2017
Annual
Report
Proud to be part of our nation’s water and wastewater infrastructure solution.
Aqua America, Inc.
Forward-Looking Information
This document includes forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are
based on management’s beliefs and assumptions. Various factors may cause actual results
to be materially different than the suggested outcomes within forward-looking statements.
Accordingly, there is no assurance that such results will be realized. For details on the
uncertainties that may cause the Company’s actual future results to be materially different than
those expressed in our forward-looking statements, see our Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission (“SEC”)
and available on the SEC’s website at www.sec.gov. In light of these risks, uncertainties, and
assumptions, the events described in the forward-looking statements might not occur or might
occur to a different extent or at a different time than described. Forward-looking statements
speak only as of the date they are made. Aqua America, Inc. expressly disclaims an obligation
to publicly update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Aqua America’s Core Values:
Integrity, Respect and the Pursuit of Excellence.
At Aqua, our values are close to heart, embedded at the core of our company and
reinforce the commitment we have to being exceptional. They are the principles
that guide and inspire our work as a leader in the renewal of our nation’s water and
wastewater infrastructure for stronger communities.
Integrity: Aqua is a place of honesty, good character and trust. We care about one
another, our customers and our mission of protecting and providing Earth’s most
essential resource.
Respect: We are committed to one another, our customers, the community and
the environment. We respect our well-being and the importance of time with
family and friends.
Excellence: Whether at home or at work, we seek growth and development
opportunities and excel in safety and customer service. We work to uphold a
successful company that maximizes shareholder value.
At Aqua, we approach every day with integrity, respect and the pursuit of
excellence to be the best we can be.
AQUA 2017 ANNUAL REPORT | 1
Financial Highlights
in thousands of dollars, except per-share amounts
Operating revenues
$809,525
$819,875
(1.3%)
2017
2016
% Change
Regulated segment
Operating revenues
$804,905
$800,107
0.6%
Operating and maintenance expense
$286,962
$285,347
(0.6%)
Net income
$239,738
$234,182
Diluted net income per common share
$1.35
$1.32
2.4%
2.2%
Annualized dividend rate
per common share (12/31)
$0.818
$0.765
7.0%
Total assets
$6,332,463
$6,158,991
2.8%
Number of utility customers served
982,849
972,265
1.1%
$1.35
$1.32
$1.26
Diluted Net Income
per Common Share
$1.20
$1.15
Capital Spending
(existing operations)
’ 13
’ 14
’ 15†
’ 16
’ 17
$307,908
$328,605
$364,689
$382,996
$478,089
’ 13
’ 14
’ 15
’ 16
’ 17
982,849
972,265
957,866
Utility Customer
Connections
(continuing operations)
940,119
928,200
Dividend per Share
(annualized)
’ 13
’ 14
’ 15
’ 16
’ 17
$0.818
$0.765
$0.712
$0.660
$0.608
’ 13
’ 14
’ 15
’ 16
’ 17
† 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
AQUA 2017 ANNUAL REPORT | 3
A message
from the
Chairman & CEO
Christopher H. Franklin
Chairman, President, and Chief Executive Officer
The year 2017 ushered in a renewed national dialogue on
the state of our country’s infrastructure. Throughout the
year, the nation’s roads, bridges, water and wastewater
systems were a topic of conversation from the Oval Office
to dining room tables across the country. From calls for
urgent investment in rapidly deteriorating infrastructure
to frank discussions over how to fund such a vast need,
it’s been a critically important conversation – and one that
Aqua has long been championing.
The state of our nation’s water infrastructure
When it comes to water and wastewater infrastructure,
the reality is that the United States has more than 1 million
miles of underground pipe, much of which is nearly a
century old and in dire need of replacement. According
to the American Water Works Association, it will cost
an estimated $1 trillion to maintain and expand drinking
water service to meet demands over the next 20 years.
There is no question that upgrading water and wastewater
infrastructure is a major challenge facing our country, and
Aqua is proud to be leading the charge when it comes to
offering a viable solution. As one of the largest publicly
regulated water companies in the country, we are actively
renewing and improving infrastructure through thoughtful
and continuous capital investment. In fact, in 2017 alone,
we invested $478 million in water and wastewater
infrastructure.
Aqua America’s role in infrastructure renewal
Most importantly, our investment has had a direct impact
on the communities we serve across our eight-state
footprint – communities like:
• University Park, Illinois, where we were able to
significantly improve water quality with a 14-mile
pipeline project
• Lakes of Mission Grove, Texas, which lacked its
own wastewater plant
• Southeastern Pennsylvania, where main breaks
were reduced by 70 percent following significant
infrastructure investments
You can read more about the investment Aqua has made in
these communities in the pages that follow.
In September, I had the great honor of addressing the
U.S. House of Representatives’ Transportation and
Infrastructure Committee’s Subcommittee on Water
Resources and the Environment, where I explained to
legislators why publicly regulated utilities like Aqua are
well positioned to play a major role in helping more cities
and towns across the country address their water and
wastewater needs. As I told Congress, the road to repairing
and replacing water and wastewater infrastructure in
the country should include private capital going to work
to help solve the problem. In speaking out on these
issues, I hope to continue encouraging discourse on the
importance of infrastructure investment, and about our
willingness to be a part of the solution.
Investment in water infrastructure is an important
component of our business strategy. It ensures that we can
continue to provide safe and reliable water and wastewater
services, which in turn leads to increased customer
confidence and supports Aqua’s excellent reputation.
Additionally, this investment is the base from which we
grow shareholder value.
Our activity in this area requires that any opportunity
would be scalable, would come with a management
team and would provide a product or service that would
include regulated utilities as their customers. Although
we have considered several market-based opportunities,
the regulated market has been particularly active and has
required the largest portion of management’s time.
Since 2015, we have sold the small, market-based
businesses that were determined not to be scalable and
have focused almost entirely on the regulated business.
While market-based opportunities remain in our strategy,
our near-term activity will focus primarily on the regulated
business.
A strong commitment to stakeholders
For the last 25 years, I have been proud to work for a
company that is driven by talented, motivated employees
who give back to the communities in which we operate.
On behalf of the senior leadership team and board of
directors, I thank each employee who focuses every day on
supporting Aqua’s mission to protect and provide Earth’s
most essential resource. I’d also like to extend a special
thanks to our shareholders for your continued confidence
and support, which enables us to execute on our goals so
successfully.
As Americans and as the current stewards of our country’s
infrastructure, we believe we have a responsibility not
only to our company and our shareholders, but also to our
fellow citizens, to invest in and maintain our infrastructure.
Our infrastructure is basic to our quality of life, commerce
and security – our commitment has never been stronger.
With appreciation,
A three-pronged strategy for growth
Our work to continue building shareholder value manifests
itself in our three-pronged growth strategy. The company
has followed this strategy for two years and it is proving
successful. The first prong of the strategy is our work to
become the solution chosen by middle-market municipal
water and wastewater utilities as they face the financial,
compliance and operational challenges of running utility
systems. Unlike elected officials who must share their
daily focus beyond running a utility with responsibilities
in human services, public safety, and roads and bridges,
among other challenges, our dedicated employees at
Aqua focus their undivided time improving and maintaining
water and wastewater infrastructure.
Since we’ve applied our three-pronged strategy two years
ago, we’ve acquired more customers from municipal
systems than we had in the previous eight years, and our
pipeline of opportunities is stronger than ever before.
The second prong of our strategy focuses on the
acquisition of regulated utilities. Over many years, we’ve
developed a deep expertise installing pipe and plant and
successfully recovering the cost of the capital and return
on the capital through the regulatory process. In fact, we’ve
installed 538 miles of main, just in the past three years. Our
expertise in this area can be more broadly applied to solve
infrastructure rehabilitation issues faced by other utilities
through a disciplined acquisition program. Management
and the board continue to explore opportunities to apply
our core expertise by seeking relationships that could lead
to the acquisition of additional regulated operations.
While market premiums for mergers and acquisitions
remain elevated, our work in this area remains active and
the team is attentive to potential opportunities in the
regulated market.
Our third prong in the growth strategy considers market-
based opportunities. These are acquisition opportunities
that are outside the regulated business but would
complement the regulated business and capitalize on our
core strengths.
“ According to the American Water Works Association, it will
A
A
A
According to the American Water Works Association, it will
c
co
ost an estimated $1 trillion to maintain and expand drinking
cost an estimated $1 trillion to maintain and expand drinking
water service to meet demands over the next 20 years.
water service to meet demands over the next 20 years.
W t W
t th A
i ti
di
it
“
AQUA 2017 ANNUAL REPORT | 5
AQUA 2017 ANNUAL REPORT | 5
Pennsylvania Main
Replacement Program
Aqua Pennsylvania
01
Renewed Infrastructure
Benefits Customers and the
Environment
Aqua Pennsylvania owns and is responsible for 5,800 miles of pipe—varying in size, type and
age—in 32 counties. Much of this water infrastructure is approaching the end of its useful
lifecycle, making it susceptible to main breaks, service interruptions and water discoloration.
It also increases customer dissatisfaction and what’s known as non-revenue water – water
lost through leaks, breaks, and so on, before it passes through a customer meter. Managing
a distribution system of this size requires substantial planning, expertise and foresight.
“ Over the past few years, Aqua has shown the Treasure Lake Property
Owners Association their true ability in water supply service and
customer care. Aqua has gone above and beyond in their efforts
while working with the TLPOA including the assistance of traffic
“
control, road closures and detours, and clean-up of work areas. The
entire Aqua staff has shown us a great level of understanding and
respect when it comes to our needs and requirements at Treasure
Lake. We look forward to building a stronger and more efficient
water system with Aqua in the future.
Shirley Elmore, CMCA, AMS, PCAM
General Manager
Treasure Lake Property Owners Association
“ When we purchased the Treasure Lake system, only 60 percent of
the water leaving the well stations reached customers. We have
since replaced 15 percent of the distribution system, increasing
deliverability to nearly 80 percent with a goal to increase that
“
further by the end of 2019.
Patrick Burke
Director, Operations
Aqua Pennsylvania
SOLUTION
Aqua Pennsylvania has proactively focused on its main replacement program to
better serve its customers. In 2017 alone, Aqua Pennsylvania completed nearly 200 projects,
replacing 135 miles of main with an investment of $141 million. Over the life of the main
replacement program, Aqua Pennsylvania has replaced more than 1,700 miles of pipe with
an investment of $1.4 billion.
OUTCOME
Aqua Pennsylvania’s investment in the state’s water and
wastewater infrastructure continues to benefit customers and the
environment alike. When the program started, the pipes were on a 900-
year replacement cycle. Today, that has been significantly reduced to
a 90-year replacement cycle. The benefits of the main replacement
program have been most dramatic in its southeastern division—the
largest with 4,600 miles of main that serve 1 million people. Main
breaks there have been reduced by 70 percent to an all-time low of
eight breaks per 100 miles of pipe, per year, and customer complaints
have fallen by 59 percent. Non-revenue water also continues to trend
downward, reducing expenses for power and treatment chemicals,
which ultimately protects our ecosystem. In 2017, non-revenue water
was 17.5 percent, which is excellent for a system the size and age of
the southeast division.
AQUA 2017 ANNUAL REPORT | 7
University
Park Pipeline
Aqua Illinois
02
Expertise and Persistence
Delivers for Illinois
Residents and Businesses
Residents and businesses of University Park, Illinois were served by a water source
that contained high levels of iron, calcium and magnesium, creating taste and
hardness issues. Many relied on water softeners and filters to reduce hardness. While
the water met all U.S. Environmental Protection Agency regulations, it fell short of
customer expectations. The well source was simply not good, leaving Aqua Illinois
with a complicated problem.
SOLUTION
SOLUTION
al
Aqua Illinois conducted a feasibility study to explore a set of potential
tia
Aqua Illinois conducted a feasibility study to explore a set of potent
r
solutions; enhancing wells, improving treatments or running a pipeline from a better
solutions; enhancing wells, improving treatments or running a pipeline from a bett
te
h
water source to University Park. Extending the pipeline would be complex both
oth
water source to University Park. Extending the pipeline would be complex bo
n
physically and financially, requiring Aqua Illinois to navigate jurisdiction issues, obtain
ain
d
easements and design around waterways and farm fields. Thanks to the experienced
ced
and dedicated staff of Aqua Illinois, construction began in late 2016 and successfully
concluded in November 2017. The 14 miles of new pipeline runs from Aqua Illinois’
award-winning Kankakee plant to its customers in University Park.
“ A huge upside is the cost savings and no more lugging bags of
salt down to the water softener. Now our water comes straight
to the tap clean and ready to drink.
“
Joe Dascenzo
Resident
Monee, IL
5
“ Since Aqua started delivering filtered and
softened water from the Kankakee Water
Treatment Plant, Arctic Glacier Ice has seen the
water quality characteristics improve dramatically.
“
As a result of the improved water quality, Arctic
Glacier Ice is now able to produce crystal clear ice
of the highest quality for our customers.
Tim Teehan
Operations Manager
Arctic Glacier Ice
OUTCOME
Aqua
Illinois
is proud that both
residents and businesses are benefiting
from this expansive project. University Park
customers have seen a 90 percent reduction in
i
iron and a 70 percent reduction in hardness. The
p
pipeline project also increased water capacity,
w
wwhich is attracting new economic development
which is attracting new economic development
t
to the area.
to the area.
“ I have made it a top priority of my administration
to improve water quality and attract growth to
our community. Working with Aqua, University
Park now has the best tasting water in the State
“
and a reliable water system capable of promoting
quality residential, commercial, and industrial
growth in our community.
Vivian Covington
Mayor
Village of University Park, IL
AQUA 2017 ANNUAL REPORT | 9
Lakes of Mission Grove
Wastewater Treatment Plant
Aqua Texas
03
New Texas Wastewater
Plant Increases Capacity
Five-Fold
When Aqua Texas acquired the Lakes of Mission Grove system, the community’s
population was so low that the volume of wastewater produced couldn’t
sustain its own treatment plant. This required Aqua Texas to haul wastewater
to a treatment plant each day.
“ It’s essential that we
adequately plan for the
growth of the systems for
the families we serve.
“
Bob Laughman
President
Aqua Texas
“ The completion of the wastewater treatment plant
makes the Lakes of Mission Grove subdivision one of
the most desirable small communities in the county.
“
Carolyn Schiller
Resident
Lakes of Mission Grove Homeowners Association
SOLUTION
When the community’s population started to rapidly grow, Aqua was able to
plan for a new wastewater treatment plant that could serve current residents and new
families to come. In 2016, Aqua Texas began the bidding process for the engineering of
what would become a $1.2 million plant to serve the Lakes of Mission Grove residents.
OUTCOME
The project successfully concluded
in November 2017, providing a new
treatment capacity of 135,000 gallons of
wastewater per day, serving an additional
500 homes. The efficient new plant provides
significant operational savings and increased
environmental benefits.
AQUA 2017 ANNUAL REPORT | 11
AQUA 2017 ANNUAL REPORT | X
2017
Financial
Data
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:
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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;
the profitability of future acquisitions;
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;
our ability to file rate cases on a timely basis to minimize regulatory lag;
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 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;
the extent to which we are able to develop and market new and improved services;
the effect of the loss of major customers;
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.
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
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)
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, 2017.
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 an estimated 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 2017. As of December 31, 2017, 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 Infrastructure, LLC and Aqua Resources, Inc. Aqua
Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry. Aqua
Resources provides water and wastewater service through two operating and maintenance contracts with municipal
authorities close to our utility companies’ service territory; and offers, through a third party, water and sewer line repair
service and protection solutions to households. In 2017, we completed the sale of business units that are reported within
the Company’s market-based subsidiary, Aqua Resources, which installed and tested devices that prevent the
contamination of potable water and repaired water and wastewater systems, and repaired and performed maintenance on
water and wastewater systems. Additionally, during 2016 we completed the sale of business units within Aqua
Resources, which were reported as assets held for sale in the Company’s consolidated balance sheets, which provided
liquid waste hauling and disposal services, and inspection, and cleaning and repair of storm and sanitary wastewater lines.
Industry Mission
The mission of the regulated 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:
(cid:120) strict environmental, health and safety standards;
(cid:120) aging utility infrastructure and the need for substantial capital investment;
(cid:120) economic regulation by state, and/or, in some cases, local government;
(cid:120) declining consumption per customer as a result of conservation;
(cid:120) lawsuits and the need for insurance; and
(cid:120) 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 Public Utility
Commission of Texas. The profitability of our utility operations is influenced to a great extent by the timeliness 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)
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 and adequate rate relief is important to our
continued profitability and in providing a fair return to our shareholders; 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, 2017, the Company’s rate base is
estimated to be $4,125,000, which is comprised of:
(cid:120)
(cid:120)
$2,874,000 filed with respective state utility commissions or local regulatory authorities; and
$1,251,000 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 their respective 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
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.
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)
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 future earnings growth through capital investment. 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 2017, we completed four acquisitions, which along with the organic growth in our existing systems, represents
10,584 new customers. 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.
We believe that utility acquisitions, organic growth, and a potential 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 facilities and regulated utility systems) in 2012, there are
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 regulated
utilities. 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:
(cid:120) the benefits of economies of scale;
(cid:120) the increasing cost and complexity of environmental regulations;
(cid:120) the need for substantial capital investment;
(cid:120) the need for technological and managerial expertise;
(cid:120) the desire to improve water quality and service;
(cid:120) limited access to cost-effective financing;
(cid:120) the monetizing of public assets to support, in some cases, the declining financial condition of municipalities; and
(cid:120) the use of system sale proceeds by a municipality to accomplish other public purposes.
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)
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 regulated 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, by acquiring businesses
that provide water and wastewater or other utility-related services, and investing in infrastructure projects.
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 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, 2017, 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
earnings per share;
operating revenues;
income from continuing operations;
earnings before interest, taxes, and depreciation (“EBITD”);
earnings before income taxes as compared to our operating budget;
net income; and
the dividend rate on common stock.
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)
In addition, we consider other key measures in evaluating our utility business performance within our Regulated segment:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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 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:
(cid:120) 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.
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.
(cid:120) 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 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.
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)
Consolidated Selected Financial and Operating Statistics
Our selected five-year consolidated financial and operating statistics follow:
Years ended December 31,
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
2017
2016
2015
2014
2013
807,872
40,956
1,338
19,430
113,253
982,849
801,190
40,582
1,349
19,036
110,108
972,265
791,404
40,151
1,353
17,420
107,538
957,866
779,665
39,614
1,357
17,412
102,071
940,119
771,660
39,237
1,368
17,230
98,705
928,200
131,170
27,916
62,983
82,780
10,357
800,107
19,768
130,373
27,880
65,324
87,560
9,903
804,905
4,620
122,795
27,369
59,474
76,472
9,934
756,057
23,846
$ 483,865 $ 484,901 $ 477,773 $ 460,013 $ 457,404
121,178
126,677
25,263
28,021
57,446
56,997
73,062
79,399
10,174
10,746
744,527
779,613
17,366
34,591
$ 809,525 $ 819,875 $ 814,204 $ 779,903 $ 761,893
$ 287,206 $ 304,897 $ 309,310 $ 288,556 $ 283,561
-
$
$ 239,738 $ 234,182 $ 201,790 $ 213,884 $ 202,871
$ 239,738 $ 234,182 $ 201,790 $ 233,239 $ 221,300
$ 478,089 $ 382,996 $ 364,689 $ 328,605 $ 307,908
21,433 $
- $
- $
- $
35.5%
16.9%
7.0%
10.9%
29.6%
12.2%
3.5
6.6%
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%
(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.
7
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
AQUA AMERICA, INC. AND SUBSIDIARIES
(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 5.7% and our net income
has grown at an annual compound rate of approximately 4.1% during the five-year period ended December 31, 2017.
During the past five years, operating revenues grew at a compound rate of 1.5% and operating expenses grew at a
compound rate of 2.1%.
Operating Segments
We have identified ten operating segments and we have one reportable segment based on the following:
(cid:120) 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.
(cid:120) 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.
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)
The following table provides the Regulated segment and consolidated information for the years ended December 31,
2017, 2016, and 2015:
2017
Other and
2016
Other and
Regulated
Eliminations Consolidated
Regulated
Eliminations Consolidated
$
804,905
$
4,620
$
809,525
$
800,107
$ 19,768
$ 819,875
286,962
54,524
244
2,104
287,206
56,628
285,347
53,916
19,550
2,469
Earnings (loss) before interest, taxes, depreciation and amortization
$
463,419
$
2,272
465,691
$
460,844
$
(2,251)
Operating revenues
Operations and maintenance expense
Taxes other than income taxes
Depreciation and amortization
Operating income
Other expense (income):
Interest expense, net
Allowance for funds used during construction
Gain on sale of other assets
Equity income in joint venture
Provision for income taxes
Net income
Operating revenues
Operations and maintenance expense
Taxes other than income taxes
304,897
56,385
458,593
133,008
325,585
80,594
(8,815)
(378)
(976)
20,978
$
239,738
$ 234,182
2015
Other and
Regulated
Eliminations Consolidated
$
779,613
$ 34,591
$
814,204
282,866
52,361
26,444
2,696
136,724
328,967
88,341
(15,211)
(484)
(331)
16,914
309,310
55,057
449,837
128,737
321,100
76,536
(6,219)
(468)
(678)
35,177
14,962
$
201,790
Earnings before interest, taxes, depreciation and amortization
$
444,386
$
5,451
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 loss in joint venture
Provision for income taxes
Net income
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)
Consolidated Results
Operating Revenues – Operating revenues totaled $809,525 in 2017, $819,875 in 2016, and $814,204 in 2015. Our
Regulated segment’s revenues totaled $804,905 in 2017, $800,107 in 2016, and $779,613 in 2015. The growth in our
Regulated segment’s revenues over the past three years is a result of increases in our water and wastewater rates and our
customer base. Rate increases implemented during the past three years have provided additional operating revenues of
$6,143 in 2017, $4,319 in 2016, and $8,503 in 2015. Negatively impacting revenues in 2017 was a decrease in customer
water consumption primarily due to unfavorable weather conditions during the year. 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 $1,695 in 2017, $8,201 in 2016, and $8,900, in 2015.
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 from
January 1, 2013 to September 30, 2017, when it resumed the use of a water Distribution System Improvement Charge on
October 1, 2017. Aqua Pennsylvania was able to lengthen the amount of time until its next base rate case, which is
expected to be filed in 2018. During 2017, 2016, and 2015, the income tax accounting change resulted in income tax
benefits of $84,766, $78,530, and $72,944 that reduced the Company’s 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. 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 previously. In accordance with the settlement
agreement, this amortization is expected to reduce income tax expense during periods when qualifying parameters are
met.
Our operating subsidiaries received rate increases representing estimated annualized revenues of $7,558 in 2017 resulting
from five base rate decisions, $3,434 in 2016 resulting from six rate decisions, and $3,347 in 2015 resulting from four rate
decisions. Revenues from these increases realized in the year of grant were $6,343 in 2017, $1,788 in 2016, and $2,887 in
2015. As of December 31, 2017, our operating subsidiaries have filed two rate requests, which are being reviewed by the
state utility commissions, proposing an aggregate increase of $13,888 in annual revenues. During 2018, we intend to file
five additional rate requests proposing an aggregate of approximately $80,000 of increased annual revenues; the timing
and extent to which our rate increase requests may be granted will vary by state. Our planned rate filings for 2018 are
subject to the issuance of procedural orders directing how the Federal tax law changes are to be reflected in our utility
customer rates.
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 $10,255 in 2017, $7,379 in 2016, and $3,261 in 2015.
Our Regulated segment also includes operating revenues of $9,903 in 2017, $10,357 in 2016, and $10,746 in 2015
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.
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)
In addition to the Regulated segment operating revenues, we recognized market-based revenues that are associated with
Aqua Resources and Aqua Infrastructure of $4,798 in 2017, $20,091 in 2016, and $34,909 in 2015. The decrease in
revenues in 2017 and 2016 is due to the disposition of business units within Aqua Resources.
Operations and Maintenance Expenses – Operations and maintenance expenses totaled $287,206 in 2017, $304,897 in
2016, and $309,310 in 2015. Most elements of operating costs are subject to the effects of inflation and changes in the
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 2017, as compared to 2016, by $17,691 or 5.8%, primarily due to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
decreases in market-based activities expenses of $15,933 due to the disposition of business units within Aqua
Resources;
a decrease in water production costs of $6,301 primarily due to a reduction in purchased water expense of $4,794
due to replacing a purchased water supply with the Company’s own water supply source;
a decrease in the Company’s self-insured employee medical benefit program expense of $4,838;
offset by $4,102 for the timing of expenses incurred for the maintenance of our utility systems and the purchase of
supplies, as well as other increases in operations and maintenance expenses.
Operations and maintenance expenses decreased in 2016 as compared to 2015 by $4,413 or 1.4%, primarily due to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
decreases in market-based activities expenses of $10,393 due to the disposition of business units within Aqua
Resources;
a decrease in water production costs of $3,156;
the effects of the recognition in 2015 of:
o leadership transition expenses of $2,510,
o the recording of a reserve of $1,862 for water rights held for future use, and
o 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, as well as other increases in operations and
maintenance expenses.
Depreciation and Amortization Expenses – Depreciation expense was $136,302 in 2017, $130,987 in 2016, and
$125,290 in 2015, 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.
Amortization expense was $422 in 2017, $2,021 in 2016, and $3,447 in 2015, 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 $56,628 in 2017, $56,385 in 2016, and $55,057
in 2015. The increase in 2017 was primarily due to an increase in gross receipts, excise and franchise taxes of $949, and
an increase in taxes assessed resulting from the pumping of ground water in Texas of $486 due to higher water production
volume and rates, offset by a $978 decrease in property taxes primarily due to a favorable ruling on a property tax appeal
in Ohio. 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.
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)
Interest Expense, net – Net interest expense was $88,341 in 2017, $80,594 in 2016, and $76,536 in 2015. Interest income
of $202 in 2017, $217 in 2016, and $272 in 2015 was netted against interest expense. Net interest expense increased in
2017 due to an increase in average borrowings of $157,768 and an increase in short-term and long-term interest rates. 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. Interest income decreased in 2017 due to lower investment rates. The weighted average cost of
fixed rate long-term debt was 4.35% at December 31, 2017, 4.26% at December 31, 2016, and 4.57% at December 31,
2015. The weighted average cost of fixed and variable rate long-term debt was 4.29% at December 31, 2017, 4.23% at
December 31, 2016, and 4.44% at December 31, 2015.
Allowance for Funds Used During Construction – The allowance for funds used during construction (“AFUDC”) was
$15,211 in 2017, $8,815 in 2016, and $6,219 in 2015, 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, and changes in the amount of AFUDC
related to equity. The increase in 2017 and 2016 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 2017 and 2016, and 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 $11,633
in 2017, $6,561 in 2016, and $4,621 in 2015.
Gain on Sale of Other Assets – Gain on sale of other assets totaled $484 in 2017, $378 in 2016, and $468 in 2015, 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 $(331) in 2017, $(976) in 2016,
and $35,177 in 2015. The equity earnings in 2017 primarily resulted from the sale of raw water to firms in the natural gas
drilling industry. 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. In 2015, a noncash impairment charge
was recognized by the joint venture on its long-lived assets for which our share was $32,975. The impairment charge was
recognized in 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, a distinguishable reduction in the
volume of water sales by the joint venture which led to a lowered forecast in 2015 on future water sales volumes by the
joint venture, as well as changes in the natural gas industry and market conditions. At the time of the impairment, these
market conditions were largely associated with natural gas prices, which sharply declined in 2015 and this downturn no
longer appeared to be temporary and instead was expected to be a long-term condition.
Income Taxes – Our effective income tax rate was 6.6% in 2017, 8.2% in 2016, and 6.9% in 2015. The effective income
tax rate for 2017, 2016, and 2015 was affected by the 2012 income tax accounting change for qualifying utility asset
improvements at Aqua Pennsylvania which resulted in a $84,766, $78,530, and $72,944 net reduction to the Company’s
2017, 2016, and 2015 Federal and state income tax expense, respectively. As of December 31, 2017, 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 up to $24,243 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.
Offsetting this reduction was the effect of the revaluation of our deferred income tax assets and liabilities, triggered by the
TCJA, which resulted in the recognition of additional income tax expense of $3,141 to the extent revalued deferred
income taxes are not believed to be recoverable in utility customer rates.
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)
Summary –
Operating income
Net income
Diluted net income per share
Years ended December 31,
2016
2017
2015
$
328,967 $
239,738
1.35
325,585 $
234,182
1.32
321,100
201,790
1.14
The changes in diluted net income per share in 2017 and 2016 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, are important to the future realization of improved profitability.
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
(Gain) loss on sale of other assets
Equity loss in joint venture
Income before income taxes
Provision for income taxes
Net income
Three Months Ended December 31,
2017
2016
$
203,312
$
196,799
79,243
34,794
64
12,238
126,339
76,973
23,217
(4,641)
(162)
71
58,488
5,015
53,473
$
77,550
33,342
654
13,291
124,837
71,962
20,458
(2,369)
12
167
53,694
4,045
49,649
$
The increase in operating revenues of $6,513 was primarily due to an increase in water and wastewater rates and
infrastructure rehabilitation surcharges of $4,247, an increase in customer water consumption, and additional revenues of
$438 associated with a larger customer base due to utility acquisitions, offset by a decrease in market-based activities
revenue of $2,323 due to dispositions.
The increase in operations and maintenance expense of $1,693 is due primarily to $3,490 associated with the timing of
expenses incurred for the maintenance of our utility systems and the purchase of supplies, an increase in postretirement
benefits expense of $1,249, offset by a decrease in market-based activities expenses of $2,952, and a decrease in water
production costs of $1,842 due to replacing a purchased water supply with the Company’s own water supply source.
Depreciation expense increased by $1,452 primarily due to the utility plant placed in service since December 31, 2016.
The decrease in other taxes of $1,053 is primarily due to a decrease in property taxes of $1,466 due to a favorable
property tax appeal in Ohio, offset by an increase in capital stock taxes of $199 due to the effect of a reversal of a reserve
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)
from the prior year, and an increase in taxes assessed resulting from the pumping of ground water in Texas of $166 due to
higher water production volume and rates.
Interest expense increased by $2,759 due to an increase in the average outstanding debt balance.
AFUDC increased by $2,272 due to an increase in the average balance of utility plant construction work in progress, to
which AFUDC is applied, and an increase in the AFUDC rate as a result of an increase in the amount of AFUDC related
to equity.
The provision for income taxes increased by $970 primarily as a result of the revaluation of our deferred income tax assets
and liabilities, triggered by the TCJA, which resulted in the recognition of additional income tax expense of $3,141 to the
extent revalued deferred income taxes are not believed to be recoverable in utility customer rates, offset by the effect of
additional tax deductions recognized in the fourth quarter of 2017 for certain qualifying infrastructure improvements for
Aqua Pennsylvania.
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, 2017 were as follows:
2013
2014
2015
2016
2017
Net Operating Cash
Flows
$
$
365,803
364,888
370,794
396,163
381,318
1,878,966
Dividends
$
102,889
112,106
121,248
130,923
140,660
607,826
Capital Expenditures
$
$
307,908
328,605
364,689
382,996
478,089
1,862,287
$
$
Acquisitions
$
14,997
14,616
28,989
9,423
5,860
73,885
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 $31,657 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 $978,762, and have refunded $22,607 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 2018 capital program, exclusive of the costs of new mains financed by advances and contributions in aid of
construction, is estimated to be approximately $500,000 in infrastructure improvements for the communities we serve.
The 2018 capital program is expected to include $213,200 for infrastructure rehabilitation surcharge qualified projects.
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 from January 1,
2013 to September 30, 2017, we were able to use the income tax savings derived from the qualifying utility asset
improvements to maintain Aqua Pennsylvania’s capital investment program. Our planned 2018 capital program in
Pennsylvania is estimated to be approximately $337,000, a portion of which is expected to be eligible as a deduction for
qualifying utility asset improvements for Federal income tax purposes. Our overall 2018 capital program, along with
$113,769 of debt repayments and $160,973 of other contractual cash obligations, as reported in the section captioned
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)
“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 2019 through 2020, including recurring programs, such as the ongoing
replacement or rehabilitation of water meters and 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
$875,000. We anticipate that approximately one-half of these expenditures will require external financing. We expect to
refinance $189,025 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.
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 the reduction in the corporate
income tax rate, and 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. Timely rate orders permitting compensatory rates of return on
invested capital 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 from January 1, 2013 to September 30,
2017, and lengthen the amount of time until the next Aqua Pennsylvania rate case, which is expected to be filed in 2018.
As a result of the Pennsylvania rate order, income tax benefits reduced the Company’s current income tax expense and
increased net income by $84,766 in 2017, $78,530 in 2016, and $72,944 in 2015. 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.
Acquisitions
As part of the Company’s growth-through-acquisition strategy, the Company has entered into purchase agreements to
acquire the water or wastewater utility system assets of six municipalities for a total combined purchase price in cash of
$150,700. The purchase price for these pending acquisitions is subject to certain adjustments at closing, and the pending
acquisitions are subject to regulatory approvals, including the final determination of the fair value of the rate base
acquired. Closings for these acquisitions are expected to occur by the end of 2018, which is subject to the timing of the
regulatory approval process. These acquisitions are expected to add approximately 16,325 customers in two of the states
in which the Company operates.
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)
During the past five years, we have expended cash of $73,885 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 2017, we completed four acquisitions of water and wastewater utility systems for $5,860 in cash in two of the states in
which we operate, adding 1,003 customers.
In January 2016, we acquired the water and wastewater utility system assets of Superior Water Company, Inc., which
provided public water service to 4,108 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, adding 2,469
customers.
In April 2015, we acquired the water and wastewater utility system assets of North Maine Utilities, located in the Village
of Glenview, Illinois serving 7,409 customers. 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, adding 3,170 customers.
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, adding 6,148 customers. 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, adding 5,991 customers.
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 56 mile pipeline construction and permitted intake on the Susquehanna River cost $109,000. As of
December 31, 2017, 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 an unconsolidated affiliate and is
accounted for under the equity method of accounting. Our initial investment is carried at cost. Subsequently, the carrying
amount of our investment is adjusted to reflect capital contributions or distributions, our equity in earnings and losses
since the commencement of the system’s operations, and a decline in the fair value of our investment. In 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 2017, the Company sold two business units within Aqua Resources, which resulted in total
proceeds of $867, and recognized a net loss of $324. 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.
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)
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 expanded its sewer customer base by accepting new wastewater flows from the City. Additionally, in March,
2014, we completed the sale of our wastewater treatment facility in Georgia.
In 2013, 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 Florida, through five
separate sales transactions. 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).
Additionally, 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).
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 $1,670,223 of long-term debt and obtained other short-term borrowings during the past five
years. At December 31, 2017, we have a $250,000 long-term revolving credit facility that expires in February 2021, of
which $19,811 was designated for letter of credit usage, $170,189 was available for borrowing, and $60,000 of
borrowings were outstanding at December 31, 2017. In addition, we have short-term lines of credit of $135,500, of which
$131,850 was available as of December 31, 2017. 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 2017, 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
could result in us being required to repay or refinance 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 SEC in February 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. This registration statement
expires in February 2018, and we intend to file a new three-year 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
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)
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, 2017 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 2017 dividend payment, holders of 9.9% 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 551,788 original issue shares of common stock for net proceeds of $13,625 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 2017, 2016, and 2015, 447,753, 484,645, and 535,439 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 $15,168, $14,916, and $14,380, 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 2015, we repurchased 805,000 shares of our
common stock in the open market for $20,502. In 2016, we did not repurchase any shares of our common stock in the
open market under this program. 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.
18
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
AQUA AMERICA, INC. AND SUBSIDIARIES
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2017:
(In thousands of dollars, except per share amounts)
Payments Due By Period
Total
Less than 1
year
1 - 3 years 3 - 5 years
More than 5
years
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
$ 2,143,127 $ 113,769 $ 189,025 $ 121,966 $ 1,718,367
1,009,385
13,056
9,644
-
-
6,623
$ 3,648,604 $ 274,742 $ 351,283 $ 265,504 $ 2,757,075
1,366,407
20,080
31,510
63,064
12,484
11,932
148,277
2,957
8,989
-
-
2,035
131,248
2,148
8,024
-
-
2,118
77,497
1,919
4,853
63,064
12,484
1,156
(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 2027 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
$17,583. 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.
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)
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
2017
2016
2015
2014
2013
52.3%
47.7%
100.0%
50.8%
49.2%
100.0%
50.8%
49.2%
100.0%
49.4%
50.6%
100.0%
50.3%
49.7%
100.0%
(1) Includes current portion, as well as our borrowings under a variable rate revolving credit agreement of
$60,000 at December 31, 2017, $25,000 at December 31, 2016, $60,000 at December 31, 2015, $72,000 at
December 31, 2014, and $0 at December 31, 2013.
Over the past five years, the changes in the capitalization ratios primarily resulted from the issuance of debt to finance our
acquisitions and capital program, growth in net income, the issuance of common stock, and the declaration of dividends.
INCOME TAX MATTERS
Tax Cuts and Jobs Act of 2017
On December 22, 2017, President Trump signed the TCJA into law. Substantially all of the provisions of the TCJA are
effective for tax years beginning after December 31, 2017, except as noted below. The TCJA includes significant changes
to the Code and the taxation of business entities, and includes specific provisions related to regulated public utilities.
Significant changes include a reduction in the corporate federal income tax rate from 35% to 21%, and a limitation on the
utilization of NOLs arising after December 31, 2017 to 80% of taxable income with an indefinite carryforward. The
specific provisions related to regulated public utilities in the TCJA generally allow for the continued deductibility of
interest expense, the elimination of full expensing for tax purposes of certain property acquired after September 27, 2017
and the continuation of certain rate normalization requirements for accelerated depreciation benefits. Our market-based
companies still qualify for 100% deductibility of qualifying property acquired after September 27, 2017.
The Company’s regulated operations accounting for income taxes are impacted by the FASB’s accounting guidance for
regulated operations. Reductions in accumulated deferred income tax balances due to the reduction in the corporate
income tax rates to 21% under the provisions of the TCJA results in amounts previously collected from utility customers
for these deferred taxes to be refundable to such customers, generally through reductions in future rates. The TCJA
includes provisions that stipulate how these excess deferred taxes are to be passed back to customers for certain
accelerated tax depreciation benefits. Potential refunds of other deferred taxes will be determined by our state regulators.
Our state regulatory commissions have or are in the process of issuing procedural orders directing how the tax law
changes are to be reflected in our utility customer rates. In addition, we have two rate cases currently in progress in two
states in which TCJA is expected to be addressed in the new base rates. The December 31, 2017 consolidated balance
sheet reflects the impact of the TCJA on our regulatory assets and liabilities, which reduced our regulatory assets by
$357,262 and increased our regulatory liabilities by $303,320. These adjustments had no impact on our 2017 cash flows.
As of December 31, 2017, resulting from the TCJA enactment, our deferred income tax assets and liabilities were
revalued based upon the new corporate income tax rate of 21%. The revaluation of our deferred income tax assets and
liabilities resulted in the recognition of additional income tax expense of $3,141 to the extent revalued deferred income
taxes are not believed to be recoverable in utility customer rates.
20
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
AQUA AMERICA, INC. AND SUBSIDIARIES
(In thousands of dollars, except per share amounts)
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(cid:3)(cid:3)(cid:326)(cid:3)(cid:50)(cid:88)(cid:85)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)
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 (cid:326)(cid:3)(cid:58)(cid:72)(cid:3)(cid:71)(cid:72)(cid:73)(cid:72)(cid:85)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:86)(cid:75)(cid:72)(cid:72)(cid:87)(cid:3)(cid:68)(cid:86)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)
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.
Valuation of Long-Lived Assets, Goodwill and Intangible Assets(cid:3)(cid:326)(cid:3)(cid:58)(cid:72)(cid:3)(cid:85)(cid:72)(cid:89)(cid:76)(cid:72)(cid:90)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:16)(cid:79)(cid:76)(cid:89)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)
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
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)
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, based on our
assessment of the qualitative factors previously noted, we may 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 record an impairment loss
for the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of
goodwill. 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 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 (cid:326)(cid:3)(cid:58)(cid:72)(cid:3)(cid:80)(cid:68)(cid:76)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:87)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
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 3.66% for our pension plan and 3.73% for our other post-retirement benefit plans as of December 31,
2017, which represent a 47 and 52 basis-point decrease as compared to the discount rates selected at December 31, 2016,
respectively. Our post-retirement benefits expense under these plans is determined using the discount rate as of the
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)
beginning of the year, which was 4.13% for our pension plan and 4.25% for our other-postretirement benefit plans for
2017, and will be 3.66% for our pension plan and 3.73% for our other post-retirement benefit plans for 2018.
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. In 2017, we changed the targeted allocation of the plans’ assets to reflect 50% to 70%
return seeking assets, and 30% to 50% liability hedging assets, which replaced the former 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 2017, we used a 7.00% expected return on plan assets assumption which will decrease to 6.75% for 2018.
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 2018 our pension
contribution is expected to be $12,484. Future years’ contributions will be subject to economic conditions, plan
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 (cid:326)(cid:3)(cid:58)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:83)(cid:68)(cid:92)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:85)(cid:72)(cid:73)(cid:88)(cid:81)(cid:71)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
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.
23
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, 2017, the Company’s internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included
herein.
Christopher H. Franklin
Chairman, President and Chief Executive Officer
David P. Smeltzer
Executive Vice President and Chief Financial Officer
February 28, 2018
24
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Aqua America, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets and statements of capitalization of Aqua America Inc.
and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of net income, of
comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2017,
including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the
Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2017 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, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated 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 the Company’s consolidated financial statements and on the Company's internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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
25
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 28, 2018
We have served as the Company’s auditor since 2000.
26
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
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 180,700,251 and 180,311,345 in 2017 and 2016
Capital in excess of par value
Retained earnings
Treasury stock, at cost, 2,986,308 and 2,916,969 shares in 2017 and 2016
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
Book overdraft
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.
27
December 31,
2017
2016
$
7,003,993
$
6,509,117
1,604,133
5,399,860
1,507,502
5,001,615
$
$
4,204
98,596
14,361
12,542
1,543
3,763
97,394
12,961
12,804
1,728
131,246
128,650
713,971
38,485
6,671
42,230
948,647
30,845
7,026
42,208
6,332,463
$
6,158,991
90,350
$
807,135
1,132,556
(73,280)
860
90,155
797,513
1,032,844
(71,113)
669
1,957,621
1,850,068
2,029,358
21,605
2,007,753
1,759,962
22,357
1,737,605
113,769
150,671
3,650
59,165
21,629
21,359
23,764
41,152
6,535
47,256
12,616
18,367
25,607
40,484
284,488
301,536
769,073
93,186
541,910
107,341
1,269,253
91,843
250,635
115,583
1,511,510
1,727,314
571,091
542,468
$
6,332,463
$
6,158,991
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands of dollars)
Operating revenues
Operating 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 on sale of other assets
Gain on extinguishment of debt
Equity (earnings) loss in joint venture
Income before income taxes
Provision for income taxes
Net income
Net income per common share:
Basic
Diluted
Average common shares outstanding during the period:
Basic
Diluted
Years ended December 31,
2017
809,525 $
2016
819,875 $
2015
814,204
$
287,206
136,302
422
56,628
480,558
304,897
130,987
2,021
56,385
494,290
309,310
125,290
3,447
55,057
493,104
328,967
325,585
321,100
88,341
(15,211)
(484)
-
(331)
256,652
16,914
239,738 $
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
1.35 $
1.35 $
1.32 $
1.32 $
1.14
1.14
177,612
178,175
177,273
177,846
176,788
177,517
$
$
$
Cash dividends declared per common share
$
0.7920 $
0.7386 $
0.6860
See accompanying notes to consolidated financial statements.
28
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
Net income
Other comprehensive income, net of tax:
Unrealized holding gain (loss) on investments, net of tax expense (benefit) of $102,
$21, and $(53) for the years ended December 31, 2017, 2016, and 2015, respectively
Reclassification of gain on sale of investment to net income, net of tax expense of
$30 for the twelve months ended December 31, 2016 (1)
Comprehensive income
See accompanying notes to consolidated financial statements.
Years ended December 31,
2016
2017
2015
$ 239,738 $ 234,182 $ 201,790
191
39
(101)
-
$ 239,929 $ 234,164 $ 201,689
(57)
-
(1) Amount of pre-tax gain of $87 reclassified from accumulated other comprehensive income to gain on sale of other
assets on the consolidated statement of net income for the year ended December 31, 2016.
29
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
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 collateralized 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
2019 to 2033
2019 to 2056
2020 to 2057
2019 to 2043
2018 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 1.975% and 2.48% due 2018 and 2019
Notes at 3.01% and 3.59% due 2027 and 2041
Notes ranging from 4.62% to 4.87%, due 2018 through 2024
Notes ranging from 5.20% to 5.95%, due 2018 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, net of debt issuance costs
December 31,
2017
2016
$
90,350 $
807,135
1,132,556
(73,280)
860
1,957,621
90,155
797,513
1,032,844
(71,113)
669
1,850,068
4,196
12,914
19,254
475,232
631,599
205,578
44,000
32,335
6,092
25,700
6,000
1,462,900
60,000
100,000
245,000
122,800
152,427
2,143,127
113,769
2,029,358
21,605
2,007,753
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
Total capitalization
$
3,965,374 $
3,587,673
See accompanying notes to consolidated financial statements.
30
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars)
Common
stock
Capital in
excess of
par value
Retained
earnings
Treasury
stock
Accumulated
Other
Comprehensive
Income
Balance at December 31, 2014
$
89,296 $ 758,145 $
849,952 $ (42,838) $
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
-
-
-
13
-
161
212
-
-
-
-
-
-
201,790
-
(121,248)
664
-
(161)
7,328
5,860
2,602
(853)
-
-
-
-
(433)
-
-
-
-
-
-
(25,247)
-
-
-
-
-
Balance at December 31, 2015
89,682
773,585
930,061
(68,085)
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
-
-
-
220
24
-
115
114
-
-
-
-
-
-
234,182
-
(130,923)
12,625
1,364
-
(115)
4,146
5,390
1,329
(811)
-
-
-
-
-
(476)
-
-
-
-
-
-
(3,028)
-
-
-
-
-
Balance at December 31, 2016
90,155
797,513
1,032,844
(71,113)
Net income
Other comprehensive income, net of income tax of
$102
Dividends
Sale of stock (45,121 shares)
Repurchase of stock (69,339 shares)
Equity compensation plan (169,258 shares)
Exercise of stock options (174,527 shares)
Stock-based compensation
Cumulative effect of change in accounting
principle - windfall tax benefit
Other
-
-
-
23
-
85
87
-
-
-
-
-
-
239,738
-
(140,660)
1,430
-
(85)
2,786
6,342
-
(851)
-
-
-
-
(348)
982
-
-
-
-
-
(2,167)
-
-
-
-
-
788 $
-
(101)
-
-
-
-
-
-
-
-
687
-
(18)
-
-
-
-
-
-
-
-
-
669
-
191
-
-
-
-
-
-
-
-
Noncontrolling
Interest
Total
40 $ 1,655,383
-
-
-
-
-
-
-
-
-
(40)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
201,790
(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
(811)
1,850,068
239,738
191
(140,660)
1,453
(2,167)
-
2,873
5,994
982
(851)
Balance at December 31, 2017
$
90,350 $ 807,135 $ 1,132,556 $ (73,280) $
860 $
- $ 1,957,621
See accompanying notes to consolidated financial statements.
31
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization
Deferred income taxes
Provision for doubtful accounts
Stock-based compensation
(Gain) loss on sale of utility system and market-based business unit
Gain 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
Pension and other postretirement benefits contributions
Other
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
$3,578, $2,220, and $1,598
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
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
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.
Years ended December 31,
2017
2016
2015
$
239,738
$
234,182
$
201,790
136,724
13,780
4,986
6,342
774
(484)
-
(331)
(6,458)
(763)
(16,240)
3,250
381,318
(478,089)
(5,860)
-
1,342
2,223
(480,384)
7,312
(6,536)
(2,885)
591,024
(359,068)
9,012
1,453
2,873
-
(2,167)
(140,660)
(851)
99,507
441
3,763
4,204
81,771
3,177
45,385
39,220
$
$
$
133,008
17,250
5,505
5,390
(744)
(378)
-
(976)
(3,974)
4,756
(9,505)
11,649
396,163
(382,996)
(9,423)
-
7,746
1,464
(383,209)
7,263
(3,763)
(10,186)
503,586
(373,087)
(8,076)
1,388
4,260
1,332
(3,028)
(130,923)
(1,186)
(12,420)
534
3,229
3,763
72,662
2,739
35,145
26,234
$
$
$
128,737
16,506
5,765
5,860
-
(468)
(678)
35,177
(6,520)
(3,469)
(16,184)
4,278
370,794
(364,689)
(28,989)
47
648
(1,079)
(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
(909)
4,138
3,229
74,724
6,902
25,612
27,992
$
$
$
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.
32
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 (cid:326)(cid:3)(cid:36)(cid:84)(cid:88)(cid:68)(cid:3)(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:3)(cid:11)(cid:179)(cid:36)(cid:84)(cid:88)(cid:68)(cid:3)(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:15)(cid:180)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:15)(cid:180)(cid:3)(cid:179)(cid:90)(cid:72)(cid:15)(cid:180)(cid:3)(cid:179)(cid:82)(cid:88)(cid:85)(cid:180)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:179)(cid:88)(cid:86)(cid:180)(cid:12)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)
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 2017.
As of December 31, 2017, 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 Infrastructure LLC and Aqua Resources, Inc. Aqua Infrastructure provides non-utility raw water supply services for
firms in the natural gas drilling industry. Aqua Resources provides water and wastewater services through two operating
and maintenance contracts with municipal authorities close to our utility companies’ service territory; and offers, through
a third party, water and wastewater line repair service and protection solutions to households. In 2017, we completed the
sale of business units that are reported within the Company’s market-based subsidiary, Aqua Resources, which installed
and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, and
repaired and performed maintenance on water and wastewater systems. Additionally, during 2016 we completed the sale
of business units within Aqua Resources, which were reported as assets held for sale in the Company’s consolidated
balance sheets, which provided liquid waste hauling and disposal services, and inspection, and cleaning and repair of
storm and sanitary wastewater lines.
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 (cid:326)(cid:3)(cid:48)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)
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 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 (cid:326)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:83)(cid:68)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
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.
33
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 in the consolidated statements of cash flows:
(cid:120)
(cid:120)
pension and other postretirement benefit contributions; and
as a result of the adoption in 2017 of the FASB’s accounting guidance on the classification of certain cash receipts
and cash payments, the presentation of debt extinguishment costs (refer to Note 1 – Summary of Significant
Accounting Policies, Recent Accounting Pronouncements).
Additionally, certain prior period amounts have been reclassified to conform to the current period presentation:
(cid:120)
(cid:120)
in the consolidated balance sheets for the presentation of book overdraft, and
in Note 17 – Segment Information of total assets for Other and Eliminations for the reclassification of regulatory
assets previously reflected within Other and Eliminations that are now presented with the Regulated segment.
Recognition of Revenues (cid:326)(cid:3)(cid:53)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:53)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:72)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)
cycle basis and unbilled amounts based on estimated usage from the latest billing to the end of the accounting period. In
addition, the Company’s market-based subsidiary Aqua Resources recognizes revenues when services are performed and
Aqua Infrastructure recognizes revenues when services are performed. The Company’s market-based subsidiaries
recognized revenues of $4,798 in 2017, $20,091 in 2016, and $34,909 in 2015.
Property, Plant and Equipment and Depreciation (cid:326)(cid:3)(cid:51)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:15)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:87)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)
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, 2017, utility plant includes a net credit acquisition adjustment of
$24,550, which is generally being amortized from 2 to 59 years. Amortization of the acquisition adjustments totaled
$2,774 in 2017, $2,223 in 2016, and $2,556 in 2015.
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 prescribed 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,
2017, $16,430 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 enables 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, 2017,
$34,775 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.
34
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 (cid:326)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:179)(cid:36)(cid:41)(cid:56)(cid:39)(cid:38)(cid:180)(cid:12)(cid:3)
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 2017 was $11,633, 2016 was $6,561, and
2015 was $4,621. No interest was capitalized by our market-based businesses.
Cash and Cash Equivalents (cid:326)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:79)(cid:92)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:68)(cid:81)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:85)(cid:72)(cid:72)(cid:3)
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 $21,629 and $12,616 at December 31, 2017 and 2016, 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 book overdraft 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 (cid:326)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:71)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)
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 as the capital projects are
funded. As of December 31, 2017 and 2016, the Company did not have any funds restricted for construction activity.
35
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Accounts Receivable (cid:326)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:89)(cid:82)(cid:76)(cid:70)(cid:72)(cid:71)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:88)(cid:81)(cid:69)(cid:76)(cid:79)(cid:79)(cid:72)(cid:71)(cid:3)
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 (cid:326)(cid:3)(cid:44)(cid:81)(cid:89)(cid:72)(cid:81)(cid:87)(cid:82)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:17)(cid:3)(cid:3)(cid:38)(cid:82)(cid:86)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:76)(cid:85)(cid:86)(cid:87)(cid:16)(cid:76)(cid:81)(cid:15)(cid:3)(cid:73)(cid:76)(cid:85)(cid:86)(cid:87)(cid:16)(cid:82)(cid:88)(cid:87)(cid:3)
method.
Regulatory Assets, Deferred Charges and Other Assets (cid:326)(cid:3)(cid:39)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)
held to compensate employees in the future who participate in the Company’s 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 2017 and 2016 we received distributions of $686 and $1,666, 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 2015, the joint venture experienced the following events:
(cid:120)
(cid:120)
(cid:120)
a decline in natural gas prices, in 2015,
a distinguishable reduction in the volume of water sales by the joint venture which led to a lowered forecast in
2015 on future water sales volumes by the joint venture, and
changes in the natural gas industry and market conditions.
At the time, these market conditions were largely associated with natural gas prices, which sharply declined in 2015 and
this downturn no longer appeared temporary and instead was expected to 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 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-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.
36
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Goodwill (cid:326)(cid:3)(cid:42)(cid:82)(cid:82)(cid:71)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:87)(cid:68)(cid:81)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:73)(cid:76)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:76)(cid:81)(cid:87)(cid:68)(cid:81)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)
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, based on our
assessment of the qualitative factors previously noted, we may 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 record an impairment loss
for the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of
goodwill. The Company tested the goodwill attributable for each of our reporting units for impairment as of July 31,
2017, 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:
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
Goodwill acquired during year
Reclassifications to utility plant acquisition adjustment
Balance at December 31, 2017
Regulated
Segment
27,246 $
10,378
(98)
(159)
37,367
72
(50)
37,389 $
$
$
Other
6,620 $
-
-
(1,232)
(547)
4,841
-
-
4,841 $
Consolidated
33,866
10,378
(98)
(1,391)
(547)
42,208
72
(50)
42,230
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 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 (cid:326)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:82)(cid:80)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
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 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.
37
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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.
Customers’ Advances for Construction and Contributions in Aid of Construction (cid:326)(cid:3)(cid:58)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:76)(cid:81)(cid:86)(cid:15)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:3)
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 (cid:326)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:16)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)
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 either a straight-line basis, or
the graded vesting method, 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:
(cid:120) Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the
ability to access;
(cid:120) 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
(cid:120) Level 3: inputs that are unobservable and significant to the fair value measurement.
38
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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. Additionally, assets that are measured at fair value using the net
asset value (“NAV”) per share practical expedient are not classified in the fair value hierarchy. 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, 2017 and 2016.
Recent Accounting Pronouncements (cid:326)(cid:3)(cid:44)(cid:81)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:41)(cid:36)(cid:54)(cid:37)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3)(cid:88)(cid:83)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:74)(cid:88)(cid:76)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
presentation of net periodic pension and postretirement benefit cost (net benefit cost). Historically, net benefit cost is
reported as an employee cost within operating income, net of amounts capitalized. The guidance requires the bifurcation
of net benefit cost. The service cost component will be presented with other employee compensation costs in operating
income and the other components of net benefit cost will be reported separately outside of operating income, and will not
be eligible for capitalization. The guidance is effective for annual reporting periods beginning after December 15, 2017,
and interim periods within that reporting period, and is to be applied retrospectively for the presentation of the service cost
component and the other components of net benefit cost, and on a prospective basis for the capitalization of only the
service cost component of net benefit cost. On January 1, 2018, the Company adopted the updated guidance, which did
not have a material impact on its results of operations or financial position.
In January 2017, the FASB issued updated accounting guidance that eliminates step 2 of the current goodwill impairment
test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment
loss will instead be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to
exceed the carrying amount of goodwill. The guidance will be effective for annual reporting periods beginning after
December 15, 2019, and interim periods within that reporting period, with early adoption permitted for any impairment
test performed on testing dates after January 1, 2017. The Company elected to early adopt the provisions of the updated
guidance, for its annual impairment valuation performed in the third quarter of 2017, and the provisions of the updated
guidance did not have an impact on its results of operations or financial position.
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 has elected to early adopt the
provisions of the updated guidance, which resulted in the reclassification of $375 debt extinguishment costs for 2016,
from cash flows from operating to financing activities to conform to the new classification.
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 was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal
years, with early adoption available. On January 1, 2017, the Company adopted the updated guidance, prospectively, and
recognized a previously unrecognized windfall tax benefit for stock-based compensation of $982, associated with the
Company’s 2012 Federal net operating loss, which was recorded as an adjustment to deferred income taxes and retained
earnings (refer to the presentation of “cumulative effect of change in accounting principle – windfall tax benefit” on the
Company’s Consolidated Statement of Equity). Additionally, income tax benefits in excess of compensation costs or tax
deficiencies for share-based compensation are now recorded to our income tax provision, instead of historically to
stockholder’s equity, which impacts our effective tax rate. Lastly, all tax-related cash flows resulting from share-based
payments are reported prospectively 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.
39
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 January 2016, the FASB issued updated accounting guidance on the recognition and measurement of financial assets
and financial liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair
value recognized in net income. The updated guidance is effective for interim and annual periods beginning after
December 31, 2017. On January 1, 2018, the Company adopted the updated guidance, which did not have a material
impact on its results of operations or financial position.
In May 2014, the FASB issued updated accounting guidance on recognizing revenue from contracts with customers,
which outlines a single comprehensive model that an entity will apply to determine the measurement of revenue and
timing of recognition. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or
services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The
updated guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and
cash flows arising from customer contracts, including significant judgments and changes in judgments and assets
recognized from costs incurred to fulfill a contract. The updated guidance is effective for annual periods beginning after
December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective
approach reflecting the application of the updated guidance in each prior reporting period, or (ii) a modified retrospective
approach with the cumulative effect of initially adopting the updated guidance recognized through retained earnings at the
date of adoption. In 2016, the Company performed an evaluation of the requirements of the updated guidance and
believes that the impact of adoption will not result in a material change in the Company’s measurement of revenue. In
2017, the American Institute of Certified Public Accountants (“AICPA”) power and utility entities revenue recognition
task force determined that contributions in aid of construction are not in the scope of the new standard, and submitted its
recommendation to the AICPA’s revenue recognition working group for approval. The Company implemented the
updated guidance using the modified retrospective approach on January 1, 2018, which did not result in a change in the
Company’s measurement of revenue, and reached the following conclusions:
(cid:120) The Company’s tariff sale contracts, including those with lower credit quality customers, are generally deemed to
be probable of collection, and thus the timing of revenue recognition will continue to be concurrent with the
delivery of water and wastewater services, consistent with our current practice.
(cid:120) Contributions in aid of construction are outside of the scope of the standard, and will continue to be accounted for
as a noncurrent liability.
Note 2 – Acquisitions
As part of the Company’s growth-through-acquisition strategy, the Company has entered into purchase agreements to
acquire the water or wastewater utility system assets of six municipalities for a total combined purchase price in cash of
$150,700. The purchase price for these pending acquisitions is subject to certain adjustments at closing, and the pending
acquisitions are subject to regulatory approvals, including the final determination of the fair value of the rate base
acquired. Closings for these acquisitions are expected to occur by the end of 2018, which is subject to the timing of the
regulatory approval process. These acquisitions are expected to add approximately 16,325 customers in two of the states
in which the Company operates.
40
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Pursuant to the Company’s growth-through-acquisition strategy, the Company completed the following acquisitions:
In 2017, the Company completed four acquisitions of water and wastewater utility systems in two states adding 1,003
customers. The total purchase price of these utility systems consisted of $5,860 in cash, which resulted in $72 of goodwill
being recorded. The operating revenues included in the consolidated financial statements of the Company during the
period owned by the Company for the utility systems acquired in 2017 are $461. The pro forma effect of the businesses
acquired is not material either individually or collectively to the Company’s results of operations.
In January 2016, the Company acquired Superior Water Company, Inc., which provides public water service to 4,108
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 adding 2,469 customers.
The total purchase price of these utility 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 were $4,896 in 2017 and $3,809 in 2016. 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
adding 3,170 customers. 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 $10,868 in 2017, $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.
Note 3 –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 2017 and 2016
In the second quarter of 2016, the Company decided to market for sale two business units that are reported within the
Company’s market-based subsidiary, Aqua Resources. One business unit installed and tested devices that prevent the
contamination of potable water and repaired water and wastewater systems, for which the sale was completed in January
2017. The other business unit repaired and performed maintenance on water and wastewater systems, for which the sale
was completed in June 2017. These business units were reported as assets held for sale in the Company’s December 31,
2016 consolidated balance sheet included in this Annual Report. These transactions resulted in total proceeds of $867 and
the recognition of a net loss of $324.
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
41
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
and disposal services. 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, 2017
In the first quarter of 2017, the Company decided to market for sale a water system that serves approximately 265
customers. This water system is reported as assets held for sale in the Company’s consolidated balance sheet.
Note 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 equipment
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,
2017
2016
Approximate Range of
Useful Lives
Weighted Average
Useful Life
$
3,134,900 $
1,753,433
296,736
768,962
768,655
103,357
6,826,043
201,902
(24,550)
598
$
7,003,993 $
2,898,560
1,621,972
283,635
733,074
733,837
98,529
6,369,607
163,565
(25,683)
1,628
6,509,117
30 - 93 years
5 - 85 years
14 - 85 years
12 - 90 years
4 - 63 years
-
-
2 - 59 years
3 - 25 years
79 years
51 years
47 years
41 years
25 years
-
-
31 years
13 years
December 31,
2017
2016
65,695
35,042
4,930
105,667
7,071
98,596
$
$
63,518
34,635
6,336
104,489
7,095
97,394
$
$
The Company’s utility customers are located principally in the following states: 47% in Pennsylvania, 15% in Ohio, 10%
in North Carolina, 8% in Texas, and 7% in Illinois. No single customer accounted for more than one percent of the
Company's regulated operating revenues during the years ended December 31, 2017, 2016, and 2015. 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,
2017
2016
2015
7,095 $
4,986
(6,135)
1,125
7,071 $
5,873 $
5,500
(5,410)
1,132
7,095 $
5,365
5,762
(6,513)
1,259
5,873
$
$
42
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:
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
December 31, 2017
Regulatory
Assets
584,067 $
5,367
112,532
2,198
3,259
2,901
3,647
713,971 $
Regulatory
Liabilities
438,750
35,249
65,964
-
1,855
-
92
541,910
$
$
December 31, 2016
Regulatory
Assets
814,418 $
4,986
119,519
1,984
2,111
3,268
2,361
948,647 $
Regulatory
Liabilities
157,266
31,288
59,882
-
2,143
-
56
250,635
$
$
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.
Additionally, the recording of AFUDC for equity funds results in the recognition of a regulatory asset for income taxes,
which represents amounts due related to the revenue requirement.
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.
On December 22, 2017, President Trump signed the TCJA into law, which reduced the Federal corporate income tax rate
from 35% to 21%. Reductions in accumulated deferred income tax balances due to the reduction in the corporate income
tax rate to 21% under the provisions of the TCJA will result in amounts previously collected from utility customers for
these deferred taxes to be refundable to such customers, generally through reductions in future rates. The TCJA includes
provisions that stipulate how these excess deferred taxes relating to certain accelerated tax depreciation benefits are to be
passed back to customers. Potential refunds of other deferred taxes will be determined by our state regulators. The
December 31, 2017 consolidated balance sheet reflects the impact of the TCJA on our regulatory assets and liabilities, and
reduces our regulatory assets by $357,262 and increases our regulatory liabilities by $303,320. These adjustments had no
impact on our 2017 cash flows.
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.
43
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 15 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 consists of:
Current:
Federal
State
Deferred:
Federal
State
Total tax expense
Years Ended December 31,
2017
2016
2015
$
$
1,297
1,837
3,134
21,376
(7,596)
13,780
16,914
$
$
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
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 3% to 9.99% for all years presented.
44
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 corporate income tax rate to
income before income tax expense 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
Federal tax rate change
Other, net
Actual income tax expense
Years Ended December 31,
2016
2017
$ 89,828 $ 89,306 $ 75,863
2015
(69,325)
(3,743)
199
(595)
(455)
(376)
3,141
(1,760)
(59,488)
(202)
199
(174)
(456)
(421)
-
(359)
$ 16,914 $ 20,978 $ 14,962
(62,831)
(1,662)
199
(227)
(455)
(405)
-
(2,947)
In 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.
The Company recorded income tax benefits of $84,766, $78,530, and $72,944 during 2017, 2016, and 2015, respectively.
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 2017, 2016, and 2015 was
6.6%, 8.2%, and 6.9%, respectively.
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.
45
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
Effect of Federal tax rate change
Balance at December 31,
2017
2016
28,099 $
705
(11,221)
17,583 $
28,016
83
-
28,099
$
$
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, 2017 and 2016, $24,243 and $20,674 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 net deferred tax liability:
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 and credit carryforwards
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
December 31,
2017
2016
$
17,123 $
12,956
1,752
36,353
56,642
2,348
127,174
11,623
115,551
21,738
15,751
3,114
38,269
77,911
2,137
158,920
9,486
149,434
795,537
1,104,032
46,143
36,353
6,591
884,624
269,773
38,269
6,613
1,418,687
Net deferred tax liability
$
769,073 $ 1,269,253
At December 31, 2017, the Company has a cumulative Federal NOL of $63,302. 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 $588. As a result
46
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
of the adoption on January 1, 2017 of the FASB’s updated accounting guidance on simplifying the accounting for share-
based payments, the Company recognized a windfall tax benefit of $982 associated with the Company's 2012 Federal
NOL, which was recorded as an adjustment to retained earnings.
At December 31, 2017, the Company has a cumulative state NOL of $627,258, 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
$64,476 and $85,380, 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 $127,778 and $712,638, respectively. The Company records its
unrecognized tax benefit as a reduction to its deferred income tax liability.
As of December 31, 2017, the Company’s Federal income tax returns for all years through 2011 have been closed. Tax
years 2012 through 2017 remain open to Federal examination. The statute remains open for the Company’s state income
tax returns for tax years 2014 through 2017 in the various states in which it conducts business.
On December 22, 2017, President Trump signed the TCJA into law. Substantially all of the provisions of the TCJA are
effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Code and
the taxation of business entities, and includes specific provisions related to regulated public utilities. Significant changes
that impact the Company included in the TCJA are a reduction in the corporate federal income tax rate from 35% to 21%,
effective January 1, 2018, and a limitation of the utilization of NOLs arising after December 31, 2017 to 80% of taxable
income with an indefinite carryforward. The specific TCJA provisions related to our regulated entities generally allow for
the continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain property
acquired after September 27, 2017 and the continuation of certain rate normalization requirements for accelerated
depreciation benefits. Our market-based companies still qualify for 100% deductibility of qualifying property acquired
after September 27, 2017.
Changes in the Code from the TCJA had a material impact on our financial statements in 2017. In accordance with the
FASB’s accounting guidance for income taxes, the tax effects of changes in tax laws must be recognized in the period in
which the law is enacted, or December 22, 2017 for the TCJA. Additionally, deferred tax assets and liabilities are
required to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled.
Thus, at the date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rate. For our
regulated entities, the change in deferred taxes is recorded as either an offset to a regulatory asset or liability and may be
subject to refund to customers. In instances where the deferred tax balances are not in ratemaking, such as the Company’s
market-based operations, the change in deferred taxes is recorded as an adjustment to our deferred tax provision. To the
extent the revalued deferred income tax assets and liabilities were outside of our regulated operations and are not believed
to be recoverable in utility customer rates, the revalued amount of $3,141 was recognized as additional deferred income
tax expense during the quarter ended December 31, 2017.
The staff of the SEC has recognized the complexity of reflecting the impacts of the TCJA, and on December 22, 2017
issued guidance, which clarifies accounting for income taxes if information is not yet available or complete and provides
for up to a one year period in which to complete the required analyses and accounting (the measurement period). The
guidance describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform:
(1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a
reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is
not able to determine a reasonable estimate and therefore continues to apply the FASB’s accounting guidance, based on
the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted.
47
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company has completed or has made a reasonable estimate for the measurement and accounting of the effect of the
TCJA which have been reflected in the December 31, 2017 financial statements. The accounting for these completed and
provisional items, described below, increased the 2017 deferred income tax provision by $3,141 for the year ending
December 31, 2017, and decreased the accumulated deferred income tax liability by $303,320 at December 31, 2017.
One of our states, Pennsylvania, has not yet issued an accounting or procedural order addressing how the TCJA changes
are to be reflected in our utility customer rates. As of December 31, 2017, the Company has provisionally estimated that
$175,108 of deferred income tax liabilities for our Pennsylvania subsidiary will be a regulatory liability. Additionally,
two operating divisions in one of our states operate under locally-negotiated contractual rates with their respective
counties, and it is expected that negotiations will results in a contract that will pass back the effects of the reduction in the
corporate net income tax rate under the TCJA; however, these negotiations have not yet started. As of December 31,
2017, the Company has provisionally estimated that $9,419 of deferred income tax liabilities for these two divisions will
be a regulatory liability. Overall, the Company has applied a reasonable interpretation of the impact of the TCJA and a
reasonable estimate of the regulatory resolution. Further clarification of the TCJA and regulatory resolution may change
the amounts estimated of the deferred income tax provision and the accumulated deferred income tax liability.
The Company’s regulated operations accounting for income taxes are impacted by the FASB’s accounting guidance for
regulated operations. Reductions in accumulated deferred income tax balances due to the reduction in the Federal
corporate income tax rates to 21% under the provisions of the TCJA will result in amounts previously collected from
utility customers for these deferred taxes to be refundable to such customers, generally through reductions in future rates.
The TCJA includes provisions that stipulate how these excess deferred taxes related to certain accelerated tax depreciation
deduction benefits are to be passed back to customers. Potential refunds of other deferred taxes will be determined by our
state regulators. Our state regulatory commissions have or are in the process of issuing procedural orders directing how
the tax law changes are to be reflected in our utility customer rates. In addition, we have two rate cases currently in
progress in two states in which the TCJA is expected to be addressed in the new base rates. The December 31, 2017
consolidated balance sheet reflects the impact of the TCJA on our regulatory assets and liabilities which reduced our
regulatory assets by $357,262 and increased our regulatory liabilities by $303,320. These adjustments had no impact on
our 2017 cash flows.
Note 8 – Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes:
Property
Gross receipts, excise and franchise
Payroll
Regulatory assessments
Pumping fees
Other
Total taxes other than income taxes
Years Ended December 31,
2017
2016
2015
25,810 $
13,458
9,477
2,552
5,057
274
56,628
$
26,788
12,510
9,772
2,630
4,571
114
56,385
$
$
26,545
11,847
9,539
2,689
3,993
444
55,057
$
$
48
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 9 – Commitments and Contingencies
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:
2018
2019
2020
2021
2022
Thereafter
$
1,312
$
1,010
$
743
$
585
$
365
$
250
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 2019 and 2052, and contain
renewal provisions. Some leases are subject to an adjustment every five years based on changes in the Consumer Price
Index. Subject to the aforesaid adjustment, during each of the next five years, an average of $602 of annual lease
payments for land is due, and the aggregate of the years remaining approximates $12,806.
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 2022 are expected to average $4,373
and the aggregate of the years remaining approximates $9,644.
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:
2018
2019
2020
2021
2022
Thereafter
$
1,157
$
1,007
$
1,028
$
1,048
$
1,069
$
6,623
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,
2016
2015
2017
$
2,241 $
8,558
945
2,776 $
13,955
940
2,440
13,718
972
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, 2017, the aggregate amount of $18,961 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, 2017, estimates that approximately $7,131 of the amount accrued for
49
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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.
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 $1,451 and $1,770 at
December 31, 2017 and 2016 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,
2017 and 2016. 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, 2017, restrictions on
the net assets of the Company were $1,443,473 of the total $1,957,621 in net assets. Included in this amount were
restrictions on Aqua Pennsylvania’s net assets of $1,090,062 of their total net assets of $1,528,172. As of December 31,
2017, $1,396,003 of Aqua Pennsylvania’s retained earnings of $1,416,003 and $142,700 of the retained earnings of
$189,000 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%
Total
2018
464 $
51,327
1,766
2,807
11,195
20,595
13,000
484
431
5,700
6,000
113,769 $
$
$
2019
2020
2021
2022
Thereafter
464 $
463 $
1,222
51,813
2,758
50,404
36,126
-
569
566
700
-
1,158
1,863
2,555
16,616
18,120
-
615
613
2,400
-
144,622 $
44,403 $
464 $
910
1,913
2,594
15,297
8,402
-
666
1,665
4,900
-
36,811 $
466 $
888
1,965
2,541
237
17,979
-
358
721
-
-
25,155 $
1,875
7,409
9,934
706,977
660,650
256,783
31,000
29,643
2,096
12,000
-
1,718,367
In October 2017, Aqua Pennsylvania issued $75,000 of first mortgage bonds, of which $35,000 is due in 2054, $20,000 is
due in 2055, and $20,000 is due in 2057 with interest rates of 4.06%, 4.07%, and 4.09%, respectively. The proceeds from
these bonds were used to repay existing indebtedness and for general corporate purposes.
50
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
In July 2017 Aqua Illinois issued $100,000 of first mortgage bonds consisting of the following:
Amount
$25,000
$6,000
$15,000
$10,000
$22,000
$22,000
Interest Rate
3.64%
3.89%
3.90%
4.18%
4.22%
4.24%
Maturity
2032
2037
2038
2047
2049
2050
The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
In July 2017, Aqua Pennsylvania issued $80,000 of first mortgage bonds, of which $40,000 is due in 2055 and $40,000 is
due in 2057 with interest rates of 4.04% and 4.06%, respectively. The proceeds from these bonds were used to repay
existing indebtedness and for general corporate purposes.
In January 2017, Aqua Pennsylvania issued $50,000 of first mortgage bonds, of which $10,000 is due in 2042 and
$40,000 is due in 2044 with interest rates of 3.65% and 3.69%, respectively. The proceeds from these bonds were used to
repay existing indebtedness and for general corporate purposes.
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.
As of December 31, 2017 and 2016, the Company did not have any funds restricted for construction activity.
The weighted average cost of long-term debt at December 31, 2017 and 2016 was 4.29% and 4.23%, respectively. The
weighted average cost of fixed rate long-term debt at December 31, 2017 and 2016 was 4.36% and 4.26%, respectively.
The Company has a five-year $250,000 unsecured revolving credit facility, with four banks that expires in February 2021.
This facility includes 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, 2017, the Company has the following sublimits and available capacity
under the credit facility: $50,000 letter of credit sublimit, $30,189 of letters of credit available capacity, $0 borrowed
under the swing-line commitment, and $60,000 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 1.91% and 1.54%, and the average borrowing was $48,333 and $89,374, during 2017 and 2016,
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 2017, the Company was in compliance with its debt covenants under its
51
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
loan and debt agreements. 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 2017, 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, 2017 and 2016, funds borrowed under the agreement were $3,650 and $5,545,
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 1.78% and 1.18%, and
the average borrowing was $21,913 and $29,760, during 2017 and 2016, respectively. The maximum amount outstanding
at the end of any one month was $66,466 and $52,905 in 2017 and 2016, respectively.
At December 31, 2017 and 2016, 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,
2017 and 2016, funds borrowed under the short-term lines of credit were $0 and $990, respectively. The average
borrowing under the lines was $908 and $2,944 during 2017 and 2016, respectively. The maximum amount outstanding
at the end of any one month was $990 in 2017 and $9,440 in 2016, 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 2017 and 2016 was 1.81% and 1.24%,
respectively.
Interest Income and Expense– Interest income of $202, $217, and $272 was netted against interest expense on the
consolidated statement of net income for the years ended December 31, 2017, 2016, and 2015, respectively. The total
interest cost was $88,543, $80,811, and $76,808 in 2017, 2016, and 2015, including amounts capitalized for borrowed
funds of $3,578, $2,220, and $1,598, 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 uninvested cash, is determined based on level 1
methods and assumptions. As of December 31, 2017 and 2016, the carrying amounts of the Company's cash and cash
equivalents were $4,204 and $3,763, which equates to their fair value. The fair value of “available-for-sale” securities to
fund our deferred compensation and non-qualified pension plan liabilities, which represents mutual and money market
funds, is determined based on quoted market prices from active markets utilizing level 1 methods and assumptions. As of
December 31, 2017 and 2016, the carrying amount of these securities was $21,776 and $20,342. As of December 31,
2017 and 2016, the carrying amount of the Company’s loans payable was $3,650 and $6,535, respectively, which equates
to their estimated fair value.
52
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
Carrying amount
Estimated fair value
December 31,
2017
2016
$
2,143,127
2,262,785
$
1,910,633
2,018,933
The fair value of long-term debt has been determined by discounting the future cash flows using current market interest
rates for similar financial instruments of the same duration utilizing level 2 methods and assumptions. The Company’s
customers’ advances for construction have a carrying value of $93,186 and $91,843 at December 31, 2017 and 2016,
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 2027 and amounts not paid by the respective contract
expiration dates become non-refundable. The fair value of these amounts would, however, be less than their carrying
value due to the non-interest bearing feature.
Note 12 – Stockholders’ Equity
At December 31, 2017, 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
2017
177,713,943
2,986,308
December 31,
2016
177,394,376
2,916,969
2015
176,544,091
2,819,569
At December 31, 2017, the Company had 1,770,819 shares of authorized but unissued Series Preferred Stock, $1.00 par
value.
The Company has a universal shelf registration statement with the 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. This registration statement expires in
February 2018, and we intend to file a new three-year universal shelf registration statement.
In 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, 2017 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 2017, 2016, and 2015, 447,753 484,645, and 535,439 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 $15,168, $14,916, and
$14,380, respectively. During 2017 and 2016, under the dividend reinvestment portion of the Plan, 45,121 and 47,478
53
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
original issue shares of common stock were sold, providing the Company with proceeds of $1,453 and $1,388,
respectively.
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. The specific timing, amount and other terms of
repurchases depend on market conditions, regulatory requirements and other factors. 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. In 2014, we repurchased 560,000 shares of our common stock in the open market
for $13,280. This program expired on December 31, 2016.
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,
2016
177,273
2017
177,612
2015
176,788
563
178,175
573
177,846
729
177,517
For the years ended December 31, 2017, 2016, and 2015, 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 $11.02 and $10.43 at December 31, 2017 and 2016, 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
54
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 awards to non-employee directors, the Board of Directors makes such awards. At December 31, 2017, 3,720,624
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 2017, 2016, and 2015, 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.
The performance goals of the 2017, 2016, and 2015 PSU grants consisted of the following metrics:
Metric 1 – Company’s total shareholder return (“TSR”) compared to the TSR for a specific peer
group of investor-owned water companies (a market-based condition)
Metric 2 – Company’s TSR compared to the TSR for the companies listed in the Standard and
Poor’s Midcap Utilities Index (a market-based condition)
Metric 3 – Achievement of a targeted cumulative level of rate base growth as a result of
acquisitions (a performance-based condition)
Metric 4 – Achievement of targets for maintaining consolidated operations and maintenance
expenses over the three year measurement period (a performance-based condition)
Metric 5 – Achievement of a targeted cumulative level of rate base growth as a result of
acquisitions (a performance-based condition)
Metric 6 – Achievement of targets for maintaining consolidated operations and maintenance
expenses over the three year measurement period (a performance-based condition)
Metric 7 – 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)
Metric 8 – Earning a cumulative total earnings before taxes for the Company’s operations other
than Aqua Pennsylvania for the three year performance period compared to a target (a
performance-based condition)
The following table provides the compensation expense and income tax benefit for PSUs:
Performance Grant of:
2015
2017
26.47% 27.5% 30%
2016
26.47% 27.5% 30%
23.53% -
23.53% -
-
-
-
-
-
-
25.0% -
20.0% -
-
-
20%
20%
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
4,351 $
1,766
55
Years ended December 31,
2017
2016
3,823 $
1,552
2015
4,419
1,796
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes nonvested PSU transactions for the year ended December 31, 2017:
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
476,896 $
125,202
(33,502)
(22,664)
32,400
(125,999)
452,333
27.96
30.79
28.14
28.68
25.31
36.37
26.16
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based
conditions 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,
2016
2017
2015
3.0
1.49%
17.9%
30.79 $
3,926 $
3,207 $
3.0
0.91%
17.9%
28.89 $
5,912 $
5,104 $
$
$
$
3.0
1.03%
16.9%
26.46
7,964
6,416
As of December 31, 2017, $4,945 of unrecognized compensation costs related to PSUs is expected to be recognized over
a weighted average period of approximately 1.7 years. The aggregate intrinsic value of PSUs as of December 31, 2017
was $18,114. 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.
56
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 the compensation expense and income
tax benefit for RSUs:
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
Years ended December 31,
2017
1,183 $
489
2016
1,061 $
438
2015
1,076
444
The following table summarizes nonvested RSU transactions for the year ended December 31, 2017:
Nonvested stock units at beginning of period
Granted
Stock units vested but not paid
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
109,273 $
41,293
(1,467)
(26,914)
(5,398)
116,787
28.48
30.37
31.47
26.45
31.03
29.46
$
Years ended December 31,
2017
2016
2015
30.37 $
896
751
32.08 $
805
605
26.00
2,327
1,904
As of December 31, 2017, $1,401 of unrecognized compensation costs related to RSUs is expected to be recognized over
a weighted average period of approximately 1.7 years. The aggregate intrinsic value of RSUs as of December 31, 2017
was $4,582. 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.
57
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Stock Options – A stock option represents the option to purchase a number of shares of common stock of the Company as
specified in the stock option grant agreement at the exercise price per share as determined by the closing market price of
our common stock on the grant date. Stock options are exercisable in installments of 33% annually, starting one year
from the grant date and expire ten years from the grant date. The vesting of stock options granted in 2017 are subject to
the achievement of the following performance goal: the Company achieves at least an adjusted return on equity equal to
150 basis points below the return on equity granted by the Pennsylvania Public Utility Commission during the Company’s
Pennsylvania subsidiary’s last rate proceeding. The adjusted return on equity equals net income, excluding net income or
loss from acquisitions which have not yet been incorporated into a rate application as of the last year end, divided by
equity which excludes equity applicable to acquisitions which are not yet incorporated in a rate application during the
award period.
The fair value of each stock option is amortized into compensation expense using the graded vesting method, which
results in the recognition of compensation costs over the requisite service period for each separately vesting tranche of the
stock options as though the stock options were, in substance, multiple stock option grants. The following table provides
compensation expense and income tax benefit for stock options:
Years ended December 31,
2017
2016
2015
Stock-based compensation within operations and maintenance expenses
Income tax benefit
$
245 $
208
- $
260
-
193
There were no stock options granted during the years ended December 31, 2016, and 2015.
Options under the plans were issued at the closing market price of the stock on the day 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 provides the assumptions used in the pricing
model for grants and the resulting grant date fair value of stock options granted in the period reported:
Expected term (years)
Risk-free interest rate
Expected volatility
Dividend yield
Grant date fair value per option
Year ended December 31,
2017
5.45
2.01%
17.7%
2.51%
4.07
$
The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a
reduction in compensation expense.
58
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes stock option transactions for the year ended December 31, 2017:
Outstanding, beginning of year
Granted
Forfeited
Expired / Cancelled
Exercised
Outstanding at end of year
Exercisable at end of year
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (years)
Aggregate
Intrinsic Value
Shares
427,335 $
120,127
(5,191)
(2,812)
(174,527)
364,932 $
15.55
30.47
30.47
14.26
16.46
19.83
249,996 $
14.93
3.7 $
1.2 $
7,081
6,074
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 intrinsic value of stock options exercised:
Intrinsic value of options exercised
Years ended December 31,
2017
2016
2015
$
2,767
$
2,945
$
4,154
The following table summarizes information about the options outstanding and options exercisable as of December 31,
2017:
Range of prices:
$13.00 - 14.99
$15.00 - 15.99
$16.00 - 16.99
$17.00 - 30.99
Shares
89,770
101,167
59,059
114,936
364,932
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Life (years)
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
2.1 $
1.2
0.2
9.1
3.7
13.72
15.30
16.15
30.47
19.83
89,770 $
101,167
59,059
-
249,996
13.72
15.30
16.15
-
14.93
As of December 31, 2017, there was $223 of total unrecognized compensation costs related to nonvested stock options
granted under the plans. The cost is expected to be recognized over a weighted average period of approximately 1.5
years.
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.
59
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes the value of restricted stock awards:
Years ended December 31,
2017
2016
2015
Intrinsic value of restricted stock awards vested
Fair value of restricted stock awards vested
$
- $
-
- $
-
860
553
As of December 31, 2017, 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, 2017, 2016, and 2015.
Stock Awards – The following table provides compensation costs for stock-based compensation related to stock awards:
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
563 $
233
506 $
210
365
151
The following table summarizes the value of stock awards:
Years ended December 31,
2017
2016
2015
Years ended December 31,
2017
2016
2015
Intrinsic and fair value of stock awards vested
Weighted average fair value of stock awards granted
$
563 $
506 $
34.42
31.87
365
26.44
The following table summarizes stock award transactions for year ended December 31, 2017:
Nonvested stock awards at beginning of period
Granted
Vested
Nonvested stock awards at end of period
Number of
Stock Awards
Weighted
Average Fair
Value
- $
16,345
(16,345)
-
-
34.42
34.42
-
60
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 had non-qualified Supplemental Executive Retirement Plans,
which were terminated in 2016, 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.
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 $8,858 and
$9,990 to participants who elected this option during 2017 and 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 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.
61
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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:
2018
2019
2020
2021
2022
2023-2027
$
20,516
20,462
21,580
20,674
21,538
106,397
2,249
2,553
2,777
2,957
3,177
18,764
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 loss
Plan participants' contributions
Benefits paid
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
Asset transfer
Fair value of plan assets at December 31,
Funded status of plan:
Net liability recognized at December 31,
Pension Benefits
2017
2016
Other Post-retirement Benefits
2017
2016
$
308,172 $
3,174
12,434
18,516
-
(21,317)
-
-
320,979
242,360
33,278
16,032
(21,317)
-
-
-
270,353
$
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
69,312
1,020
2,947
4,047
124
(1,490)
-
-
75,960
46,085
5,188
500
(1,323)
-
-
(2,700)
47,750
$
65,137
1,014
2,927
1,400
170
(1,336)
-
-
69,312
43,704
2,149
1,360
(1,128)
-
-
-
46,085
$
50,626 $
65,812
$
28,210
$
23,227
62
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
Other Post-retirement Benefits
2017
396 $
50,230
50,626 $
2016
613
65,199
65,812
$
$
2017
-
28,210
28,210
2016
$
$
-
23,227
23,227
$
$
At December 31, 2017 and 2016, 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
2017
2016
$
320,979
270,353
$
308,172
242,360
Accumulated Benefit Obligation Exceeds the Fair Value of
Plan Assets
2017
2016
$
301,473
270,353
$
291,889
242,360
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
Special termination benefits
Net periodic benefit cost
Pension Benefits
Other Post-retirement Benefits
2017
2016
2015
2017
2016
2015
$
3,174
$
3,179 $
3,349
$
1,020 $
12,434
(17,077)
579
8,003
-
-
13,038
(16,910)
578
7,153
2,895
302
12,955
(18,702)
174
5,993
-
-
2,947
(2,589)
(509)
1,165
-
-
$
1,014
2,927
(2,647)
(549)
926
-
-
1,224
2,802
(2,923)
(687)
1,282
-
-
$
7,113
$
10,235 $
3,769
$
2,034 $
1,671
$
1,698
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, 2017 and 2016. 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.
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 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
2017
86,750 $
3,262
90,012 $
2016
92,436
3,841
96,277
Other Post-retirement Benefits
2017
15,724
(1,869)
13,855
$
$
2016
15,441
(2,378)
13,063
$
$
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 ending December 31, 2018:
Net actuarial loss
Prior service cost (credit)
Pension Benefits
$
7,291
527
Other Post-retirement Benefits
1,182
$
(509)
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
2016
2017
Other Post-
retirement Benefits
2017
2016
3.66%
4.13%
3.0-4.0% 3.0-4.0%
3.73% 4.25%
n/a
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
7.0%
5.0%
2022
6.6%
5.0%
2020
n/a – Assumption is not applicable.
64
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
Other Post-retirement Benefits
2017
2016
2015
2017
2016
2015
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
4.13%
7.00%
4.48%
7.25%
4.20%
7.50%
4.25%
4.60%
4.17%
4.67-7.00% 4.83-7.25% 5.00-7.50%
3.0-4.0% 3.0-4.0% 3.0-4.0%
n/a
n/a
n/a
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.
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
6.6%
5.0%
2021
7.0%
5.0%
2021
7.0%
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:
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
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
$
$
4,797
277
$
$
(4,369)
(244)
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 2017, the Company used a 7.00% expected return on plan
assets assumption which will decrease to 6.75% for 2018. 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. Risk is managed through fixed income investments to manage interest
rate exposures that impact the valuation of liabilities and through the diversification of investments across and within
65
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
various asset categories. Investment returns are compared to a total plan benchmark constructed by applying the plan’s
asset allocation target weightings to passive index returns representative of the respective asset classes in which the plan
invests. The Retirement and Employee Benefits Committee meets quarterly 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:
Return seeking assets
Liability hedging assets
Total
Target Allocation
50 to 70%
30 to 50%
100%
Percentage of Plan Assets at
December 31,
2017
Target Allocation
Percentage of Plan Assets at
December 31,
2016
64% Domestic equities
36% International equities
100% Fixed income
Alternative investments
Cash and cash equivalents
Total
25 to 75%
0 to 10%
25 to 50%
0 to 5%
0 to 20%
100%
The fair value of the Company’s pension plans’ assets at December 31, 2017 by asset class are as follows:
Common stock
Return seeking assets:
Global equities
Real estate securities
Hedge / diversifying strategies
Credit
Liability hedging assets
Cash and cash equivalents
Total pension assets
Level 1
Level 2
Level 3
Assets measured at
NAV (a)
$
26,902 $
- $
- $
-
$
-
-
-
-
-
4,650
31,552 $
-
-
-
-
-
-
- $
-
-
-
-
-
-
- $
$
66,281
14,110
38,143
28,395
91,872
-
238,801
$
65%
6%
19%
2%
8%
100%
Total
26,902
66,281
14,110
38,143
28,395
91,872
4,650
270,353
(a) Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the
fair value hierarchy.
66
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, 2016 by asset class are as follows:
Level 1
Level 2
Level 3
Total
Domestic equities:
Common stocks
Mutual funds
International equities
Fixed income:
$
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:
Real estate
Commodity funds
Cash and cash equivalents
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
$
Equity securities include our common stock in the amounts of $16,471 or 6.1% and $20,632 or 8.5% of total pension
plans’ assets as of December 31, 2017 and 2016, respectively.
The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset class are as
follows:
Return seeking assets
Liability hedging assets
Total
Target Allocation
50 to 70%
30 to 50%
100%
Percentage of Plan Assets at
December 31,
2017
Target Allocation
Percentage of Plan Assets at
December 31,
2016
62% Domestic equities
38% International equities
100% Fixed income
Alternative investments
Cash and cash equivalents
Total
25 to 75%
0 to 10%
25 to 50%
0 to 5%
0 to 20%
100%
52%
3%
25%
0%
20%
100%
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 other post-retirement benefit plans’ assets at December 31, 2017 by asset class are as
follows:
Return seeking assets:
Global equities
Real estate securities
Liability hedging assets
Cash and cash equivalents
Total other post-retirement assets
Level 1
Level 2
Level 3
Assets measured at
NAV (a)
$
$
9,477 $
1,731
5,265
3,947
20,420 $
- $
-
-
-
- $
- $
-
-
-
- $
15,158
3,211
8,961
-
27,330
$
$
Total
24,635
4,942
14,226
3,947
47,750
(a) Assets that are measured at fair value using the NAV per share practical expedient have not been classified in the
fair value hierarchy.
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:
Common stocks
Mutual funds
International equities
Fixed income:
U.S. Treasury and government agency bonds
Corporate and foreign bonds
Alternative investments
Cash and cash equivalents
Total other post-retirement assets
Valuation Techniques Used to Determine Fair Value
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
(cid:120) Common Stocks - Investments in common stocks are valued using unadjusted quoted prices obtained from active
markets.
(cid:120) Return Seeking Assets – Investments in return seeking assets consists of the following:
o Global equities, which consist of common and preferred shares of stock, traded on U.S. or foreign
exchanges that are valued using unadjusted quoted prices obtained from active markets, or commingled
fund vehicles, consisting of such securities valued using NAV, which are not classified within the fair
value hierarchy.
o Real estate securities, which consist of securities, traded on U.S. or foreign exchanges that are valued
using unadjusted quoted prices obtained from active markets, or for real estate commingle fund vehicles
that are not publicly quoted, the fund administrators value the funds using the NAV per fund share,
derived from the quoted prices in active markets of the underlying securities and are not classified within
the fair value hierarchy.
68
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
o Hedge / diversifying strategies, which consist of a multi-manager fund vehicle having underlying
exposures that collectively seek to provide low correlation of return to equity and fixed income markets,
thereby offering diversification. As a multi-manager fund investment, NAV is derived from underlying
manager NAVs, which are derived from the quoted prices in active markets of the underlying securities
and are not classified within the fair value hierarchy.
o Credit, which consist of certain opportunistic, return-oriented credits which primarily include below
investment grade bonds (i.e. high yield bonds), bank loans, and securitized debt. Credits are valued using
the NAV per fund share, derived from either quoted prices in active markets of the underlying securities,
or less active markets, or quotes of similar assets, and are not classified within the fair value hierarchy.
(cid:120)
Liability Hedging Assets – Investments in liability hedging assets consist of funds investing in high-quality fixed
income (i.e. U.S. Treasury securities and government bonds), and for funds for which market quotations are
readily available, are valued at the last reported closing price on the primary market or exchange on which they
are traded. Funds for which market quotations are not readily available, are valued using the NAV per fund share,
derived from the quoted prices in active markets of the underlying securities and are not classified within the fair
value hierarchy.
(cid:120) Cash and Cash Equivalents – Investments in 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.
(cid:120) Mutual Funds – Investments in mutual funds which consist of either equity or fixed income investments are
valued using the net asset value per unit as obtained from quoted market prices from active markets.
(cid:120)
International Equities – Investments in international equities are valued using unadjusted quoted prices obtained
from active markets.
(cid:120) Fixed Income – Investments in fixed income that comprise U.S. Treasury and government agency bonds, and
corporate and foreign bonds are valued utilizing pricing models that incorporate available trade, bid, and other
market information to value the fixed income securities.
(cid:120) Alternative Investments – Investments in alternative investments are comprised of either real estate funds, real
estate investment trusts, or commodity funds, and are valued using unadjusted quoted prices obtained from active
markets.
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 2018 our
pension contribution is expected to be $12,484.
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 based on a percentage of an employee’s contribution, subject to specific
limitations, as well as, non-discretionary contributions based on eligible hourly wages for certain union employees,
discretionary year-end contributions based on an employee’s eligible compensation, and employer profit sharing
contributions. 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 $5,374,
$4,988, and $5,001, for the years ended December 31, 2017, 2016, and 2015, 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 been capitalized and depreciated
69
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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. Beginning on October 1, 2017, Aqua
Pennsylvania initiated a water infrastructure rehabilitation surcharge for the capital invested since the last rate proceeding
and expects to file a base rate case in 2018.
The Company’s operating subsidiaries were allowed rate increases totaling $7,558 in 2017, $3,434 in 2016, and $3,347 in
2015, represented by five, six, and four rate decisions, respectively. Revenues from these increases realized in the year of
grant were approximately $6,343, $1,788, and $2,887 in 2017, 2016, and 2015, 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 2017, 2016, and 2015 of $10,255, $7,379, and $3,261, 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 Infrastructure and Aqua Resources. 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.
70
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:
Operating revenues
$
804,905
$
4,620
$
809,525
$
800,107
$
19,768
$
819,875
Regulated
Eliminations
Consolidated
Regulated
Eliminations
Consolidated
2017
Other and
2016
Other and
Operations and maintenance expense
Depreciation
Amortization
Operating income (loss)
Interest expense, net
Allowance for funds used during construction
Equity earnings in joint venture
Income tax (benefit)
Net income (loss)
Capital expenditures
Total assets
Goodwill
286,962
136,246
240
326,935
81,974
15,211
-
14,107
246,548
478,077
6,236,109
37,389
244
56
182
2,032
6,367
-
(331)
2,807
(6,810)
12
96,354
4,841
2015
Other and
287,206
136,302
422
328,967
88,341
15,211
(331)
16,914
239,738
478,089
285,347
131,835
2,076
326,933
76,222
8,815
-
24,956
234,922
381,965
6,332,463
6,066,477
42,230
37,367
19,550
304,897
(848)
(55)
(1,348)
4,372
-
(976)
(3,978)
(740)
1,031
92,514
4,841
130,987
2,021
325,585
80,594
8,815
(976)
20,978
234,182
382,996
6,158,991
42,208
Operating revenues
$
779,613
$
34,591
$
814,204
Regulated
Eliminations
Consolidated
Operations and maintenance expense
Depreciation
Amortization
Operating income
Interest expense, net
Allowance for funds used during construction
Equity loss in joint venture
Income tax (benefit)
Net Income (loss)
Capital expenditures
Total assets
Goodwill
282,866
125,146
3,364
315,876
72,703
6,219
-
26,379
224,122
363,594
5,645,780
27,246
26,444
144
83
5,224
3,833
-
35,177
(11,417)
(22,332)
1,095
72,093
6,620
309,310
125,290
3,447
321,100
76,536
6,219
35,177
14,962
201,790
364,689
5,717,873
33,866
71
Selected Quarterly Financial Data (Unaudited)
Aqua America, Inc. and Subsidiaries
(In thousands of dollars, except per share amounts)
2017
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
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
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$
187,787 $
203,418 $
215,008 $
203,312
$
809,525
69,128
69,896
49,072
0.28
0.28
0.1913
0.1913
32.32
29.41
70,853
84,612
60,968
0.34
0.34
0.1913
0.1913
34.41
31.18
67,982
97,486
76,225
0.43
0.43
0.2047
0.2047
34.66
32.30
79,243
76,973
53,473
0.30
0.30
0.2047
0.2047
39.55
33.12
287,206
328,967
239,738
1.35
1.35
0.7920
0.7920
39.55
29.41
$
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
High and low prices of the Company’s common stock are as reported on the New York Stock Exchange.
72
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:
Total assets
Property, plant and equipment, net
2017
2016
2015
2014
2013
$
1.35 $
1.35
1.32 $
1.32
1.14 $
1.14
1.21 $
1.20
-
-
1.35
1.35
0.79
12.2%
$
11.02 $
39.23
-
-
1.32
1.32
0.74
12.7%
10.43 $
30.04
-
-
1.14
1.14
0.69
11.7%
9.78 $
29.80
0.11
0.11
1.32
1.31
0.63
14.1%
9.37 $
26.70
$
809,525 $
819,875 $
814,204 $
779,903 $
136,724
88,341
256,652
16,914
239,738
-
133,008
80,594
255,160
20,978
234,182
-
128,737
76,536
216,752
14,962
201,790
-
239,738
234,182
201,790
126,535
76,397
239,103
25,219
213,884
19,355
233,239
1.15
1.15
0.10
0.10
1.26
1.25
0.58
14.4%
8.68
23.59
761,893
123,985
77,316
224,104
21,233
202,871
18,429
221,300
$ 6,332,463 $
6,158,991 $
5,717,873 $
5,383,243 $
5,027,430
5,399,860
5,001,615
4,688,925
4,401,990
4,138,568
Aqua America stockholders' equity
Long-term debt, including current portion, excluding debt issuance costs (3)
1,957,621
2,143,127
1,850,068
1,910,633
1,725,930
1,779,205
1,655,343
1,619,270
1,534,835
1,554,871
Total debt, excluding debt issuance costs (3)
2,146,777
1,917,168
1,795,926
1,637,668
1,591,611
ADDITIONAL INFORMATION:
Operating cash flows from continuing operations
$
381,318 $
396,163 $
370,794 $
364,888 $
Capital expenditures
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)
478,089
5,860
140,660
982,849
23,511
177,714
1,530
382,996
9,423
130,923
972,265
24,750
177,394
1,551
364,689
28,989
121,248
957,866
25,269
176,544
1,617
328,605
14,616
112,106
940,119
25,780
176,753
1,617
365,803
307,908
14,997
102,889
928,200
25,833
176,751
1,542
(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, 2017, 2016, 2015, 2014, and 2013 were $21,605, $22,357,
$23,165, $23,509, and $24,387, respectively
73
Stock Price Performance
The graph below matches the cumulative 5-Year total return of holders of Aqua America, Inc.’s common stock
with the cumulative total returns of the S&P 500 index, and the S&P MidCap 400 Utilities index. The graph
assumes that the value of the investment in our common stock, in each index, and in the peer group (including
reinvestment of dividends) was $100 on 12/31/2012 and tracks it through 12/31/2017.
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 12/31/12 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.
Years as of December 31
2012
2013
2014
2015
2016
2017
Aqua America, Inc.
100.00
118.76
137.88
157.86
162.94
217.95
S&P 500 Index
100.00
132.39
150.51
152.59
170.84
208.14
S&P MidCap 400 Utilities Index
100.00
127.72
151.13
145.78
184.16
204.62
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
74
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 1800
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
Exchange Commission (SEC) and the New York Stock
Exchange. Copies of our key corporate governance
documents, including our Corporate Governance
Guidelines, Code of Ethical Business Conduct,
and the charters of each committee of our Board
of Directors can be obtained from the corporate
governance portion of the investor relations section of
our Website, AquaAmerica.com. Amendments to the
Code of Ethical Business, and in the event of any grant
of waiver from a provision of the Code of Conduct
requiring disclosure under applicable SEC rules will be
disclosed on our Website.
Annual Meeting
8:30 a.m. Eastern Daylight Time
Tuesday, May 8, 2018
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
paid on up to 100,000 shares of Common Stock in
additional shares of Common Stock at a discretionary
discount from a price based on the market value of
the stock. The discount between 0 and 5.0 percent on
the shares purchased or issued to meet the dividend
reinvestment requirement will be designated by us in
our sole discretion prior to the purchase or issuance
of such shares. We reserve the right to change, reduce
or discontinue any discount at any time without notice.
In addition, shareholders may purchase additional
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
Drexelbrook Banquet Facility and Corporate Center
www.computershare.com/investor. Please read the
prospectus carefully before you invest.
4700 Drexelbrook Drive
Drexel Hill, PA 19026
Transfer Agent and Registrar
Computershare
P.O. Box 505000
Louisville, KY 40233
800.205.8314 or
www.computershare.com/investor
75
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 2018 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 610.645.1040 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
For future annual meetings, you may request separate
voting material by calling Broadridge at 866.540.9095,
or by writing to Broadridge Financial Solutions,
Inc., Householding Department, 51 Mercedes Way,
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.
Direct Deposit
With direct deposit, Aqua America cash dividends are
deposited automatically on the dividend payment date
of each quarter. Shareholders will receive confirmation
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.
76
Dividends
Aqua America has paid dividends for 73 consecutive years. The normal Common Stock dividend dates for 2018
and the first six months of 2019 are:
Declaration Date
Ex-Dividend Date
Record Date
Payment Date
February 5, 2018
February 14, 2018
February 16, 2018
March 1, 2018
May 7, 2018
May 16, 2018
May 18, 2018
June 1, 2018
August 6, 2018
August 15, 2018
August 17, 2018
September 1, 2018
November 5, 2018
November 14, 2018
November 16, 2018
December 1, 2018
February 4, 2019
February 13, 2019
February 15, 2019
March 1, 2019
May 6, 2019
May 15, 2019
May 17, 2019
June 1, 2019
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 notification of the lost or missing check. All
inquiries 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.
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
forwarded to:
Computershare, N.A.
P.O. BOX 505000
Louisville, KY 40233
77
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Corporate
Information
Aqua America, Inc.
As of March 29, 2018
BOARD OF DIRECTORS
OFFICERS
Christopher H. Franklin
Chairman, President, and Chief Executive Officer
Richard S. Fox
Executive Vice President
Chief Operating Officer, Regulated Operations
Christopher P. Luning
Senior Vice President
General Counsel and Secretary
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
Christopher H. Franklin
Chairman, President, and Chief Executive Officer
Aqua America, Inc.
Director since 2015
Nicholas DeBenedictis
Chairman Emeritus
Aqua America, Inc.
Director since 1992
Carolyn J. Burke
Executive Vice President, Strategy
Dynegy, Inc.
Director since 2016
Richard H. Glanton
Founder
ElectedFace, Inc.
Director since 1995
William P. Hankowsky
Chairman, President, and Chief Executive Officer
Liberty Property Trust
Director since 2004
Daniel J. Hilferty
President and Chief Executive Officer
Independence Health Group
Director since 2017
Wendell F. Holland, Esq.
Partner
CFSD Group, LLC
Director since 2011
Ellen T. Ruff
Partner
McGuireWoods, LLP.
Director since 2006
Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, Pennsylvania 19010
877.987.2782
AquaAmerica.com
NYSE: WTR