other comprehensive income.
Investment in Joint Venture – The Company uses the equity method of accounting to account for our 49%
investment in a joint venture with a firm in the natural gas industry for the construction and operation of a private
pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale in north-central
Pennsylvania, which commenced operations in 2012. Our initial investment is carried at cost. Subsequently, the
carrying amount of our investment is adjusted to reflect capital contributions or distributions, and our equity in
earnings or losses since the commencement of the system’s operations, as well as a decline in the fair value of our
investment. Our share of equity earnings or losses in the joint venture is reported in the consolidated statements
of net income as equity (earnings) losses in joint venture. During 2016 and 2015 we received distributions of
$1,666 and $441, respectively. For our equity method investment in joint venture, the Company evaluates
whether it has experienced a decline in the value of its investment that is other than temporary in nature. We
would recognize an impairment loss if the fair value of our investment is less than the carrying amount of the
investment, and the decline in value is considered other than temporary. Additionally, the Company would
recognize its share of an impairment loss if the joint venture determines that the carrying amount of the joint
venture’s assets exceeds the sum of the joint venture’s undiscounted estimated cash flows.
During the fourth quarter of 2015, the joint venture experienced the following events: a marked decline in natural
gas prices, particularly in the fourth quarter of 2015, following a period of steady decline in 2015, a
distinguishable reduction in the volume of water sales by the joint venture which led to a lowered forecast in the
fourth quarter of 2015 on future water sales volumes by the joint venture, as well as changes in the natural gas
industry and market conditions. These market conditions were largely associated with natural gas prices, which
sharply declined in the fourth quarter of 2015 and this downturn no longer appeared temporary and instead may
be a long-term condition. It was then determined that the carrying amount of the joint venture’s long-lived assets
exceeded the sum of the joint venture’s undiscounted estimated cash flows, which resulted in the recognition of a
noncash impairment charge of $32,975 ($21,433 after-tax) in the fourth quarter of 2015, representing the
Company’s share of the impairment charge. The impairment charge, on a pre-tax basis, is reported as equity loss
in joint venture on the Company’s consolidated statements of income. The amount of the impairment charge
recognized by the joint venture is equal to the difference between the carrying value and the fair value of the long-
37
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
lived assets. Fair value is estimated to be the present value of the future net cash flows associated with the assets,
discounted using a rate commensurate with the risk and remaining life of the assets.
Goodwill ─ Goodwill represents the excess cost over the fair value of net tangible and identifiable intangible
assets acquired through acquisitions. Goodwill is not amortized but is tested for impairment annually, or more
often, if circumstances indicate a possible impairment may exist. When testing goodwill for impairment, we may
assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors,
overall financial performance, and entity specific events, for some or all of our reporting units to determine
whether it’s more likely than not that the fair value of a reporting unit is less than its carrying amount.
Alternatively, we may bypass this qualitative assessment for some of our reporting units and perform a
quantitative goodwill impairment test by determining the fair value of a reporting unit based on a discounted cash
flow analysis. If we perform a quantitative test and determine that the fair value of a reporting unit is less than its
carrying amount, we would determine the reporting unit’s implied fair value of its goodwill and compare it with
the carrying amount of its goodwill to measure such impairment. The Company tested the goodwill attributable
for each of our reporting units for impairment as of July 31, 2016, and concluded that the estimated fair value of
each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount, indicating that
none of the Company’s goodwill was impaired. The following table summarizes the changes in the Company’s
goodwill:
Regulated
Segment
Other
Balance at December 31, 2014
Goodwill acquired during year
Reclassifications from (to) utility plant acquisition adjustment, net
Other
Balance at December 31, 2015
Goodwill acquired during year
Reclassifications to utility plant acquisition adjustment
Disposition
Classified as assets held for sale
Balance at December 31, 2016
$
24,564 $
-
2,682
-
27,246
10,378
(98)
(159)
$
37,367 $
Consolidated
31,184
12
2,682
(12)
33,866
10,378
(98)
(1,391)
(547)
42,208
6,620 $
12
-
(12)
6,620
(1,232)
(547)
4,841 $
The reclassification of goodwill to utility plant acquisition adjustment results from a mechanism approved by the
applicable utility commission. The mechanism provides for the transfer over time, and the recovery through
customer rates, of goodwill associated with some acquisitions upon achieving specific objectives. The
reclassification from utility plant acquisition adjustment to goodwill represents the purchase price in excess of the
fair market value of the net assets acquired, from a prior acquisition, which was originally accounted for as utility
plant acquisition adjustment.
The goodwill allocated to a disposition or classified as assets held for sale results from the allocation of goodwill
for market-based business units based on their relative fair value as compared to Aqua Resource’s fair value.
Income Taxes ─ The Company accounts for some income and expense items in different time periods for
financial and tax reporting purposes. Deferred income taxes are provided on specific temporary differences
between the tax basis of the assets and liabilities, and the amounts at which they are carried in the consolidated
financial statements. The income tax effect of temporary differences not currently recovered in rates is recorded
as deferred taxes with an offsetting regulatory asset or liability. These deferred income taxes are based on the
enacted tax rates expected to be in effect when such temporary differences are projected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be
38
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
realized. Investment tax credits are deferred and amortized over the estimated useful lives of the related
properties. Judgment is required in evaluating the Company’s Federal and state tax positions. Despite
management’s belief that the Company’s tax return positions are fully supportable, the Company establishes
reserves when it believes that its tax positions are likely to be challenged and it may not fully prevail in these
challenges. The Company’s provision for income taxes includes interest, penalties and reserves for uncertain tax
positions.
In 2012, the Company changed its tax method of accounting for qualifying utility asset improvement costs in
Aqua Pennsylvania effective with the tax year ended December 31, 2012 and for prior tax years. The tax
accounting method was changed to permit the expensing of qualifying utility asset improvement costs that were
previously being capitalized and depreciated for book and tax purposes. This change was implemented in
response to a June 2012 rate order issued by the Pennsylvania Public Utility Commission to Aqua Pennsylvania,
which provides for a reduction in current income tax expense as a result of the recognition of income tax benefits
for qualifying utility asset improvements. This change results in a significant reduction in the effective income
tax rate, a reduction in current income tax expense, and reduces the amount of taxes currently payable. For
qualifying capital expenditures made prior to 2012, the resulting tax benefits have been deferred as of December
31, 2012 and, in accordance with the rate order, a ten year amortization of the income tax benefits, which reduces
future income tax expense, commenced in 2013. During 2013, our Ohio and North Carolina operating divisions
implemented this change. These divisions currently do not employ a method of accounting that provides for a
reduction in current income taxes as a result of the recognition of income tax benefits, and as such the change in
the Company’s tax method of accounting in these operating divisions had no impact on the Company’s effective
income tax rate.
Customers’ Advances for Construction and Contributions in Aid of Construction ─ Water mains, other utility
property or, in some instances, cash advances to reimburse the Company for its costs to construct water mains or
other utility property, are contributed to the Company by customers, real estate developers and builders in order to
extend utility service to their properties. The value of these contributions is recorded as customers’ advances for
construction. Over time, the amount of non-cash contributed property will vary based on the timing of the
contribution of the non-cash property and the volume of non-cash contributed property received in connection
with development in our service territories. The Company makes refunds on these advances over a specific
period of time based on operating revenues related to the property, or as new customers are connected to and take
service from the applicable water main. After all refunds are made, any remaining balance is transferred to
contributions in aid of construction. Contributions in aid of construction include direct non-refundable
contributions and the portion of customers' advances for construction that become non-refundable.
Based on regulatory conventions in states where the Company operates, generally our subsidiaries depreciate
contributed property and amortize contributions in aid of construction at the composite rate of the related
property. Contributions in aid of construction and customers’ advances for construction are deducted from the
Company’s rate base for rate-making purposes, and therefore, no return is earned on contributed property.
Stock-Based Compensation ─ The Company records compensation expense in the financial statements for stock-
based awards based on the grant date fair value of those awards. Stock-based compensation expense includes an
estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards on a straight-
line basis, which is generally commensurate with the vesting term.
Fair Value Measurements – 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:
39
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
• 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 years ended December 31, 2016 and 2015.
Recent Accounting Pronouncements ─ In August 2016, the FASB issued updated accounting guidance on the
classification of certain cash receipts and cash payments in the statement of cash flows, which is intended to
reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early
adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated
cash flow statement.
In March 2016, the FASB issued updated accounting guidance on simplifying the accounting for share-based
payments, which includes several aspects of the accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim
periods within those fiscal years, with early adoption available. The Company has evaluated the requirements of
the updated guidance and has determined that upon adoption, on January 1, 2017, the Company will recognize a
previously unrecognized windfall tax benefit for stock-based compensation of $2,805 ($1,823 after-tax),
associated with the Company’s 2012 Federal net operating loss, which will be recorded as an adjustment to
retained earnings. Additionally, once adopted, income tax benefits in excess of compensation costs or tax
deficiencies for share-based compensation will be recorded to our income tax provision, instead of, as was done
historically, to stockholder’s equity, which will impact our effective tax rate. Lastly, all tax-related cash flows
resulting from share-based payments will be reported as operating activities on the statement of cash flows, a
change from the historical requirement to present tax benefits as an inflow from financing activities and an
outflow from operating activities.
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. Refer to Note 9 – Commitments and Contingencies for further
information on the Company’s leases.
In September 2015, the FASB issued updated accounting guidance on simplifying measurement-period
adjustments in business combinations, which eliminates the requirement that an acquirer in a business
combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a
40
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
measurement-period adjustment during the period in which it determines the amount of the adjustment. The
updated guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those
fiscal years, with early adoption available. The Company adopted the provisions of this accounting standard, as
required on January 1, 2016, and it did not have an impact on its results of operations or financial position.
In April 2015, the FASB issued updated accounting guidance on simplifying the presentation of debt issuance
costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the
carrying value of the associated debt liability. Previously, debt issuance costs were presented in the balance sheet
as a deferred charge. The accounting standard is effective for reporting periods beginning after December 15,
2015, and will be applied retrospectively. The Company adopted the provisions of this accounting standard as
required on January 1, 2016. The adoption of this standard was applied retrospectively and resulted in the
reclassification as of December 31, 2015 of $23,165 from deferred charges and other assets, net to debt issuance
costs, which is reported as a reduction to long-term debt.
In August 2014, the FASB issued an accounting standard that will require management to assess an entity’s
ability to continue as a going concern for each annual and interim reporting period and to provide related footnote
disclosures in circumstances in which substantial doubt exists. The accounting standard is effective in the first
annual reporting period ending after December 15, 2016. The Company adopted the provisions of this accounting
standard for its year ended December 31, 2016, which did not have an impact on its results of operations or
financial position.
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. Additionally,
the accounting for contributions in aid of construction may be impacted by the updated accounting guidance if the
contributions are determined to be in scope. In July 2015, the FASB approved a one year deferral to the original
effective date of this guidance. 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 based on current interpretations of the updated guidance believes that the impact of
adoption may not result in a material change in our measurement of revenue and timing of recognition if
contributions in aid of construction is determined to not be in scope. The Company continues to evaluate the
impact of adoption if contributions in aid of construction are determined to be in scope. Additionally, we plan to
implement the updated guidance using the modified retrospective approach.
Note 2 – Acquisitions
Pursuant to the Company’s growth-through-acquisition strategy, the Company completed the following
acquisitions. In January 2016, the Company acquired Superior Water Company, Inc., which provides public water
service to approximately 3,900 customers in portions of Berks, Chester, and Montgomery counties in
Pennsylvania. The total purchase price for the utility system was $16,750, which consisted of the issuance of
439,943 shares of the Company’s common stock and $3,905 in cash. The purchase price allocation for this
acquisition consisted primarily of acquired property, plant and equipment of $25,167, contributions in aid of
construction of $16,565, and goodwill of $8,622. Additionally, during 2016 the Company completed 18
acquisitions of water and wastewater utility systems in various states. The total purchase price of these utility
41
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
systems consisted of $5,518 in cash. The operating revenues included in the consolidated financial statements of
the Company during the period owned by the Company for the utility systems acquired in 2016 are $3,809. The
pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s
results of operations.
In April 2015, the Company acquired the water and wastewater utility system assets of North Maine Utilities,
located in the Village of Glenview, Illinois serving approximately 7,400 customers. The total purchase price
consisted of $23,079 in cash. The purchase price allocation for this acquisition consists primarily of acquired
property, plant and equipment. Additionally, in 2015, the Company completed 14 acquisitions of water and
wastewater utility systems in various states. The total purchase price of these utility systems consisted of $5,210
in cash. The operating revenues included in the consolidated financial statements of the Company during the
period owned by the Company for the utility systems acquired were $10,708 in 2016 and $6,662 in 2015. The pro
forma effect of the businesses acquired is not material either individually or collectively to the Company’s results
of operations.
In 2014, the Company completed 16 acquisitions of water and wastewater utility systems in various states. The
total purchase price of these utility systems consisted of $10,530 in cash. Further, in August 2014, the Company
acquired a market-based business that specializes in the inspection, cleaning and repair of storm and sanitary
sewer lines. The total purchase price consisted of $3,010, of which a total of $810 is contingent upon satisfying
certain annual performance targets over a three-year period for which $270 has been paid for completion of the
performance targets for year one. Additionally, in December 2014, the Company acquired a market-based
business that specializes in providing water distribution system services to prevent the contamination of potable
water, including training to waterworks operators. The total purchase price consisted of $1,800, of which $700
was paid in the first quarter of 2015. The operating revenues included in the consolidated financial statements of
the Company during the period owned by the Company for these utility systems and market-based businesses
were $13,493 in 2016, $19,154 in 2015, and $4,403 in 2014. The decrease in operating revenues is due to the sale
of a market-based business unit in 2016. The pro forma effect of the businesses acquired is not material either
individually or collectively to the Company’s results of operations.
Note 3 – Discontinued Operations and Other Dispositions
Discontinued Operations – In December 2014, we completed the sale of our water utility system in southwest
Allen County, Indiana to the City of Fort Wayne, Indiana (the “City”) for $67,011, which included a payment
received in December 2014 of $50,100 in addition to $16,911 the City already paid the Company for the northern
portion of our water and wastewater utility systems, which were acquired by the City in February 2008, by
eminent domain. We recognized a gain on sale of $29,210 ($17,611 after-tax) in the fourth quarter of 2014. As a
result of this transaction, Aqua Indiana will expand its sewer customer base by accepting new wastewater flows
from the City.
In September 2012, the Company began to market for sale its non-regulated wastewater treatment facility in
Georgia. In March 2014, we completed the sale of our wastewater treatment facility in Georgia, which concluded
our operations in this state.
The operating results, cash flows, and financial position of the Company’s subsidiaries named above have been
presented in the Company’s consolidated statements of net income, consolidated statements of cash flow, and
consolidated balance sheets as discontinued operations.
42
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
A summary of discontinued operations presented in the consolidated statements of net income includes the
following:
Operating revenues
Total operating expenses
Operating income
Other (income) expense:
Gain on sale
Other, net
Income from discontinued operations before income taxes
Provision for income taxes
Income from discontinued operations
Year Ended
December 31,
2014
$
$
6,324
3,262
3,062
(29,093)
-
32,155
12,800
19,355
As of December 31, 2016 and 2015 the Company does not have any assets or liabilities of discontinued operations
held for sale.
Other Dispositions – The following dispositions have not been presented as discontinued operations in the
Company’s consolidated financial statements as they do not qualify as discontinued operations, since their
disposal does not represent a strategic shift that has a major effect on our operations or financial results. The
gains or loss disclosed below are reported in the consolidated statements of net income as a component of
operations and maintenance expense. These business units were reported within the Company’s market-based
subsidiary, Aqua Resources, and were included in “Other” in the Company’s segment information.
Dispositions Completed in 2016
In the third quarter of 2016, the Company marketed for sale a business unit which inspects, cleans and repairs
storm and sanitary wastewater lines. In November 2016, this business unit was sold for $1,059 in cash and
resulted in a loss on sale of $1,081. Further, in December 2015, the Company decided to sell a business unit
which provides liquid waste hauling and disposal services. This business unit was reported as assets held for sale
in the Company’s December 31, 2015 consolidated balance sheet included in this Annual Report. During the
second quarter of 2016, this business unit was sold for $3,400 in cash and resulted in a gain on sale of $537.
Dispositions Reported as Assets Held for Sale at December 31, 2016
In the second quarter of 2016, the Company decided to market for sale business units, which install and test
devices that prevent the contamination of potable water and repair water and wastewater systems, for which the
sale was completed in January 2017, and a business unit that repairs and performs maintenance on water and
wastewater systems. These business units are reported within the Company’s market-based subsidiary, Aqua
Resources. These business units are reported as assets held for sale in the Company’s consolidated balance sheets
included in this Annual Report.
43
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 4 – Property, Plant and Equipment
Utility plant and equipment:
Mains and accessories
Services, hydrants, treatment plants and reservoirs
Operations structures and water tanks
Miscellaneous pumping and purification equipment
Meters, data processing, transportation and operating
i
Land and other non-depreciable assets
Utility plant and equipment
Utility construction work in progress
Net utility plant acquisition adjustment
Non-utility plant and equipment
Total property, plant and equipment
Note 5 – Accounts Receivable
Billed utility revenue
Unbilled revenue
Other
Less allowance for doubtful accounts
Net accounts receivable
December 31,
2016
2015
Approximate Range
of Useful Lives
Weighted Average
Useful Life
$ 2,898,560 $ 2,696,194
1,531,052
1,621,972
263,722
283,635
687,472
733,074
684,335
733,837
98,575
98,529
6,369,607
5,961,350
163,565
(25,683)
1,628
144,448
(24,428)
6,641
$ 6,509,117 $ 6,088,011
30 - 93 years
5 - 85 years
14 - 85 years
7 - 90 years
4 - 63 years
-
-
2 - 59 years
3 - 15 years
77 years
49 years
47 years
40 years
25 years
-
-
28 years
6 years
December 31,
2016
2015
63,518 $
34,635
6,336
104,489
7,095
97,394 $
56,876
37,276
10,867
105,019
5,873
99,146
$
$
The Company’s utility customers are located principally in the following states: 47% in Pennsylvania, 16% in
Ohio, 10% in North Carolina, 8% in Texas, and 8% in Illinois. No single customer accounted for more than one
percent of the Company's regulated operating revenues during the years ended December 31, 2016, 2015, and
2014. The following table summarizes the changes in the Company’s allowance for doubtful accounts:
Balance at January 1,
Amounts charged to expense
Accounts written off
Recoveries of accounts written off
Balance at December 31,
2016
2015
2014
5,873 $
5,500
(5,410)
1,132
7,095 $
5,365 $
5,762
(6,513)
1,259
5,873 $
4,413
5,838
(6,120)
1,234
5,365
$
$
44
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 6 – Regulatory Assets and Liabilities
The regulatory assets represent costs that are probable to be fully recovered from customers in future rates while
regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or amounts
recovered from customers in advance of incurring the costs. Except for income taxes, regulatory assets and
regulatory liabilities are excluded from the Company’s rate base and do not earn a return. The components of
regulatory assets and regulatory liabilities are as follows:
December 31, 2016
December 31, 2015
Income taxes
Utility plant retirement costs
Post-retirement benefits
Accrued vacation
Water tank painting
Fair value adjustment of long-term debt assumed in
acquisition
Rate case filing expenses and other
Regulatory
Assets
$
Regulatory
Liabilities
807,952 $
4,986
119,519
1,984
2,111
157,266
31,288
59,882
-
2,143
Regulatory
Assets
$
Regulatory
Liabilities
699,247 $
6,052
112,626
1,744
303
181,067
27,604
50,775
-
-
3,268
8,827
948,647 $
-
56
250,635
$
3,636
6,510
830,118 $
-
61
259,507
$
Items giving rise to deferred state income taxes, as well as a portion of deferred Federal income taxes related to
specific differences between tax and book depreciation expense, are recognized in the rate setting process on a
cash basis or as a reduction in current income tax expense and will be recovered as they reverse. Amounts
include differences that arise between specific utility asset improvement costs capitalized for book and deducted
as an expense for tax purposes.
A portion of the regulatory liability for income taxes is related to Aqua Pennsylvania’s income tax accounting
change for the tax benefits realized on the Company’s 2012 tax return, which have not yet reduced current income
tax expense due to the ten year amortization period which began in 2013. This amortization was stipulated in a
June 2012 rate order issued to Aqua Pennsylvania and is subject to specific parameters being met each year.
Beginning in 2013, the Company amortized $38,000, annually, of its deferred income tax benefits, which reduced
current income tax expense and increased the Company’s net income by $16,734.
The regulatory asset for utility plant retirement costs, including cost of removal, represents costs already incurred
that are expected to be recovered in future rates over a five year recovery period. The regulatory liability for
utility plant retirement costs represents amounts recovered through rates during the life of the associated asset and
before the costs are incurred.
The regulatory asset for accrued vacation represents costs that would otherwise be charged to operations and
maintenance expense for vacation that is earned by employees, which is recovered as a cost of service.
The regulatory asset for Post-retirement benefits, which includes pension and other post-retirement benefits,
primarily reflects a regulatory asset that has been recorded for the costs that would otherwise be charged to
stockholders’ equity for the underfunded status of the Company’s pension and other post-retirement benefit plans.
The Company also has a regulatory asset related to post-retirement benefits costs that represent costs already
incurred which are now being recovered in rates over 10 years. The regulatory liability for post-retirement
benefits represents costs recovered in rates in excess of post-retirement benefits expense.
Expenses associated with water tank painting are deferred and amortized over a period of time as approved in the
regulatory process. Water tank painting costs are generally being amortized over a period ranging from 1 to 20
45
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
years. The regulatory liability for water tank painting costs represents amounts recovered through rates and
before the costs are incurred.
The Company recorded a fair value adjustment for fixed rate, long-term debt assumed in acquisitions that matures
in various years ranging from 2022 to 2029. The regulatory asset or liability results from the rate setting process
continuing to recognize the historical interest cost of the assumed debt.
The regulatory asset related to rate case filing expenses and other represents the costs associated with filing for
rate increases that are deferred and amortized over periods that generally range from one to five years, and costs
incurred by the Company for which it has received or expects to receive rate recovery.
The regulatory asset related to the costs incurred for information technology software projects and water main
cleaning and relining projects are described in Note 1 – Summary of Significant Accounting Policies – Property,
Plant and Equipment and Depreciation.
Note 7 – Income Taxes
The provision for income taxes for the Company’s continuing operations consists of:
Current:
Federal
State
Deferred:
Federal
State
Total tax expense
Years Ended December 31,
2016
2015
2014
$
$
2,046 $
1,682
3,728
21,489
(4,239)
17,250
20,978 $
2,624 $
(4,168)
(1,544)
12,649
3,857
16,506
14,962 $
(11,296)
5,038
(6,258)
37,500
(6,023)
31,477
25,219
The statutory Federal tax rate is 35% and for states with a corporate net income tax, the state corporate net income
tax rates range from 4% to 9.99% for all years presented.
46
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The reasons for the differences between amounts computed by applying the statutory Federal income tax rate to
income before income tax expense for the Company’s continuing operations are as follows:
Computed Federal tax expense at statutory rate
Decrease in Federal tax expense related to an income tax accounting change for
qualifying utility asset improvement costs
State income taxes, net of Federal tax benefit
Increase in tax expense for depreciation expense to be recovered in future rates
Stock-based compensation
Deduction for Aqua America common dividends paid under employee benefit plan
Amortization of deferred investment tax credits
Other, net
Actual income tax expense
Years Ended December 31,
2016
2014
2015
$ 89,306 $ 75,863 $ 83,686
(57,015)
(62,831)
(640)
(1,662)
317
199
(168)
(227)
(350)
(455)
(416)
(405)
(2,947)
(195)
$ 20,978 $ 14,962 $ 25,219
(59,488)
(202)
199
(174)
(456)
(421)
(359)
In December 2012, the Company changed its tax method of accounting for qualifying utility system repairs in
Aqua Pennsylvania effective with the tax year ended December 31, 2012 and for prior tax years. The tax
accounting method was changed to permit the expensing of qualifying utility asset improvement costs that were
previously being capitalized and depreciated for book and tax purposes. This change was implemented in
response to a June 2012 rate order issued by the Pennsylvania Public Utility Commission to Aqua Pennsylvania
which provides for a reduction in current income tax expense as a result of the flow-through recognition of some
income tax benefits due to the income tax accounting change. In 2014, the Company recorded $69,048 of income
tax benefits. In 2015, the Company recorded $72,944 of income tax benefits. In 2016, the Company recorded
$78,530 of income tax benefits. The Company recognized a tax deduction on its 2012 Federal tax return of
$380,000 for qualifying capital expenditures made prior to 2012, and based on the rate order, in 2013, the
Company began to amortize 1/10th of these expenditures. In accordance with the rate order, the amortization is
expected to reduce current income tax expense during periods when qualifying parameters are met. Beginning in
2013, the Company amortized the qualifying capital expenditures made prior to 2012 and recognized $38,000,
annually, of deferred income tax benefits, which reduced current income tax expense and increased the
Company’s net income by $16,734. The Company’s effective income tax rate for 2016, 2015, and 2014, for its
continuing operations, was 8.2%, 6.9%, and 10.5%, respectively.
In September 2013, the Department of Treasury and the Internal Revenue Service issued “Guidance Regarding
Deduction and Capitalization of Expenditures Related to Tangible Property” which contains standards for
determining whether and when a taxpayer must capitalize costs incurred in acquiring, maintaining or improving
tangible property. These regulations were effective for the Company’s 2014 fiscal year, and the adoption of these
regulations did not have a material impact on the Company’s consolidated results of operations or consolidated
financial position.
The Company establishes reserves for uncertain tax positions based upon management’s judgment as to the
sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require
judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. The
Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as
required. However, to the extent the final tax outcome of these matters is different than the estimates recorded,
the Company would then adjust its tax reserves or unrecognized tax benefits in the period that this information
becomes known. The Company has elected to recognize accrued interest and penalties related to uncertain tax
positions as income tax expense.
47
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the changes in the Company’s unrecognized tax benefits:
Balance at January 1,
Additions based on tax position related to the current year
Balance at December 31,
2016
2015
$
$
28,016 $
83
28,099 $
25,292
2,724
28,016
The unrecognized tax benefits relate to the income tax accounting change, and the tax position is attributable to a
temporary difference. The Company does not anticipate material changes to its unrecognized tax benefits within
the next year. As a result of the regulatory treatment afforded by the income tax accounting change in
Pennsylvania and despite this position being a temporary difference, as of December 31, 2016 and 2015, $20,674
and $17,777 and, respectively, of these tax benefits would have an impact on the Company’s effective income tax
rate in the event the Company does sustain all, or a portion, of its tax position.
The following table provides the components of the net deferred tax liability from continuing operations:
Deferred tax assets:
Customers' advances for construction
Costs expensed for book not deducted for tax, principally accrued expenses
Utility plant acquisition adjustment basis differences
Post-retirement benefits
Tax loss carryforward
Other
Less valuation allowance
Deferred tax liabilities:
Utility plant, principally due to depreciation and differences in the basis of fixed assets
due to variation in tax and book accounting
Deferred taxes associated with the gross-up of revenues necessary to recover, in rates,
the effect of temporary differences
Tax effect of regulatory asset for post-retirement benefits
Deferred investment tax credit
Net deferred tax liability
December 31,
2016
2015
$
21,738 $
15,751
3,114
38,269
77,911
2,137
158,920
9,486
149,434
27,675
15,612
3,489
36,362
93,263
1,102
177,503
10,982
166,521
1,104,032
1,027,406
269,773
38,269
6,613
1,418,687
214,861
36,362
6,815
1,285,444
$
1,269,253
1,118,923
At December 31, 2016, the Company has a cumulative Federal net operating loss (“NOL”) of $113,144. The
Company believes the Federal NOLs are more likely than not to be recovered and require no valuation allowance.
The Company’s Federal NOLs do not begin to expire until 2032.
In 2012 and 2011, as a result of the Company’s Federal cumulative NOLs the Company ceased recognizing the
windfall tax benefit associated with stock-based compensation, because the deduction did not reduce income taxes
payable. As of December 31, 2015, the Company utilized all of the 2011 NOL and recognized a windfall tax
benefit of $1,680. As a result of the adoption on January 1, 2017 of the FASB’s updated accounting guidance on
simplifying the accounting for share-based payments, the Company will recognize a windfall tax benefit of
48
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
$2,805 associated with the Company's 2012 Federal NOL, which will be recorded as an adjustment to retained
earnings.
At December 31, 2016 the Company has a cumulative state NOL of $575,330, a portion of which is offset by a
valuation allowance because the Company does not believe these NOLs are more likely than not to be realized.
The state NOLs do not begin to expire until 2023.
The Company has unrecognized tax positions that result in the associated tax benefit being unrecognized. The
Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis,
of $62,747 and $85,044, respectively, which results from the Company’s adoption in 2013 of the FASB’s
accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward exists. The amounts of the Company’s Federal and state NOL
carryforwards prior to being reduced by the unrecognized tax positions are $175,891 and $660,373, respectively.
The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability.
As of December 31, 2016, the Company’s Federal income tax returns for all years through 2011 have been closed.
Tax years 2012 through 2016 remain open to Federal examination. The statute remains open for the Company’s
state income tax returns for tax years 2013 through 2016 in the various states in which the Company’s conducts
business.
Note 8 – Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes:
Property
Capital Stock
Gross receipts, excise and franchise
Payroll
Regulatory assessments
Pumping fees
Other
Total taxes other than income taxes
Note 9 – Commitments and Contingencies
Years Ended December 31,
2016
2015
2014
26,788 $
1,442
10,864
9,772
2,630
4,571
318
56,385 $
26,545 $
1,644
10,362
9,539
2,689
3,993
285
55,057 $
24,133
1,315
10,945
7,583
2,538
3,618
321
50,453
$
$
The following disclosures reflect commitments and contingencies for the Company’s continuing operations.
Commitments – The Company leases motor vehicles, buildings and other equipment under operating leases that
are noncancelable. The future annual minimum lease payments due are as follows:
2017
2018
2019
2020
2021
Thereafter
$
1,122 $
962 $
789 $
750 $
559 $
588
The Company leases parcels of land on which treatment plants and other facilities are situated and adjacent
parcels that are used for watershed protection. The operating leases are noncancelable, expire between 2017 and
2052 and contain renewal provisions. Some leases are subject to an adjustment every five years based on changes
49
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
in the Consumer Price Index. Subject to the aforesaid adjustment, during each of the next five years, an average
of $582 of annual lease payments for land is due, and the aggregate of the years remaining approximates $12,927.
The Company maintains agreements with other water purveyors for the purchase of water to supplement its water
supply, particularly during periods of peak demand. The agreements stipulate purchases of minimum quantities
of water to the year 2026. The estimated annual commitments related to such purchases through 2021 are
expected to average $5,075 and the aggregate of the years remaining approximates $13,587.
The Company has entered into purchase obligations, in the ordinary course of business, that include agreements
for water treatment processes at some of its wells in a small number of its divisions. The 20 year term agreement
provides for the use of treatment equipment and media used in the treatment process and are subject to adjustment
based on changes in the Consumer Price Index. The future contractual cash obligations related to these
agreements are as follows:
2017
2018
2019
2020
2021
Thereafter
$
22,153 $
1,101 $
1,101 $
1,100 $
1,099 $
7,326
Rent expense under operating leases, purchased water expense, and water treatment expenses under these
agreements were as follows:
Operating lease expense
Purchased water under long-term agreements
Water treatment expense under contractual agreement
Years Ended December 31,
2015
2014
2016
$
2,440 $
13,955
940
2,440 $
13,718
972
2,820
13,139
892
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 December 31, 2016, the aggregate amount of $13,892 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, Aqua America has insurance coverage for a number of these loss
contingencies, and as of December 31, 2016, estimates that approximately $1,242 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 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.
50
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Additionally, 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 $1,770 and
$1,496 at December 31, 2016 and 2015 and represents a reserve for unpaid claim costs, including an estimate for
the cost of incurred but not reported claims.
Note 10 – Long-term Debt and Loans Payable
Long-term Debt – The consolidated statements of capitalization provide a summary of long-term debt as of
December 31, 2016 and 2015. The supplemental indentures with respect to specific issues of the first mortgage
bonds restrict the ability of Aqua Pennsylvania and other operating subsidiaries of the Company to declare
dividends, in cash or property, or repurchase or otherwise acquire the stock of these companies. Loan agreements
for Aqua Pennsylvania and other operating subsidiaries of the Company have restrictions on minimum net
assets. As of December 31, 2016, restrictions on the net assets of the Company were $1,324,679 of the total
$1,850,068 in net assets. Included in this amount were restrictions on Aqua Pennsylvania’s net assets of $999,061
of their total net assets of $1,419,703. As of December 31, 2016, approximately $1,268,494 of Aqua
Pennsylvania’s retained earnings of approximately $1,288,494 and approximately $118,400 of the retained
earnings of approximately $171,800 of other subsidiaries were free of these restrictions. Some supplemental
indentures also prohibit Aqua Pennsylvania and some other subsidiaries of the Company from making loans to, or
purchasing the stock of, the Company.
Sinking fund payments are required by the terms of specific issues of long-term debt. Excluding amounts due
under the Company’s revolving credit agreement, the future sinking fund payments and debt maturities of the
Company’s long-term debt are as follows:
Interest Rate Range
0.00% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%
8.00% to 8.99%
9.00% to 9.99%
10.00% to 10.99%
2017
$
487 $
51,389
1,649
2,712
58,952
24,945
9,000
445
392
700
-
Total
$
150,671 $
2018
483 $
51,398
1,693
2,808
11,195
10,596
12,985
523
521
5,700
6,000
103,902 $
2019
2020
2021
Thereafter
486 $
486 $
484 $
1,287
1,739
2,760
50,404
31,125
-
566
563
700
-
1,232
1,786
2,557
16,617
23,120
-
612
611
2,400
-
1,003
1,835
2,595
15,298
8,402
-
663
1,662
4,900
-
89,630 $
49,421 $
36,842 $
2,235
9,230
10,966
613,512
468,452
274,699
31,000
30,257
2,816
12,000
-
1,455,167
In December 2016, Aqua Pennsylvania issued $85,000 of first mortgage bonds, of which $25,000 is due in 2051
and $60,000 is due in 2056 with interest rates of 3.85% and 3.95%, respectively. In January 2017, Aqua
Pennsylvania issued $50,000 of first mortgage bonds, of which $10,000 is due in 2042 and $40,000 is due in 2044
with interest rates of 3.65% and 3.69%, respectively. The proceeds from these bonds were used to repay existing
indebtedness and for general corporate purposes.
In November 2016, the Company issued $125,000 of senior notes, of which $35,000 is due in 2031, $30,000 is
due in 2034, $25,000 is due in 2035, $10,000 is due in 2038, and $25,000 is due in 2041 with interest rates of
3.01%, 3.19%, 3.25%, 3.41%, and 3.57%, respectively. The proceeds from these bonds were used to repay
existing indebtedness and for general corporate purposes.
In December 2015, Aqua Pennsylvania issued $210,000 of first mortgage bonds, of which $65,000 is due in 2036,
$20,000 is due in 2037, $25,000 is due in 2038, $60,000 is due in 2046, $20,000 is due in 2047, and $20,000 is
51
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
due in 2048 with interest rates of 3.77%, 3.82%, 3.85%, 4.16%, 4.18%, and 4.20%, respectively. The proceeds
from these bonds were used to repay existing indebtedness and for general corporate purposes.
In October 2015, Aqua Pennsylvania provided notice for the early redemption of $4,000 of first mortgage bonds
at 8.14% that were originally maturing in 2025 and $95,985 of tax-exempt bonds at 5.00% that were originally
maturing between 2035 and 2038. Upon early redemption in December 2015 of the tax-exempt bonds, a gain of
$678 was recognized resulting from the recognition of the unamortized issuance premium.
In May 2015, the Company issued $70,000 of senior unsecured notes due in 2030 with an interest rate of 3.59%.
The proceeds were used to repay existing indebtedness and for general corporate purposes.
In May 2015, Aqua Pennsylvania entered into a $50,000 three-year unsecured loan at an interest rate of 1.975%.
The proceeds from this loan were used for refinancing existing indebtedness and general working capital
purposes.
As of December 31, 2016 and 2015, the Company did not have any funds restricted for construction activity.
The weighted average cost of long-term debt at December 31, 2016 and 2015 was 4.23% and 4.44%,
respectively. The weighted average cost of fixed rate long-term debt at December 31, 2016 and 2015 was 4.26%
and 4.57%, respectively.
The Company has a five-year unsecured revolving credit facility, which was amended in February 2016 to extend
the expiration from March 2017 to February 2021, to increase the facility from $200,000 to $250,000, and added
a fourth bank to the lending group. Included within this facility is a $15,000 sublimit for daily demand loans.
Funds borrowed under this facility are classified as long-term debt and are used to provide working capital as well
as support for letters of credit for insurance policies and other financing arrangements. As of December 31, 2016,
the Company has the following sublimits and available capacity under the credit facility: $50,000 letter of credit
sublimit, $32,439 of letters of credit available capacity, $0 borrowed under the swing-line commitment, and
$25,000 of funds borrowed under the agreement. Interest under this facility is based at the Company’s option, on
the prime rate, an adjusted Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. A facility
fee is charged on the total commitment amount of the agreement. Under this facility the average cost of
borrowings was 1.54% and 0.87%, and the average borrowing was $89,374 and $82,880, during 2016 and 2015,
respectively.
The Company is obligated to comply with covenants under some of its loan and debt agreements. These
covenants contain a number of restrictive financial covenants, which among other things limit, subject to specific
exceptions, the Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and require
a minimum level of earnings coverage over interest expense. During 2016, the Company was in compliance with
its debt covenants under its credit facilities. Failure to comply with the Company’s debt covenants could result in
an event of default, which could result in the Company being required to repay or finance its borrowings before
their due date, possibly limiting the Company’s future borrowings, and increasing its borrowing costs.
Loans Payable – In November 2016, Aqua Pennsylvania renewed its $100,000 364-day unsecured revolving
credit facility with four banks. The funds borrowed under this agreement are classified as loans payable and used
to provide working capital. As of December 31, 2016 and 2015, funds borrowed under the agreement were
$5,545 and $7,281, respectively. Interest under this facility is based, at the borrower’s option, on the prime rate,
an adjusted federal funds rate, an adjusted London Interbank Offered Rate corresponding to the interest period
selected, an adjusted Euro-Rate corresponding to the interest period selected or at rates offered by the banks. This
agreement restricts short-term borrowings of Aqua Pennsylvania. A commitment fee of 0.05% is charged on the
total commitment amount of Aqua Pennsylvania’s revolving credit agreement. The average cost of borrowing
under the facility was 1.18% and 0.86%, and the average borrowing was $29,760 and $25,486, during 2016 and
52
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
2015, respectively. The maximum amount outstanding at the end of any one month was $52,905 and $40,000 in
2016 and 2015, respectively.
At December 31, 2016 and 2015, the Company had other combined short-term lines of credit of $35,500. Funds
borrowed under these lines are classified as loans payable and are used to provide working capital. As of
December 31, 2016 and 2015, funds borrowed under the short-term lines of credit were $990 and $9,440,
respectively. The average borrowing under the lines was $2,944 and $5,132 during 2016 and 2015, respectively.
The maximum amount outstanding at the end of any one month was $9,440 in 2016 and 2015, respectively.
Interest under the lines is based at the Company’s option, depending on the line, on the prime rate, an adjusted
Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. The average cost of borrowings under
all lines during 2016 and 2015 was 1.24% and 0.99%, respectively.
Interest Income and Expense– Interest income of $217, $272, and $316 was netted against interest expense on
the consolidated statement of net income for the years ended December 31, 2016, 2015, and 2014, respectively.
The total interest cost was $80,811, $76,808, and $76,713 in 2016, 2015, and 2014, including amounts capitalized
of $8,815, $6,219, and $5,134, respectively.
Note 11 – Fair Value of Financial Instruments
Financial instruments are recorded at carrying value in the financial statements and approximate fair value, with
the exception of long-term debt, 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 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 December 31, 2016 and 2015, the
carrying amounts of the Company's cash and cash equivalents were $3,763 and $3,229, which equates to their fair
value. The fair value of “available-for-sale” securities to fund our deferred compensation plan liability, which
represents mutual funds, is determined based on quoted market prices from active markets. As of December 31,
2016 and 2015, the carrying amount of these securities was $17,072 and $10,284. 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 December 31, 2016 and 2015, the Company did not have any funds
restricted for construction activity. As of December 31, 2016 and 2015, the carrying amount of the Company’s
loans payable was $6,535 and $16,721, respectively, which equates to their estimated fair value.
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
Carrying amount
Estimated fair value
December 31,
2016
2015
$
1,910,633
2,018,933
$
1,779,205
1,905,393
The fair value of long-term debt has been determined by discounting the future cash flows using current market
interest rates for similar financial instruments of the same duration utilizing level 2 methods and assumptions.
The Company’s customers’ advances for construction have a carrying value of $91,843 and $86,934 at December
31, 2016 and 2015, respectively. 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 2026 and
amounts not paid by the 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.
53
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 12 – Stockholders’ Equity
At December 31, 2016, the Company had 300,000,000 shares of common stock authorized; par value $0.50.
Shares outstanding and treasury shares held were as follows:
Shares outstanding
Treasury shares
2016
177,394,376
2,916,969
December 31,
2015
176,544,091
2,819,569
2014
176,753,270
1,837,984
At December 31, 2016, the Company had 1,770,819 shares of authorized but unissued Series Preferred Stock,
$1.00 par value.
In February 2015, the Company filed a universal shelf registration statement with the Securities and Exchange
Commission (“SEC”) to allow for the potential future sale by the Company, from time to time, in one or more
public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities and other
securities specified therein at indeterminate prices.
In February 2015, the Company filed a registration statement with the SEC which permits the offering, from time
to time, of an aggregate of $500,000 in shares of common stock and shares of preferred stock in connection with
acquisitions. During 2016, 439,943 shares of common stock totaling $12,845 were issued by the Company to
acquire a water utility system. The balance remaining available for use under the acquisition shelf registration as
of December 31, 2016 is $487,155.
The form and terms of any securities issued under the universal shelf registration statement and the acquisition
shelf registration statement will be determined at the time of issuance.
The Company has a Dividend Reinvestment and Direct Stock Purchase Plan (“Plan”) that allows reinvested
dividends to be used to purchase shares of common stock at a five percent discount from the current market value.
Under the direct stock purchase program, shares are purchased by investors at a five percent discount from the
market price. The shares issued under the Plan are either shares purchased by the Company’s transfer agent in the
open-market or original issue shares. In 2016, 2015, and 2014, 484,645, 535,439, and 558,317 shares of the
Company were purchased under the dividend reinvestment portion of the Plan by the Company’s transfer agent in
the open-market for $14,916, $14,380, and $14,148, respectively. During 2016 and 2015, under the dividend
reinvestment portion of the Plan, 47,478 and 26,295 original issue shares of common stock were sold, providing
the Company with proceeds of $1,388 and $677, respectively. During 2014 to minimize share dilution, the
Company did not sell original issue shares of common stock under the Plan.
In October 2013, the Company’s Board of Directors approved a resolution authorizing the Company to purchase,
from time to time, up to 685,348 shares of its common stock in the open market or through privately negotiated
transactions. This authorization renewed the number of shares that had remained, when affected for stock splits,
from an existing share buy-back authorization from 1997. The specific timing, amount and other terms of
repurchases will depend on market conditions, regulatory requirements and other factors. In 2014, we
repurchased 560,000 shares of our common stock in the open market for $13,280. In December 2014, the
Company’s Board of Directors authorized a share buyback program, commencing in 2015, of up to 1,000,000
shares to minimize share dilution through timely and orderly share repurchases. In December 2015, the
Company’s Board of Directors added 400,000 shares to this program. In 2016, we did not repurchase any shares
of our common stock in the open market. In 2015, we repurchased 805,000 shares of the Company’s common
stock in the open market for $20,502. This program expired on December 31, 2016.
54
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company’s accumulated other comprehensive income is reported in the stockholders’ equity section of the
consolidated balance sheets, the consolidated statements of equity, and the related components of other
comprehensive income are reported in the consolidated statements of comprehensive income. The Company
reports its unrealized gains or losses on investments as other comprehensive income and accumulated other
comprehensive income. The Company recorded a regulatory asset for its underfunded status of its pension and
other post-retirement benefit plans that would otherwise be charged to other comprehensive income, as it
anticipates recovery of its costs through customer rates.
Note 13 – Net Income per Common Share and Equity per Common Share
Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net
income per 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 share. The dilutive effect of stock-based compensation is calculated by 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 share:
Average common shares outstanding during the period for basic
computation
Effect of dilutive securities:
Employee stock-based compensation
Average common shares outstanding during the period for diluted
computation
Years ended December 31,
2015
2016
2014
177,273
176,788
176,864
573
729
899
177,846
177,517
177,763
For the years ended December 31, 2016, 2015, and 2014, all of the Company’s employee stock options were
included in the calculation 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.
Equity per common share was $10.43 and $9.78 at December 31, 2016 and 2015, respectively. These amounts
were computed by dividing Aqua America stockholders’ equity by the number of shares of common stock
outstanding at the end of each year.
Note 14 – Employee Stock and Incentive Plan
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 award, 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 common 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, 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
55
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
awards to non-employee directors, the Board of Directors makes such awards. At December 31, 2016, 3,952,869
shares underlying stock-based compensation awards were still available for grant under the 2009 Plan.
The recording of compensation expense for share-based compensation has no impact on net cash flows and results
in the reclassification on the consolidated cash flow statements of related tax benefits from cash flows from
operating activities to cash flows from financing activities to the extent these tax benefits exceed the associated
compensation cost.
Performance Share Units – During 2016, 2015, and 2014, the Company granted 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 periods, 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, which consisted of the following metrics for the 2016 grant:
• 27.5% of the PSUs could be earned based on the Company’s total shareholder return (“TSR”) compared
to the TSR for a specific peer group of investor-owned water companies (a market-based condition);
• 27.5% of the PSUs could be earned based on the Company’s TSR compared to the TSR for the
companies listed in the Standard and Poor’ Midcap Utilities Index (a market-based condition);
• 25% of the PSUs could be earned based on the achievement of a targeted cumulative level of rate base
growth as a result of acquisitions (a performance-based condition); and
• And 20% of the PSUs could be earned based on the achievement of targets for maintaining consolidated
operations and maintenance expenses over the three year measurement period (a performance-based
condition).
The performance goals of the 2015 and 2014 grants consisted of the following metrics:
• 30% of the PSUs could be earned based on the Company’s TSR compared to the TSR for a specific peer
group of investor-owned water companies (a market-based condition);
• 30% of the PSUs could be earned based on the Company’s TSR compared to the TSR for the companies
listed in the Standard and Poor’s Midcap Utilities Index (a market-based condition);
• 20% of the PSUs could be earned based on maintaining an average ratio of operations and maintenance
expenses as a percentage of revenues at Aqua Pennsylvania compared to a target average ratio for the
three year performance period (a performance-based condition); and
• 20% of the PSUs could be earned based on earning a cumulative total earnings before taxes for the
Company operations other than Aqua Pennsylvania for the three year performance period compared to a
target (a performance-based condition).
56
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides compensation costs for PSUs:
Stock-based compensation within operations and maintenance expense
Income tax benefit
Years ended December 31,
2015
2014
2016
$
3,823
1,552
4,419 $
1,796
4,996
2,044
The following table summarizes nonvested PSU transactions for the year ended December 31, 2016:
Nonvested share units at beginning of period
Granted
Performance criteria adjustment
Forfeited
Share units vested in prior period and issued in current period
Share units issued
Nonvested share units at end of period
Number of
Share Units
Weighted
Average Fair
Value
424,858 $
152,750
66,512
(21,964)
44,625
(189,885)
476,896 $
25.78
28.89
26.65
26.85
26.88
23.25
27.96
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the
market-based conditions associated with the PSUs using the Monte Carlo valuation method, which assesses the
probabilities of various outcomes of market conditions. The other portion of the fair value of the PSUs associated
with performance-based conditions was 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 fair value of each PSU grant is amortized into
compensation expense on a straight-line basis over their respective vesting periods, generally 36 months. The
accrual of compensation costs is based on an 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. The following table provides the assumptions used in the pricing model for the grant, the resulting
grant date fair value of PSUs, and the intrinsic value and fair value of PSUs that vested during the year:
Expected term (years)
Risk-free interest rate
Expected volatility
Weighted average fair value of PSUs granted
Intrinsic value of vested PSUs
Fair value of vested PSUs
Years ended December 31,
2015
2016
2014
3.0
0.91%
17.9%
28.89 $
5,912 $
5,104 $
3.0
1.03%
16.9%
26.46 $
7,964 $
6,416 $
$
$
$
3.0
0.68%
19.8%
25.31
4,327
3,297
57
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
As of December 31, 2016, $5,444 of unrecognized compensation costs related to PSUs is expected to be recognized
over a weighted average period of approximately 1.8 years. The aggregate intrinsic value of PSUs as of December
31, 2016 was $15,582. The aggregate intrinsic value of PSUs is based on the number of nonvested share units and
the market value of the Company’s common stock as of the period end date.
Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s
common stock and is valued based on the fair market value of the Company’s stock on the date of grant. RSUs
are eligible to be earned at the end of a specified restricted period, generally three years, beginning on the date of
grant. In some cases, the right to receive the shares is subject to specific performance goals established at the time
the grant is made. 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 compensation costs for RSUs:
Stock-based compensation within operations and maintenance expense
Income tax benefit
2016
$
Years ended December 31,
2015
2014
1,061 $
438
1,076 $
444
1,122
464
The following table summarizes nonvested RSU transactions for the year ended December 31, 2016:
Nonvested stock units at beginning of period
Granted
Stock units vested and issued
Forfeited
Nonvested stock units at end of period
The following table summarizes the value of RSUs:
Weighted average fair value of RSUs granted
Intrinsic value of vested RSUs
Fair value of vested RSUs
Number of
Stock Units
Weighted
Average Fair
Value
88,353 $
50,612
(25,740)
(3,952)
109,273 $
24.94
32.08
23.51
27.81
28.48
$
Years ended December 31,
2016
2015
2014
32.08 $
805
605
26.00 $
2,327
1,904
24.80
759
544
As of December 31, 2016, $1,498 of unrecognized compensation costs related to RSUs is expected to be recognized
over a weighted average period of approximately 1.8 years. The aggregate intrinsic value of RSUs as of December
31, 2016 was $3,283. The aggregate intrinsic value of RSUs is based on the number of nonvested stock units and
the market value of the Company’s common stock as of the period end date.
58
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Stock Options – The following table provides compensation costs for stock options:
Years ended December 31,
2016
2015
2014
Income tax benefit
$
260
$
193
$
189
There were no stock options granted during the years ended December 31, 2016, 2015, and 2014.
Options under the plans were issued at the closing market price of the stock on the day of the grant. Options are
exercisable in installments of 33% annually, starting one year from the date of the grant and expire 10 years from
the date of the grant. The fair value of options was estimated at the grant date using the Black-Scholes option-
pricing model, which relies on assumptions that require management’s judgment.
The following table summarizes stock option transactions for the year ended December 31, 2016:
Outstanding, beginning of year
Forfeited
Expired / Cancelled
Exercised
Outstanding and exercisable at end of year
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (years)
Aggregate
Intrinsic
Value
16.62
-
16.15
18.62
15.55
1.9 $
6,190
Shares
659,533 $
-
(3,436)
(228,762)
427,335 $
The intrinsic value of stock options is the amount by which the market price of the stock on a given date, such as at
the end of the period or on the day of exercise, exceeded the closing market price of stock on the date of grant. The
following table summarizes the aggregate intrinsic value of stock options exercised and the fair value of stock
options which became vested:
Intrinsic value of options exercised
Years ended December 31,
2016
2015
2014
$
2,945 $
4,154 $
4,054
59
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes information about the options outstanding and options exercisable as of
December 31, 2016:
Options Outstanding and Exercisable
Range of prices:
$13.00 - 14.99
$15.00 - 15.99
$16.00 - 16.99
$17.00 - 19.99
Weighted Average
Remaining Life
(years)
Shares
Weighted Average Exercise
Price
121,707
127,779
117,025
60,824
427,335
3.1
2.2
1.2
0.1
1.9
$
$
13.72
15.30
16.15
18.61
15.55
As of December 31, 2016, there were no unrecognized compensation costs related to nonvested stock options
granted under the plans.
Restricted Stock – Restricted stock awards provide the grantee with the rights of a shareholder, including the right
to receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the
restriction period. Restricted stock awards result in compensation expense which is equal to the fair market value
of the stock on the date of the grant and is amortized ratably over the restriction period. The Company expects
forfeitures of restricted stock to be de minimis.
The following table provides compensation costs for restricted stock:
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
- $
-
- $
-
691
287
The following table summarizes the value of restricted stock awards:
Years ended December 31,
2015
2016
2014
Years ended December 31,
2015
2016
2014
Intrinsic value of restricted stock awards vested
Fair value of restricted stock awards vested
Weighted average fair value of restricted stock awards granted
$
- $
-
-
860 $
553
-
1,097
906
25.19
As of December 31, 2016, there were no unrecognized compensation costs related to nonvested restricted stock as
restricted stock was fully amortized in 2014. Additionally, there was no restricted stock granted during the years
ended December 31, 2016 and 2015.
60
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Stock Awards – The following table provides compensation costs for stock-based compensation related to stock
awards:
Years ended December 31,
2015
2016
2014
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
506 $
210
365 $
151
-
-
The following table summarizes stock award transactions for year ended December 31, 2016:
Nonvested stock awards at beginning of period
Granted
Vested
Nonvested stock units at end of period
Number of
Stock Units
Weighted
Average Fair
Value
- $
15,877
(15,877)
- $
-
31.87
31.87
The per unit weighted-average fair value at the date of grant for stock awards granted during the years ended December
31, 2016 and 2015 was $31.87 and $26.44, respectively.
Note 15 – Pension Plans and Other Post-retirement Benefits
The Company maintains a qualified, defined benefit pension plan that covers its full-time employees who were
hired prior to April 1, 2003. Retirement benefits under the plan are generally based on the employee’s total years
of service and compensation during the last five years of employment. The Company’s policy is to fund the plan
annually at a level which is deductible for income tax purposes and which provides assets sufficient to meet its
pension obligations over time. To offset some limitations imposed by the Internal Revenue Code with respect to
payments under qualified plans, the Company has a non-qualified Supplemental Pension Benefit Plan for Salaried
Employees in order to prevent some employees from being penalized by these limitations, and to provide certain
retirement benefits based on employee’s years of service and compensation. The Company also has non-qualified
Supplemental Executive Retirement Plans for some current and retired employees. The net pension costs and
obligations of the qualified and non-qualified plans are included in the tables which follow. Employees hired
after April 1, 2003 may participate in a defined contribution plan that provides a Company matching contribution
on amounts contributed by participants and an annual profit-sharing contribution based upon a percentage of the
eligible participants’ compensation.
In August 2014, the Company announced changes to the way it will provide future retirement benefits to
employees acquired through a prior acquisition. Effective January 1, 2015, the Company began providing future
retirement benefits for these employees through its defined contribution plan. As a result, no further service will
be considered in future accruals in the qualified defined benefit pension plan after December 31, 2014, and as a
result of this change, the Company recognized a curtailment loss of $84 in 2014.
Effective July 1, 2015, the Company added a permanent lump sum option to the form of benefit payments offered
to participants of the qualified defined benefit pension plan upon retirement or termination. The plan paid $5,329
during the second half of 2015 to participants who elected this option and $9,990 during 2016.
In addition to providing pension benefits, the Company offers post-retirement benefits other than pensions to
employees hired before April 1, 2003 and retiring with a minimum level of service. These benefits include
61
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
continuation of medical and prescription drug benefits, or a cash contribution toward such benefits, for eligible
retirees and life insurance benefits for eligible retirees. The Company funds these benefits through various trust
accounts. The benefits of retired officers and other eligible retirees are paid by the Company and not from plan
assets due to limitations imposed by the Internal Revenue Code.
In 2016 the Company recognized a settlement loss of $2,895, which results from lump sum payments from the
non-qualified plans exceeding the threshold of service and interest cost for the period. A settlement loss is the
recognition of unrecognized pension benefit costs that would have been incurred in subsequent periods. The
Company recorded this settlement loss as a regulatory asset, as it is probable of recovery in future rates, which
will be amortized into pension benefit costs.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in
the years indicated:
Pension Benefits
Other Post-retirement Benefits
Years:
2017
2018
2019
2020
2021
2022-2026
$
$
20,791
20,640
20,240
21,369
20,824
104,672
2,025
2,296
2,570
2,815
2,974
17,701
62
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The changes in the benefit obligation and fair value of plan assets, the funded status of the plans and the
assumptions used in the measurement of the company’s benefit obligation are as follows:
Change in benefit obligation:
Benefit obligation at January 1,
Service cost
Interest cost
Actuarial (gain) loss
Plan participants' contributions
Benefits paid
Plan amendments
Settlements
Special termination benefits
Benefit obligation at December 31,
Change in plan assets:
Fair value of plan assets at January 1,
Actual return on plan assets
Employer contributions
Benefits paid
Settlements
Special termination benefits
Fair value of plan assets at December 31,
Funded status of plan:
Net amount recognized at December 31,
Pension Benefits
2016
2015
Other Post-retirement Benefits
2016
2015
$
$
306,539 $
3,179
13,038
15,321
-
(21,861)
-
(7,742)
(302)
308,172
238,605
17,375
16,285
(21,861)
(7,742)
(302)
242,360
311,609
3,349
12,955
(7,778)
-
(17,118)
3,220
-
302
306,539
244,897
(3,058)
13,884
(17,118)
-
-
238,605
65,137
1,014
2,927
1,400
170
(1,336)
-
-
-
69,312
43,704
2,149
1,360
(1,128)
-
-
46,085
$
71,958
1,224
2,802
(6,527)
204
(1,270)
(3,254)
-
-
65,137
43,326
(998)
2,428
(1,052)
-
-
43,704
$
65,812 $
67,934
$
23,227
$
21,433
63
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the net liability recognized on the consolidated balance sheets at December 31,:
Current liability
Noncurrent liability
Net liability recognized
Pension Benefits
2016
2015
Other Post-retirement Benefits
2016
2015
$
$
613 $
65,199
65,812 $
8,370
59,564
67,934
$
$
$
-
23,226
23,226
-
21,433
21,433
At December 31, 2016 and 2015, the Company’s pension plans had benefit obligations in excess of its plan assets.
The following tables provide the projected benefit obligation, the accumulated benefit obligation and fair market
value of the plan assets as of December 31,:
Projected benefit obligation
Fair value of plan assets
Accumulated benefit obligation
Fair value of plan assets
Projected Benefit Obligation Exceeds the Fair Value of
Plan Assets
2016
2015
$
308,172
242,360
$
306,539
238,605
Accumulated Benefit Obligation Exceeds the Fair Value
of Plan Assets
2016
2015
$
291,889
242,360
$
291,132
238,605
The following table provides the components of net periodic benefit costs for the years ended December 31,:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of actuarial loss
Settlement loss
Curtailment loss
Special termination benefits
Net periodic benefit cost
Pension Benefits
Other Post-retirement Benefits
2016
2015
$
3,179 $
3,349 $
13,038
(16,910)
578
7,153
2,895
-
302
12,955
(18,702)
174
5,993
-
-
-
$
10,235 $
3,769 $
2014
4,295
14,153
(17,601)
277
2,256
-
84
-
3,464
2016
2015
2014
$
1,014 $
1,224
$
1,161
2,927
(2,647)
(549)
926
-
-
-
2,802
(2,923)
(687)
1,282
-
-
-
2,903
(2,742)
(278)
260
-
-
-
$
1,671 $
1,698
$
1,304
The Company records the underfunded status of its pension and other post-retirement benefit plans on its
consolidated balance sheets and records a regulatory asset for these costs that would otherwise be charged to
stockholders’ equity, as the Company anticipates recoverability of the costs through customer rates to be
probable. The Company’s pension and other post-retirement benefit plans were underfunded at December 31,
2016 and 2015. Changes in the plans’ funded status will affect the assets and liabilities recorded on the balance
sheet. Due to the Company’s regulatory treatment, the recognition of the funded status is recorded as a regulatory
asset pursuant to the FASB’s accounting guidance for regulated operations.
64
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the amounts recognized in regulatory assets that have not been recognized as
components of net periodic benefit cost as of December 31,:
Net actuarial loss
Prior service cost (credit)
Total recognized in regulatory assets
Pension Benefits
2016
92,436 $
3,841
96,277 $
2015
87,930
4,419
92,349
$
$
Other Post-retirement Benefits
2016
15,441
(2,378)
13,063
$
$
2015
14,469
(2,926)
11,543
$
$
The following table provides the estimated net actuarial loss and prior service cost for the Company’s pension
plans that will be amortized from regulatory asset into net periodic benefit cost for the year ended December 31,
2017:
Net actuarial loss
Prior service cost (credit)
$
Pension Benefits
Other Post-retirement Benefits
1,165
(509)
$
8,023
579
Accounting for pensions and other post-retirement benefits requires 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. Each assumption is reviewed annually with assistance from the
Company’s actuarial consultant who provides guidance in establishing the assumptions. The assumptions are
selected to represent the average expected experience over time and may differ in any one year from actual
experience due to changes in capital markets and the overall economy. These differences will impact the amount
of pension and other post-retirement benefit expense that the Company recognizes.
The significant assumptions related to the Company’s benefit obligations are as follows:
Weighted Average Assumptions Used to Determine Benefit Obligations as of
December 31,
Discount rate
Rate of compensation increase
Pension Benefits
2015
2016
Other Post-
retirement Benefits
2016
2015
4.13%
4.48%
3.0-4.0% 3.0-4.0%
4.25%
n/a
4.60%
n/a
Assumed Health Care Cost Trend Rates Used to Determine Benefit Obligations as of
December 31,
Health care cost trend rate
Rate to which the cost trend is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
n/a
n/a
n/a
n/a
n/a
n/a
6.6%
5.0%
2020
7.0%
5.0%
2021
n/a – Assumption is not applicable.
65
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The significant assumptions related to the Company’s net periodic benefit costs are as follows:
Pension Benefits
2015
2016
2014
Other Post-retirement Benefits
2014
2015
2016
Weighted Average Assumptions Used to Determine
Net Periodic Benefit Costs for Years Ended
December 31,
Discount rate
Expected return on plan assets
Rate of compensation increase
Assumed Health Care Cost Trend Rates Used to
Determine Net Periodic Benefit Costs for Years
Ended December 31,
Health care cost trend rate
Rate to which the cost trend is assumed to decline
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
n/a – Assumption is not applicable.
4.48%
7.25%
5.12%
4.20%
7.50%
7.50%
3.0-4.0% 3.0-4.0% 4.0-4.5%
4.60%
4.17%
5.12%
4.83-7.25% 5.00-7.50% 5.00-7.50%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
7.0%
5.0%
2021
7.0%
5.0%
2019
7.5%
5.0%
2019
Assumed health-care trend rates have a significant effect on the expense and liabilities for other post-retirement
benefit plans. The health care trend rate is based on historical rates and expected market conditions. A one-
percentage point change in the assumed health-care cost trend rates would have the following effects:
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Effect on the health-care component of the accrued other post-retirement benefit
obligation
Effect on aggregate service and interest cost components of net periodic post-
retirement health-care benefit cost
$
$
4,456
$
(3,981)
267
$
(243)
The Company’s discount rate assumption, which is utilized to calculate the present value of the projected benefit
payments of our post-retirement benefits, was determined by selecting a hypothetical portfolio of high quality
corporate bonds appropriate to match the projected benefit payments of the plans. The selected bond portfolio
was derived from a universe of Aa-graded corporate bonds, all of which were noncallable (or callable with make-
whole provisions), and have at least $50,000 in outstanding value. The discount rate was then developed as the
rate that equates the market value of the bonds purchased to the discounted value of the plan’s benefit payments.
The Company’s pension expense and liability (benefit obligations) increases as the discount rate is reduced.
The Company’s expected return on plan assets is determined by evaluating the asset class return expectations with
its advisors as well as actual, long-term, historical results of our asset returns. The Company’s market related
value of plan assets is equal to the fair value of the plan’s assets as of the last day of its fiscal year, and is a
determinant for the expected return on plan assets which is a component of post-retirement benefits expense. The
Company’s pension expense increases as the expected return on plan assets decreases. For 2016, the Company
used a 7.25% expected return on plan assets assumption which will decrease to 7.00% for 2017. The Company
believes its actual long-term asset allocation on average will approximate the targeted allocation. The Company’s
investment strategy is to earn a reasonable rate of return while maintaining risk at acceptable levels through the
diversification of investments across and within various asset categories. Investment returns are compared to
benchmarks that include the S&P 500 Index, the Barclays Capital Intermediate Government/Credit Index, and a
66
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
combination of the two indices. The Pension Committee meets semi-annually to review plan investments and
management monitors investment performance quarterly through a performance report prepared by an external
consulting firm.
The Company’s pension plan asset allocation and the target allocation by asset class are as follows:
Domestic equities
International equities
Fixed income
Alternative investments
Cash and cash equivalents
Total
Target Allocation
25 to 75%
0 to 10%
25 to 50%
0 to 5%
0 to 20%
100%
Percentage of Plan Assets at
December 31,
2016
2015
65%
6%
19%
2%
8%
100%
63%
6%
24%
3%
4%
100%
The fair value of the Company’s pension plans’ assets at December 31, 2016 by asset class are as follows:
Level 1
Level 2
Level 3
Total
Domestic equities: (1)
Common stocks
Mutual funds
International equities (2)
Fixed income: (3)
$
152,740 $
3,668
13,813
- $
-
-
U.S. Treasury and government agency bonds
Corporate and foreign bonds
Mutual funds
-
-
9,752
11,170
24,385
Alternative investments: (4)
Real estate
Commodity funds
Cash and cash equivalents (5)
Total pension assets
2,613
1,279
348
184,213 $
-
-
22,592
58,147 $
$
-
-
-
-
-
-
-
-
-
-
$
$
152,740
3,668
13,813
11,170
24,385
9,752
2,613
1,279
22,940
242,360
67
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The fair value of the Company’s pension plans’ assets at December 31, 2015 by asset class are as follows:
Level 1
Level 2
Level 3
Total
Domestic equities: (1)
Common stocks
Mutual funds
International equities (2)
Fixed income: (3)
$
146,970 $
3,605
14,180
- $
-
-
U.S. Treasury and government agency bonds
Corporate and foreign bonds
Mutual funds
-
-
21,523
22,953
13,579
-
Alternative investments: (4)
Real estate
Commodity funds
Cash and cash equivalents (5)
Total pension assets
5,981
1,169
50
-
-
8,595
$
193,478 $ 45,127 $
-
-
-
-
-
-
-
-
-
-
$
146,970
3,605
14,180
22,953
13,579
21,523
5,981
1,169
8,645
238,605
$
(1) Investments in common stocks are valued using unadjusted quoted prices obtained from active markets.
Investments in equity mutual funds, which invest in stocks, are valued using the net asset value per unit as
obtained from quoted market prices from active markets.
(2) Investments in international equities are valued using unadjusted quoted prices obtained from active markets.
(3) Investments in U.S. Treasury and government agency bonds and corporate and foreign bonds are valued by a
pricing service which utilizes pricing models that incorporate available trade, bid, and other market
information to value the fixed income securities. Investments in fixed income mutual funds, which invest in
bonds, are valued using the net asset value per unit as obtained from quoted market prices in active markets.
(4) Alternative investments are comprised of real estate funds, real estate investment trusts, and commodity
funds, and are valued using unadjusted quoted prices obtained from active markets.
(5) Cash and cash equivalents are comprised of both uninvested cash and money market funds. The uninvested
cash is valued based on its carrying value, and the money market funds are valued utilizing the net asset value
per unit based on the fair value of the underlying assets as determined by the fund’s investment managers.
Equity securities include our common stock in the amounts of $20,632 or 8.5% and $19,958 or 8.4% of total
pension plans’ assets as of December 31, 2016 and 2015, respectively.
68
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset class
are as follows:
Percentage of Plan Assets at
December 31,
Domestic equities
International equities
Fixed income
Alternative investments
Cash and cash equivalents
Total
Target Allocation
2016
2015
25 to 75%
0 to 10%
25 to 50%
0 to 5%
0 to 20%
100%
52%
3%
25%
0%
20%
100%
54%
2%
26%
0%
18%
100%
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2016 by asset class
are as follows:
Domestic equities: (1)
Common stocks
Mutual funds
International equities (2)
Fixed income: (3)
U.S. Treasury and government agency bonds
Corporate and foreign bonds
Alternative investments (4)
Cash and cash equivalents (5)
Total other post-retirement assets
Level 1
Level 2
Level 3
Total
$
10,667 $
13,464
1,242
- $
-
-
-
-
172
-
$
25,545 $
4,968
6,347
-
9,225
20,540 $
- $
-
-
-
-
-
-
-
$
10,667
13,464
1,242
4,968
6,347
172
9,225
46,085
69
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2015 by asset class
are as follows:
Domestic equities: (1)
Common stocks
Mutual funds
International equities (2)
Fixed income: (3)
U.S. Treasury and government agency bonds
Corporate and foreign bonds
Mutual funds
Cash and cash equivalents (5)
Total other post-retirement assets
Level 1
Level 2
Level 3
Total
$
11,772 $
12,030
1,078
- $
-
-
-
-
2,177
-
4,551
4,476
-
7,620
$
27,057 $ 16,647 $
-
-
-
-
-
-
-
-
$
$
11,772
12,030
1,078
4,551
4,476
2,177
7,620
43,704
(1) Investments in common stocks are valued using unadjusted quoted prices obtained from active markets.
Investments in equity mutual funds, which invest in stocks, are valued using the net asset value per unit as
obtained from quoted market prices from active markets.
(2) Investments in international equities are valued using unadjusted quoted prices obtained from active markets.
(3) Investments in U.S. Treasury and government agency bonds and corporate and foreign bonds are valued by a
pricing service which utilizes pricing models that incorporate available trade, bid, and other market
information to value the fixed income securities. Investments in fixed income mutual funds, which invest in
bonds, are valued using the net asset value per unit as obtained from quoted market prices in active markets.
(4) Investments in alternative investments are comprised of investments in real estate funds and real estate
investment trusts and are valued using unadjusted quoted prices obtained from active markets.
(5) Cash and cash equivalents is comprised of money market funds, which are valued utilizing the net asset value
per unit based on the fair value of the underlying assets as determined by the fund’s investment managers.
Funding requirements for qualified defined benefit pension plans are determined by government regulations and
not by accounting pronouncements. In accordance with funding rules and the Company’s funding policy, during
2017 our pension contribution is expected to be $15,421.
The Company has a 401(k) savings plan, which is a defined contribution plan and covers substantially all
employees. The Company makes matching contributions that are initially invested in our common stock based on
a percentage of an employee’s contribution, subject to specific limitations. Participants may diversify their
Company matching account balances into other investments offered under the 401(k) savings plan. The
Company’s contributions, which are recorded as compensation expense, were $4,988, $5,001, and $3,051, for the
years ended December 31, 2016, 2015, and 2014, respectively.
Note 16 – Water and Wastewater Rates
On June 7, 2012, Aqua Pennsylvania reached a settlement agreement in its rate filing with the Pennsylvania
Public Utility Commission, which in addition to a water rate increase, provided for a reduction in current income
tax expense as a result of the recognition of qualifying income tax benefits upon Aqua Pennsylvania changing its
tax accounting method to permit the expensing of qualifying utility asset improvement costs that historically have
70
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
been capitalized and depreciated for book and tax purposes. In December 2012, Aqua Pennsylvania implemented
this change which provides for the flow-through of income tax benefits that resulted in a substantial reduction in
income tax expense and greater net income and cash flow. This change allowed Aqua Pennsylvania to suspend its
water Distribution System Improvement Charges in 2013 and lengthen the amount of time until the next Aqua
Pennsylvania rate case is filed.
The Company’s operating subsidiaries were allowed rate increases totaling $3,589 in 2016, $3,347 in 2015, and
$9,886 in 2014, represented by seven, four, and twelve rate decisions, respectively. Revenues from these
increases realized in the year of grant were approximately $1,801, $2,887, and $5,375 in 2016, 2015, and 2014,
respectively.
Six states in which the Company operates permit water utilities, and in five states wastewater utilities, to add a
surcharge to their water or wastewater bills to offset the additional depreciation and capital costs related to
infrastructure system replacement and rehabilitation projects completed and placed into service between base rate
filings. Currently, Pennsylvania, Illinois, Ohio, Indiana, New Jersey, and North Carolina allow for the use of this
surcharge. The surcharge for infrastructure system replacements and rehabilitations is typically adjusted
periodically based on additional qualified capital expenditures completed or anticipated in a future period, is
capped as a percentage of base rates, generally at 5% to 12.75%, and is reset to zero when new base rates that
reflect the costs of those additions become effective or when a utility’s earnings exceed a regulatory benchmark.
The surcharge for infrastructure system replacements and rehabilitations provided revenues in 2016, 2015, and
2014 of $7,379, $3,261, and $4,598, respectively.
Note 17 – 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 our water and wastewater
regulated utility companies which are organized by the states where we provide water and wastewater services.
These operating segments are aggregated into one reportable segment since 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 Resources and Aqua Infrastructure. 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.
71
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table presents information about the Company’s reportable segment:
2016
Other and
2015
Other and
Operating revenues
$ 800,107
$
19,768
$
819,875
$ 779,613
$
34,591
$
814,204
Regulated
Eliminations
Consolidated
Regulated
Eliminations
Consolidated
Operations and maintenance expense
Depreciation
Operating income (loss)
Interest expense, net
Allowance for funds used during construction
Equity (earnings) loss in joint venture
Income tax (benefit)
Net income (loss)
Capital expenditures
Total assets
Goodwill
285,347
131,835
326,933
76,222
8,815
-
24,956
234,922
381,965
19,550
(848)
(1,348)
4,372
-
(976)
(3,978)
(740)
1,031
304,897
130,987
325,585
80,594
8,815
(976)
20,978
234,182
382,996
282,866
125,146
315,876
72,703
6,219
-
26,379
224,122
363,594
26,444
144
5,224
3,833
-
35,177
(11,417)
(22,332)
1,095
309,310
125,290
321,100
76,536
6,219
35,177
14,962
201,790
364,689
5,953,702
205,289
6,158,991
5,541,335
176,538
5,717,873
37,367
4,841
42,208
27,246
6,620
33,866
2014
Other and
Regulated
Eliminations
Consolidated
Operating revenues
$ 756,057
$
23,846
$
779,903
Operations and maintenance expense
Depreciation
Operating income
Interest expense, net
Allowance for funds used during construction
Equity loss in joint venture
Income tax
Income (loss) from continuing operations
Capital expenditures
Total assets
Goodwill
274,754
122,728
305,333
72,106
5,134
-
24,792
213,890
325,943
13,802
326
9,026
4,291
-
3,989
427
(6)
2,662
288,556
123,054
314,359
76,397
5,134
3,989
25,219
213,884
328,605
5,172,371
210,872
5,383,243
24,564
6,620
31,184
72
Selected Quarterly Financial Data (Unaudited)
Aqua America, Inc. and Subsidiaries
(In thousands of dollars, except per share amounts)
2016
Operating revenues
Operations and maintenance expense
Operating income
Net income
Basic net income per common share
Diluted net income per common share
Dividend paid per common share
Dividend declared per common share
Price range of common stock:
- high
- low
2015
Operating revenues
Operations and maintenance expense
Operating income
Net income
Basic net income per common share
Diluted net income per common share
Dividend paid per common share
Dividend declared per common share
Price range of common stock:
- high
- low
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$
192,607 $
203,876 $
226,593 $
196,799 $
819,875
73,541
72,331
51,737
0.29
0.29
0.178
0.178
32.44
28.35
73,994
83,493
59,626
0.34
0.33
0.178
0.178
35.66
30.31
79,812
97,799
73,170
0.41
0.41
0.1913
0.1913
35.83
29.53
77,550
71,962
49,649
0.28
0.28
0.1913
0.1913
31.29
28.03
304,897
325,585
234,182
1.32
1.32
0.7386
0.7386
35.83
28.03
$
190,326 $
205,760 $
221,051 $
197,067 $
814,204
73,189
71,167
48,545
0.27
0.27
0.165
0.165
28.13
25.42
79,746
80,246
57,382
0.32
0.32
0.165
0.165
27.53
24.40
78,519
95,072
67,429
0.38
0.38
0.178
0.178
27.10
24.45
77,856
74,615
28,434
0.16
0.16
0.178
0.178
31.09
26.20
309,310
321,100
201,790
1.14
1.14
0.686
0.686
31.09
24.40
Fourth quarter of 2015 net income includes the Company’s share of a joint venture impairment charge of $21,433
($32,975 pre-tax).
High and low prices of the Company’s common stock are as reported on the New York Stock Exchange.
73
Summary of Selected Financial Data (Unaudited)
Aqua America, Inc. and Subsidiaries
(In thousands of dollars, except per share amounts)
Years ended December 31,
PER COMMON SHARE:
Income from continuing operations:
Basic
Diluted
Income from discontinued operations:
Basic
Diluted
Net income:
Basic
Diluted
Cash dividends declared and paid
Return on Aqua America stockholders' equity
Book value at year end
Market value at year end
INCOME STATEMENT HIGHLIGHTS:
Operating revenues
Depreciation and amortization
Interest expense, net
Income from continuing operations before income taxes (1)
Provision for income taxes
Income from continuing operations (1)
Income from discontinued operations
Net income (1)
BALANCE SHEET HIGHLIGHTS:
$
$
2016
2015
2014
2013
2012
$
1.32 $
1.32
1.14 $
1.14
-
-
-
-
1.32
1.32
0.74
12.7%
10.43 $
30.04
1.14
1.14
0.69
11.7%
9.78 $
29.80
1.21 $
1.20
0.11
0.11
1.32
1.31
0.63
14.1%
9.37 $
26.70
1.15 $
1.15
0.10
0.10
1.26
1.25
0.58
14.4%
8.68 $
23.59
1.04
1.04
0.08
0.08
1.13
1.12
0.54
14.2%
7.91
20.34
819,875 $
133,008
80,594
255,160
20,978
234,182
-
234,182
814,204 $
128,737
76,536
216,752
14,962
201,790
-
201,790
779,903 $
126,535
76,397
239,103
25,219
213,884
19,355
233,239
761,893 $
123,985
77,316
224,104
21,233
202,871
18,429
221,300
750,685
116,180
77,757
247,057
65,220
181,837
14,726
196,563
Total assets
Property, plant and equipment, net
Aqua America stockholders' equity
Long-term debt, including current portion, excluding debt
issuance costs (3)
Total debt, excluding debt issuance costs (3)
$
6,158,991 $
5,001,615
1,850,068
5,717,873 $
4,688,925
1,725,930
5,383,243 $
4,401,990
1,655,343
5,027,430 $
4,138,568
1,534,835
4,834,165
3,907,552
1,385,704
1,910,633
1,917,168
1,779,205
1,795,926
1,619,270
1,637,668
1,554,871
1,591,611
1,588,992
1,669,375
ADDITIONAL INFORMATION:
$
Operating cash flows from continuing operations
Capital additions
Net cash expended for acquisitions of utility systems and other
Dividends on common stock
Number of utility customers served (2)
Number of shareholders of common stock
Common shares outstanding (000)
Employees (full-time) (2)
395,788 $
382,996
9,423
130,923
972,265
24,750
177,394
1,551
370,794 $
364,689
28,989
121,248
957,866
25,269
176,544
1,617
364,888 $
328,605
14,616
112,106
940,119
25,780
176,753
1,617
365,409 $
307,908
14,997
102,889
928,200
25,833
176,751
1,542
375,823
347,098
121,248
93,423
917,986
26,216
175,209
1,556
(1) 2015 results includes Aqua America's share of a joint venture impairment charge of $21,433 ($32,975 pre-tax)
(2) Reflects continuing operations
(3) Debt issuance costs for the years ended December 31, 2016, 2015, 2014, 2013, and 2012 were $22,357, $23,165,
$23,509, $24,387, and $24,352, respectively
74
Stock Price Performance
The graph below matches Aqua America, Inc.’s cumulative 5-Year total shareholder return on common stock with
the cumulative total returns of the S&P 500 index and the S&P MidCap 400 Utilities index. The graph tracks the
performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends)
from 12/31/2011 to 12/31/2016.
Comparison of Five Year Cumulative Total Return*
Among Aqua America, Inc., the S&P 500 Index, and S&P MidCap 400 Utilities Index
*$100 invested on 12/31/11 in stock or index, including reinvestment of dividends Fiscal year ending December 31.
Copyright© 2017 Standard & Poor’s, a division of S&P Global. All rights reserved.
Years as of December 31
2011
2012
2013
2014
2015
2016
Aqua America, Inc.
100.00
118.60
140.85
163.52
187.23
193.25
S&P 500 Index
100.00
116.00
153.58
174.60
177.01
198.18
S&P MidCap 400 Utilities Index
100.00
103.14
131.73
155.87
150.35
189.93
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
75
Financial Reports and Investor Relations
Copies of the company’s public financial reports,
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
including annual reports and Forms 10–K and 10–Q,
Two Commerce Square
are available online and can be downloaded from
Suite 1700
the investor relations section of our Website at
2001 Market Street
AquaAmerica.com. You may also obtain these reports
Philadelphia, PA 19103-7042
by writing to us at:
Investor Relations Department
Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Corporate Governance
We are committed to maintaining high standards of
corporate governance and are in compliance with
the corporate governance rules of the Securities and
Stock Exchange
The Common Stock of the company is listed on the
New York Stock Exchange and under the ticker symbol
WTR.
Dividend Reinvestment and Direct Stock
Purchase Plan
The company’s Dividend Reinvestment and Direct
Stock Purchase Plan (“Plan”) enables shareholders
to reinvest all, or a designated portion of, dividends
Exchange Commission (SEC) and the New York Stock
paid on up to 100,000 shares of Common Stock in
Exchange. Copies of our key corporate governance
additional shares of Common Stock at a discretionary
documents, including our Corporate Governance
discount from a price based on the market value of
Guidelines, Code of Ethical Business Conduct, and the
the stock. The discount between 0 and 5.0 percent on
charters of each committee of our Board of Directors
the shares purchased or issued to meet the dividend
can be obtained from the corporate governance
reinvestment requirement will be designated by us in
portion of the investor relations section of our Website,
our sole discretion prior to the purchase or issuance
AquaAmerica.com. Amendments to the Code, and in
of such shares. We reserve the right to change, reduce
the event of any grant of waiver from a provision of the
or discontinue any discount at any time without notice.
Code requiring disclosure under applicable SEC rules
In addition, shareholders may purchase additional
will be disclosed on our Website.
shares of Aqua America Common Stock at any time
with a minimum investment of $50, up to a maximum
of $250,000 annually. Individuals may become
shareholders by making an initial investment of at
least $500. A Plan prospectus may be obtained by
calling Computershare at 800.205.8314 or by visiting
www.computershare.com/investor. Please read the
prospectus carefully before you invest.
Annual Meeting
8:30 a.m. Eastern Daylight Time
Wednesday, May 3, 2017
Drexelbrook Banquet Facility and Corporate Center
4700 Drexelbrook Drive
Drexel Hill, PA 19026
Transfer Agent and Registrar
Computershare
P.O. BOX 30170
College Station, TX 77842
800.205.8314 or
www.computershare.com/investor
76
IRA, Roth IRA, Education IRA
An IRA, Roth IRA or Coverdell Education Savings
How to obtain a separate set of voting materials
If you are a registered shareholder who shares an
Account may be opened through the Plan to hold
address with another registered shareholder and have
shares of Common Stock of the company and to
received only one Notice of Internet Availability of
make contributions to the IRA to purchase shares of
Proxy Materials or set of proxy material and wish to
Common Stock. Participants in the Plan may roll over
receive a separate copy for each shareholder in your
an existing IRA or other qualified plan distribution
household for the 2016 annual meeting, you may write
in cash into an IRA under the Plan to purchase the
or call us to request a separate copy of this material at
company’s Common Stock. Participants may also
no cost to you at 610.645.1196 or write us at:
transfer the company’s Common Stock from an existing
IRA into an IRA under the Plan. A prospectus, IRA forms
and a disclosure statement may be obtained by calling
Computershare at 800.597.7736. Please read the
prospectus carefully before you invest.
Attn: Investor Relations
Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA, 19010
Direct Deposit
With direct deposit, Aqua America cash dividends are
For future annual meetings, you may request separate
voting material by calling Broadridge at 800.542.1061,
or by writing to Broadridge Financial Solutions,
deposited automatically on the dividend payment date
Inc., Householding Department, 51 Mercedes Way,
of each quarter. Shareholders will receive confirmation
Edgewood, New York 11717.
Account Access
Aqua America shareholders may access their account
by visiting www.computershare.com/investor.
Shareholders may view their account, purchase
additional shares, and make changes to their account.
To learn more, visit www.computershare.com/investor
or call 800.205.8314.
of their deposit in the mail. Shareholders interested in
direct deposit should call the company’s transfer agent
at 800.205.8314.
Delivery of voting materials to shareholders sharing
an address
The SEC’s rules permit the Company to deliver a
Notice of Internet Availability of Proxy Materials or a
single set of proxy materials to one address shared
by two or more of the Company’s shareholders.
This is intended to reduce the printing and postage
expense of delivering duplicate voting materials
to our shareholders who have more than one Aqua
America stock account. A separate Notice of Internet
Availability or proxy card is included for each of these
shareholders. If you received a Notice of Internet
Availability you will not receive a printed copy of the
proxy materials unless you request it by following the
instructions in the notice for requesting printed proxy
material.
77
Dividends
Aqua America has paid dividends for 72 consecutive years. The normal Common Stock dividend dates for 2017
and the first six months of 2018 are:
Declaration Date
Ex-Dividend Date
Record Date
Payment Date
February 3, 2017
February 13, 2017
February 15, 2017
March 1, 2017
May 5, 2017
May 15, 2017
May 17, 2017
June 1, 2017
August 4, 2017
August 14, 2017
August 16, 2017
September 1, 2017
November 6, 2017
November 15, 2017
November 17, 2017
December 1, 2017
February 5, 2018
February 14, 2018
February 16, 2018
March 1, 2018
May 7, 2018
May 16, 2018
May 18, 2018
June 1, 2018
To be an owner of record, and therefore eligible to
Escheatment is the act of reporting and transferring
receive the quarterly dividend, shares must have been
property to a state when the rightful owner has an
purchased before the ex-dividend date. Owners of
invalid address or has not made contact or initiated a
any share(s) on or after the ex-dividend date will not
transaction during the state’s designated dormancy
receive the dividend for that quarter. The previous
period. Escheated assets are transferred to the state
owner — the owner of record — will receive the
for safekeeping (and often liquidated) until the rightful
dividend.
Only the Board of Directors may declare dividends and
set record dates. Therefore, the payment of dividends
and these dates may change at the discretion of the
Board.
Dividends paid on the company’s Common Stock are
subject to Federal and State income tax.
Lost Dividend Checks, Stock Certificates and
Escheatment
Dividend checks lost by shareholders, or those that
might be lost in the mail, will be replaced upon
owner makes a claim on the asset. To keep your
shares of stock and uncashed dividends from being
escheated, you must maintain contact (recommended
at least once a year) with the company’s transfer
agent, especially if you recently changed your address,
changed your marital status or are managing an estate
following a death. Unclaimed property laws vary widely
from state to state.
Safekeeping of Stock Certificates
Under the Direct Stock Purchase Plan, shareholders
may have their stock certificates deposited with
the transfer agent for safekeeping free of charge.
Stock certificates and written instructions should be
notification of the lost or missing check. All inquiries
forwarded to:
concerning lost or missing dividend checks should be
made to the company’s transfer agent at 800.205.8314.
Shareholders should call or write the company’s
transfer agent to report a lost certificate. Appropriate
documentation will be prepared and sent to the
shareholder with instructions.
Computershare, N.A.
P.O. Box 30170
College Station, TX 77842.
78
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Fulfilling Our Mission
With Dedication.
Aqua America continued to fulfill its mission to protect and
provide Earth’s most essential resource by making meaningful
advancements in the areas of service delivery, growth
opportunities, stakeholder education, community outreach and
workforce diversity in 2016.
Aqua America’s customers continued to see improvements in
water and service reliability delivered by the company. Progressive
legislation in Pennsylvania set the stage for additional opportunities
for Aqua America to bring its expertise to new communities. The
company worked cooperatively with environmental regulators to
maintain water quality compliance, using its engineering, operations
and technical expertise to address challenges in troubled systems.
Aqua America continued its environmental stewardship by
volunteering and financially supporting various activities, like
stream cleanups, to ensure clean water for everyone. All of these
efforts are being accomplished with a professional workforce,
which Aqua America is continuing to develop and grow, with the
goal of sustaining excellent quality and service, and achieving a
level of diversity that reflects the customers we serve.
Corporate Information
Board Of Directors
Officers
Christopher H. Franklin
President and Chief Executive Officer
Richard S. Fox
Executive Vice President and Chief Operating
Officer, Regulated Operations
Karen M. Heisler
Senior Vice President and
Chief Human Resources Officer
Christopher P. Luning
Senior Vice President, General Counsel and
Secretary
William C. Ross
Senior Vice President
Engineering and Environmental Affairs
Robert A. Rubin
Senior Vice President
Controller and Chief Accounting Officer
Daniel J. Schuller, PhD.
Executive Vice President
Corporate Development and Strategy
David P. Smeltzer
Executive Vice President
Chief Financial Officer
Nicholas DeBenedictis
Non-executive Chairman and former
Chief Executive Officer
Aqua America, Inc.
Director since 1992
Christopher H. Franklin
President and Chief Executive Officer
Aqua America, Inc.
Director since 2015
Carolyn J. Burke
Executive Vice President, Business Operations
and Systems
Dynegy, Inc.
Director since 2016
Richard H. Glanton
Founder, Chairman and Chief Executive Officer
Elected Face, Inc.
Director since 1995
Lon R. Greenberg
Chairman Emeritus
UGI Corporation
Director since 2005
William P. Hankowsky
Chairman, President and Chief Executive Officer
Liberty Property Trust
Director since 2004
Wendell F. Holland, Esq.
Partner
CFSD Group, LLC.
Director since 2011
Ellen T. Ruff
Partner
McGuireWoods, LLP.
Director since 2006
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Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, Pennsylvania 19010
877.987.2782
AquaAmerica.com
NYSE: WTR
2016
Annual Report
Aqua America, Inc.
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