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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
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Commission File Number 1-6659
AQUA AMERICA, INC. (formerly Philadelphia Suburban Corporation)
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1702594
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania 19010-3489
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610)-527-8000
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- --------------------------------------------------------------------------------
(Former Name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 29, 2004.
92,845,523.
- ----------
Part I - Financial Information
Item 1. Financial Statements
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
March 31, December 31,
Assets 2004 2003
-------------------------------
Property, plant and equipment, at cost $ 2,331,546 $ 2,302,304
Less accumulated depreciation 489,821 478,013
-------------------------------
Net property, plant and equipment 1,841,725 1,824,291
-------------------------------
Current assets:
Cash and cash equivalents 13,668 10,757
Accounts receivable and unbilled revenues, net 58,452 62,320
Inventory, materials and supplies 6,239 5,841
Prepayments and other current assets 5,132 5,051
-------------------------------
Total current assets 83,491 83,969
-------------------------------
Regulatory assets 98,133 98,761
Deferred charges and other assets, net 33,467 34,277
Funds restricted for construction activity 23,922 28,438
-------------------------------
$ 2,080,738 $ 2,069,736
===============================
Liabilities and Stockholders' Equity
Stockholders' equity:
Common stock at $.50 par value, authorized 100,000,000 shares,
issued 93,510,877 and 93,270,424 in 2004 and 2003 $ 46,756 $ 46,635
Capital in excess of par value 416,649 413,008
Retained earnings 215,370 210,915
Minority interest 971 912
Treasury stock, 677,370 and 681,384 shares in 2004 and 2003 (12,464) (12,611)
Accumulated other comprehensive income - 171
-------------------------------
Total stockholders' equity 667,282 659,030
-------------------------------
Long-term debt, excluding current portion 686,312 696,666
Commitments - -
Current liabilities:
Current portion of long-term debt 32,394 39,386
Loans payable 127,451 96,459
Accounts payable 11,593 32,321
Accrued interest 9,212 11,126
Accrued taxes 19,681 16,779
Other accrued liabilities 37,952 35,930
-------------------------------
Total current liabilities 238,283 232,001
-------------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 193,788 190,395
Customers' advances for construction 72,043 72,500
Other 10,923 9,419
-------------------------------
Total deferred credits and other liabilities 276,754 272,314
-------------------------------
Contributions in aid of construction 212,107 209,725
-------------------------------
$ 2,080,738 $ 2,069,736
===============================
See notes to consolidated financial statements on page 5 of this report.
1
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Three Months Ended
March 31,
-----------------------
2004 2003
-----------------------
Operating revenues $ 99,768 $ 80,489
Costs and expenses:
Operations and maintenance 41,831 30,664
Depreciation 13,674 11,347
Amortization 670 712
Taxes other than income taxes 7,149 5,320
-----------------------
63,324 48,043
-----------------------
Operating income 36,444 32,446
Other expense (income):
Interest expense, net 11,802 10,612
Allowance for funds used during construction (609) (376)
Gain on sale of other assets (450) (55)
-----------------------
Income before income taxes 25,701 22,265
Provision for income taxes 10,126 8,938
-----------------------
Net income 15,575 13,327
Dividends on preferred stock - 3
-----------------------
Net income available to common stock $ 15,575 $ 13,324
=======================
Net income $ 15,575 $ 13,327
Other comprehensive income (loss), net of tax:
Unrealized gain on securities 59 47
Reclassification adjustment for gains reported in net income (230) -
-----------------------
Comprehensive income $ 15,404 $ 13,374
=======================
Net income per common share:
Basic $ 0.17 $ 0.16
=======================
Diluted $ 0.17 $ 0.16
=======================
Average common shares outstanding
during the period:
Basic 92,688 84,971
=======================
Diluted 93,806 85,733
=======================
See notes to consolidated financial statements on page 5 of this report.
2
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
March 31, December 31,
2004 2003
------------------------------
Stockholders' equity:
Common stock, $.50 par value $ 46,756 $ 46,635
Capital in excess of par value 416,649 413,008
Retained earnings 215,370 210,915
Minority interest 971 912
Treasury stock (12,464) (12,611)
Accumulated other comprehensive income - 171
------------------------------
Total stockholders' equity 667,282 659,030
------------------------------
Long-term debt:
Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range
0.00% to 2.49% 18,669 16,868
2.50% to 2.99% 22,291 18,913
3.00% to 3.49% 5,587 5,618
3.50% to 3.99% 2,800 2,800
4.00% to 4.99% 8,135 8,135
5.00% to 5.49% 110,875 110,875
5.50% to 5.99% 66,260 76,260
6.00% to 6.49% 119,360 119,360
6.50% to 6.99% 42,000 42,000
7.00% to 7.49% 34,716 46,716
7.50% to 7.99% 23,000 23,000
8.00% to 8.49% 17,500 17,500
8.50% to 8.99% 9,000 9,000
9.00% to 9.49% 53,805 53,805
9.50% to 9.99% 42,748 43,242
10.00% to 10.50% 6,000 6,000
------------------------------
582,746 600,092
Notes payable, 6.05%, due 2006 960 960
Unsecured notes payable, 4.87%, due 2023 135,000 135,000
------------------------------
718,706 736,052
Current portion of long-term debt 32,394 39,386
------------------------------
Long-term debt, excluding current portion 686,312 696,666
------------------------------
Total capitalization $ 1,353,594 $ 1,355,696
==============================
See notes to consolidated financial statements on page 5 of this report.
3
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
Three Months Ended
March 31,
-----------------------
2004 2003
-----------------------
Cash flows from operating activities:
Net income $ 15,575 $ 13,327
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 14,344 12,059
Deferred income taxes 3,595 1,865
Gain on sale of other assets (450) (55)
Net (increase) decrease in receivables, inventory and prepayments (178) 744
Net decrease in payables, accrued interest, accrued taxes
and other accrued liabilities (653) (6,883)
Other 736 (1,511)
-----------------------
Net cash flows from operating activities 32,969 19,546
-----------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $609 and $376 (29,134) (24,001)
Acquisitions of water and wastewater systems (1,277) (11)
Proceeds from the sale of other assets 1,215 60
Net decrease in funds restricted for construction activity 4,516 2,775
Other (231) (130)
-----------------------
Net cash flows used in investing activities (24,911) (21,307)
-----------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 1,712 1,361
Repayments of customers' advances (676) (742)
Net proceeds of short-term debt 18,935 22,117
Proceeds from long-term debt 5,689 24
Repayments of long-term debt (23,041) (11,050)
Proceeds from issuing common stock 3,433 2,665
Repurchase of common stock (79) (105)
Dividends paid on preferred stock - (3)
Dividends paid on common stock (11,120) (9,512)
Other - (173)
-----------------------
Net cash flows from financing activities (5,147) 4,582
-----------------------
Net increase in cash and cash equivalents 2,911 2,821
Cash and cash equivalents at beginning of period 10,757 5,915
-----------------------
Cash and cash equivalents at end of period $ 13,668 $ 8,736
=======================
See notes to consolidated financial statements on page 5 of this report.
4
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share
amounts)
(UNAUDITED)
Note 1 Basis of Presentation
The accompanying consolidated balance sheet and statement of
capitalization of Aqua America, Inc. at March 31, 2004, the
consolidated statements of income and comprehensive income for
the three months ended March 31, 2004 and 2003, and the
consolidated statements of cash flow for the three months
ended March 31, 2004 and 2003, are unaudited, but reflect all
adjustments, consisting of only normal recurring accruals,
which are, in the opinion of management, necessary to present
fairly the consolidated financial position, the consolidated
results of operations, and the consolidated cash flow for the
periods presented. Because they cover interim periods, the
statements and related notes to the financial statements do
not include all disclosures and notes normally provided in
annual financial statements and, therefore, should be read in
conjunction with the Aqua America Annual Report on Form 10-K
for the year ended December 31, 2003. The results of
operations for interim periods may not be indicative of the
results that may be expected for the entire year.
Note 2 Acquisitions
In April 2004, Aqua America's Florida operating subsidiary
entered into a purchase agreement with Florida Water Services
Corporation, a subsidiary of ALLETE, Inc., to acquire the
utility assets of 63 water and wastewater systems located in
central Florida. The purchase agreement provides for a cash
purchase price of $13,820. The acquisition is scheduled to
close in mid-2004 and is subject to regulatory approval by the
Florida Public Service Commission. The Commission's review
process might result in an adjustment of the final purchase
price based on the Commission's determination of plant
investment for the system. In addition to this agreement, Aqua
America's Florida operating subsidiary entered into a second
purchase agreement with the same parties that allows it to
acquire an additional nine water and wastewater systems for
$4,180 in cash subject to the outcome of a previously
negotiated right of first refusal by Florida Water Services
Corporation with a nearby municipality.
In November 2003, Aqua America entered into a purchase
agreement with ALLETE Water Services, Inc., a subsidiary of
ALLETE, Inc., to acquire the capital stock of Heater
Utilities, Inc., which owns water and wastewater systems
located in North Carolina. The purchase agreement provides for
a cash purchase price of $48,000 and the assumption of
approximately $28,000 in debt, reflecting an acquisition
premium of approximately $18,000. The Company intends to seek
the ability to recover a portion of this premium through
customer rates via the North Carolina Utilities Commission
approval process. The acquisition, which is subject to
regulatory approval, is expected to close in mid-2004. This
acquisition will add approximately 50,000 customers in the
areas of suburban Raleigh, Charlotte, Gastonia and
Fayetteville, North Carolina.
5
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share
amounts) (continued)
(UNAUDITED)
On July 31, 2003, Aqua America completed its acquisition of
four operating water and wastewater subsidiaries of
AquaSource, Inc. (a subsidiary of DQE, Inc.), including
selected, integrated operating and maintenance contracts and
related assets (individually and collectively the acquisition
is referred to as "AquaSource") for $190,717 in cash, as
adjusted pursuant to the purchase agreement for the completion
of a closing balance sheet and the finalization of working
capital. The final purchase price will be determined through
an arbitration process and is expected to be within the range
of $178,700 to $193,717. We expect the arbitration process to
conclude by the third quarter of 2004. The results of
AquaSource have been included in our consolidated financial
statements beginning August 1, 2003. The acquired operations
of AquaSource serve over 130,000 water and wastewater customer
accounts in eleven states (including the Connecticut
operations which were sold in October 2003).
The following supplemental pro forma information is presented
to illustrate the effects of the AquaSource acquisition, which
was completed on July 31, 2003, on the historical operating
results for the three months ended March 31, 2003 as if the
acquisition had occurred at the beginning of the period:
Operating revenues $ 97,113
Net income $ 14,659
Net income per common share:
Basic $ 0.16
Diluted $ 0.16
The supplemental information is not necessarily representative
of the actual results that may have occurred for these periods
or of the results that may occur in the future. This
information does not reflect the effects of recent rate
increases or cost savings that may result from the
acquisition, such as the effects of a reduction in
administrative costs. This information is based upon the
historical operating results of AquaSource for periods prior
to the acquisition date of July 31, 2003 as provided to Aqua
America by AquaSource, Inc. and DQE, Inc. management.
Note 3 Disposition
The Company has an agreement for the sale of its only
regulated operation located in Kentucky, which was acquired
as part of the AquaSource transaction. The sale price
approximates our investment in this operation. The transaction
is expected to occur in 2004. The operation represents
approximately 0.1% of the operations acquired from AquaSource,
Inc.
6
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share
amounts) (continued)
(UNAUDITED)
Note 4 Stockholders' Equity
Aqua America reports other comprehensive income in accordance
with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." The following table
summarizes the activity of accumulated other comprehensive
income:
2004 2003
--------------------
Balance at January 1, $ 171 $ 63
Unrealized holding gain arising during the period,
net of tax of $32 in 2004 and $25 in 2003 59 47
Less: reclassification adjustment for gains included
in net income, net of tax of $173 in 2004 (230) -
--------------------
Other comprehensive income (loss), net of tax (171) 47
--------------------
Balance at March 31, $ - $ 110
====================
Note 5 Net Income per Common Share
Basic net income per common share is based on the weighted
average number of common shares outstanding. Diluted net
income per common share is based on the weighted average
number of common shares outstanding and potentially dilutive
shares. The dilutive effect of employee stock options is
included in the computation of Diluted net income per common
share. The following table summarizes the shares, in
thousands, used in computing Basic and Diluted net income per
common share:
Three Months Ended
March 31,
--------------------
2004 2003
--------------------
Average common shares outstanding during
the period for Basic computation 92,688 84,971
Dilutive effect of employee stock options 1,118 762
--------------------
Average common shares outstanding during
the period for Diluted computation 93,806 85,733
====================
7
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share
amounts) (continued)
(UNAUDITED)
Note 6 Stock-Based Compensation
Aqua America accounts for stock-based compensation using the
intrinsic value method in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no
compensation expense related to granting of stock options has
been recognized in the financial statements for stock options
that have been granted. Pursuant to the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, pro forma net
income available to common stock and earnings per share are
presented in the following table as if compensation cost for
stock options was determined as of the grant date under the
fair value method:
Three Months
Ended
March 31,
-----------------------
2004 2003
-----------------------
Net income available to common stock, as reported: $ 15,575 $ 13,324
Add: stock-based employee compensation expense
included in reported net income, net of tax 32 35
Less: pro forma expense related to stock options
granted, net of tax effects (489) (440)
-----------------------
Pro forma $ 15,118 $ 12,919
=======================
Basic net income per share:
As reported $ 0.17 $ 0.16
Pro forma 0.16 0.15
Diluted net income per share:
As reported $ 0.17 $ 0.16
Pro forma 0.16 0.15
The fair value of options at the date of grant was estimated
using the Black-Scholes option-pricing model.
8
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share
amounts) (continued)
(UNAUDITED)
Note 7 Pension Plans and Other Postretirement Benefits
The Company maintains a qualified, defined benefit plan,
nonqualified pension plans and other postretirement benefit
plans for certain of its employees. The net periodic benefit
cost is based on estimated values provided by independent
actuaries. The following table provides the components of net
periodic benefit costs for the three months ended March 31:
Other
Pension Benefits Postretirement Benefits
-------------------- -----------------------
2004 2003 2004 2003
-------------------- -----------------------
Service cost $ 930 $ 509 $ 232 $ 210
Interest cost 2,065 1,263 364 363
Expected return on plan assets (1,931) (1,091) (213) (195)
Amortization of transition
obligation (asset) (45) (29) 157 171
Amortization of prior service cost 86 55 (11) (12)
Amortization of actuarial loss 209 180 22 13
Amortization of regulatory asset - - 34 34
Capitalized costs (237) (45) (149) (144)
-------------------- --------------------
Net periodic benefit cost $ 1,077 $ 842 $ 436 $ 440
==================== ====================
Aqua America previously disclosed in its financial statements
for the year ended December 31, 2003, that it expected to
contribute $5,371 to Aqua America's defined benefit pension
plan. We made no contributions to the plan in the three months
ended March 31, 2004. In April 2004, Aqua America contributed
$1,300 and expects to contribute the following amounts: $2,771
in the third quarter of 2004 and $1,300 in the fourth quarter
of 2004. We are currently evaluating the impact of the Pension
Funding Equity Act enacted in April 2004 on our projected
funding. See Footnote 9 for a discussion of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003.
Note 8 Water and Wastewater Rates
In April 2004, the Company's operating subsidiary in Illinois
was granted a rate increase intended to increase total
revenues by approximately $2,261 on an annual basis.
9
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share
amounts) (continued)
(UNAUDITED)
Note 9 Recent Accounting Pronouncements
In January 2004, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position ("FSP") No. 106-1,
"Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act
of 2003." FSP 106-1, which was effective for the Company's
consolidated financial statements for the year ended December
31, 2003, permits a sponsor of a postretirement health care
plan that provides a prescription drug benefit to make a
one-time election to defer accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the "Act"). In accordance with FSP 106-1, the Company
made a one-time election to defer the recognition of the
impact on FSP No. 106-1 accounting. Any measures of the
accumulated postretirement benefit obligation and net periodic
postretirement benefit cost in the consolidated financial
statements and footnotes for the period ended March 31, 2004
did not reflect the effects of the Act. Currently, specific
authoritative accounting guidance for the federal subsidy is
pending and that guidance when issued may require the Company
to change previously reported information. The Company is
currently investigating the impacts of the adoption of FSP
106-1's initial recognition, measurement and disclosure
provisions on its consolidated financial statements.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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)
Forward-looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report contain, in addition to
historical information, forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements address, among other things: our use of cash; projected capital
expenditures; liquidity; possible acquisitions and other growth ventures; the
completion of various construction projects; the projected effects of recent
accounting pronouncements; the final purchase price for AquaSource; the expected
completion and timing of completion of the Heater and the Florida Water Services
acquisitions; the regulatory approval of the Florida Water Services acquisition;
the projected annual value of rate increases, as well as information contained
elsewhere in this report where statements are preceded by, followed by or
include the words "believes," "expects," "anticipates," "plans" or similar
expressions. These statements are based on a number of assumptions concerning
future events, and are subject to a number of uncertainties and other factors,
many of which are outside our control. Actual results may differ materially from
such statements for a number of reasons, including the effects of regulation,
abnormal weather, changes in capital requirements and funding, acquisitions, and
our ability to assimilate acquired operations. We undertake no obligation to
update or revise forward-looking statements, whether as a result of new
information, future events or otherwise.
General Information
Name Change - On January 16, 2004, Philadelphia Suburban Corporation changed its
corporate name to Aqua America, Inc. In addition, we have changed our ticker
symbol from PSC to WTR on the New York Stock Exchange and Philadelphia Stock
Exchange effective as of the opening of trading on January 20, 2004.
Nature of Operations - Aqua America, Inc. ("we" or "us"), a Pennsylvania
corporation, is the holding company for regulated utilities providing water or
wastewater services to approximately 2.5 million people in Pennsylvania, Ohio,
Illinois, Texas, New Jersey, Indiana, Virginia, Florida, North Carolina, Maine,
Missouri, New York, South Carolina and Kentucky. Our largest operating
subsidiary, Aqua Pennsylvania, Inc. - formerly Pennsylvania Suburban Water
Company, provides water or wastewater services to approximately 1.3 million
people in the suburban areas north and west of the City of Philadelphia and in
20 other counties in Pennsylvania. Our other subsidiaries provide similar
services in 13 other states. In addition, we provide water and wastewater
service through operating and maintenance contracts with municipal authorities
and other parties close to our operating companies' service territories. We are
the largest U.S.-based publicly-traded water utility based on number of people
served.
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)
Financial Condition
During the quarter, we had $29,134 of capital expenditures, repaid $676 of
customer advances for construction and repaid debt and made sinking fund
contributions and other loan repayments of $23,041. The capital expenditures
were related to improvements to treatment plants, new and rehabilitated water
mains, customer service lines and hydrants, in addition to well and booster
improvements.
During the quarter, the proceeds from the issuance of long-term debt, proceeds
from the issuance of common stock, internally generated funds and available
working capital were used to fund the cash requirements discussed above and to
pay dividends. At various times during the first quarter of 2004, our operating
subsidiaries issued long-term notes payable in aggregate of $5,689 at various
interest rates. At March 31, 2004, we had short-term lines of credit of
$178,000, of which $53,408 was available. In May 2004, our Pennsylvania
operating subsidiary intends to issue long-term debt of approximately $87,000
and use the proceeds to refinance short-term borrowings and to fund long-term
debt maturities.
In April 2004, our Florida operating subsidiary entered into a purchase
agreement with Florida Water Services Corporation, a subsidiary of ALLETE, Inc.,
to acquire the utility assets of 63 water and wastewater systems located in
central Florida. The purchase agreement provides for a cash purchase price of
$13,820. The acquisition is scheduled to close in mid-2004 and is subject to
regulatory approval by the Florida Public Service Commission. The Commission's
review process might result in an adjustment of the final purchase price based
on the Commission's determination of plant investment for the system. In
addition to this agreement, Aqua America's Florida operating subsidiary entered
into a second purchase agreement with the same parties that allows it to acquire
an additional nine water and wastewater systems for $4,180 in cash subject to
the outcome of a previously negotiated right of first refusal by Florida Water
Services Corporation with a nearby municipality.
In November 2003, we entered into a purchase agreement with ALLETE Water
Services, Inc. a subsidiary of ALLETE, Inc., to acquire the capital stock of
Heater Utilities, Inc., which owns water and wastewater systems in North
Carolina. The purchase agreement provides for a cash purchase price of $48,000
and the assumption of approximately $28,000 in debt, reflecting an acquisition
premium of approximately $18,000. We intend to seek the ability to recover a
portion of this premium through customer rates via the North Carolina Utilities
Commission approval process. The acquisition, which is subject to regulatory
approval, is expected to close in mid-2004. It is our intention to fund the
acquisition at closing with cash from a combination of short-term debt,
long-term debt and/or the issuance of our common stock.
Management believes that internally generated funds along with existing credit
facilities and the proceeds from the issuance of long-term debt and common stock
will be adequate to meet our financing requirements for the balance of the year
and beyond.
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)
Results of Operations
Analysis of First Quarter of 2004 Compared to First Quarter of 2003
Revenues for the quarter increased $19,279 or 24.0% primarily due to additional
water and sewer revenues of $15,400 associated with the larger customer base due
to the AquaSource acquisition, which closed in July 2003, and additional
revenues from the infrastructure rehabilitation surcharge in Pennsylvania of
$1,584.
Operations and maintenance expenses increased by $11,167 or 36.4% primarily due
to the additional operating costs associated with acquisitions, principally the
AquaSource acquisition, increased pension costs, and higher water production
expenses.
Depreciation expense increased $2,327 or 20.5% reflecting the utility plant
placed in service since the first quarter of 2003, including the assets acquired
through system acquisitions.
Amortization decreased $42 due to the amortization of the costs associated with,
and other costs being recovered in, various rate filings.
Taxes other than income taxes increased by $1,829 or 34.4% due to the additional
taxes associated with the AquaSource acquisition and an increase in state taxes.
Interest expense increased by $1,190 or 11.2% primarily due to additional
borrowings to finance the AquaSource acquisition and capital projects, offset
partially by decreased interest rates on borrowings due to refinancing of
certain existing debt issues.
Allowance for funds used during construction ("AFUDC") increased by $233
primarily due to an increase in the average balance of utility plant
construction work in progress, to which AFUDC is applied. The increase in
construction work in progress is associated with additional capital projects in
progress, including projects associated with the AquaSource acquisition.
Gain on sale of other assets totaled $450 in the first quarter of 2004 and $55
in the first quarter of 2003. The change is due to an increase in the gain on
sale of marketable securities as compared to the first quarter of 2003.
Our effective income tax rate was 39.4% in the first quarter of 2004 and 40.1%
in the first quarter of 2003. The change was due to a decrease in our
tax-deductible expenses.
Net income available to common stock for the quarter increased by $2,251 or
16.9%, in comparison to the same period in 2003 primarily as a result of the
factors described above. On a diluted per share basis, earnings increased $.01
or 6.3% reflecting the change in net income and a 9.4% increase in the average
number of common shares outstanding. The increase in the number of shares
outstanding is primarily a result of the 6,868,750 additional shares issued in
the May and August 2003 share offerings.
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)
Impact of Recent Accounting Pronouncements
In January 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") No. 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003." FSP 106-1, which was effective for our consolidated financial statements
for the year ended December 31, 2003, permits a sponsor of a postretirement
health care plan that provides a prescription drug benefit to make a one-time
election to defer accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act"). In accordance with FSP
106-1, we made a one-time election to defer the recognition of the impact on FSP
No. 106-1 accounting. Any measures of the accumulated postretirement benefit
obligation and net periodic postretirement benefit cost in the consolidated
financial statements and footnotes for the period ended March 31, 2004 did not
reflect the effects of the Act. Currently, specific authoritative accounting
guidance for the federal subsidy is pending and that guidance when issued may
require the Company to change previously reported information. We are currently
investigating the impacts of the adoption of FSP 106-1's initial recognition,
measurement and disclosure provisions on our consolidated financial statements.
14
AQUA AMERICA, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks in the normal course of
business, including changes in interest and equity prices.
There have been no significant changes in our exposure to
market risks since December 31, 2003. Refer to Item 7A of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2003 for additional information.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the
period covered by this report are functioning effectively
to provide reasonable assurance that the information
required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified
in the SEC's rules and forms. A controls system, no matter
how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud,
if any, within a company have been detected.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting
occurred during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
There are no pending legal proceedings to which we or any of
our subsidiaries is a party or to which any of their
properties is the subject that are expected to have a material
effect on our financial position, results of operations or
cash flows.
15
AQUA AMERICA, INC. AND SUBSIDIARIES
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchase of
Equity Securities
The following table summarizes Aqua America's purchases of its
common stock for the quarter ending March 31, 2004:
Issuer Purchases of
Equity Securities
Total Maximum
Number of Number of
Shares Shares
Purchased that May
as Part of Yet be
Total Publicly Purchased
Number Average Announced Under the
of Shares Price Paid Plans or Plan or
Period Purchased(1) per Share Programs Programs(2)
- ------ --------- ---------- ---------- ---------
January 1-31, 2004 158 $ 22.03 - 411,209
February 1-29, 2004 272 $ 22.00 - 411,209
March 3-31, 2004 3,245 $ 21.45 - 411,209
----- ------- ------ -------
Total 3,675 $ 21.51 - 411,209
===== ======= ====== =======
(1) These amounts consist of shares we purchased from our
employees who elected to pay the exercise price of their
stock options upon exercise by delivering to us (and,
thus, selling) shares of Aqua America common stock in
accordance with the terms of our equity compensation plans
that were previously approved by our shareholders and
disclosed in our proxy statements. This feature of our
equity compensation plan is available to all employees who
receive option grants under the plan. We purchased these
shares at their fair market value, as determined by
reference to the closing price of our common stock on the
day prior to the option exercise.
(2) On August 5, 1997, our Board of Directors authorized a
common stock repurchase program that was publicly
announced on August 7, 1997, for up to 870,282 shares. No
repurchases have been made under this program since 2000.
The program has no fixed expiration date. The number of
shares authorized for purchase was adjusted as a result of
the stock splits effected in the form of stock
distributions since the authorization date.
16
AQUA AMERICA, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive
Officer, pursuant to Rule 13a-14(a)
under the Securities and Exchange Act
of 1934.
31.2 Certification of Chief Financial
Officer, pursuant to Rule 13a-14(a)
under the Securities and Exchange Act
of 1934.
32.1 Certification of Chief Executive
Officer, pursuant 18 U.S.C. Section
1350.
32.2 Certification of Chief Financial
Officer, pursuant to 18 U.S.C. Section
1350.
(b) Reports on Form 8-K
Current Report on Form 8-K filed on January 16, 2004,
responding to Item 5, Other Events. (Related to the
Company changing its corporate name to Aqua America, Inc.
and changing the ticker symbol for its common stock on the
New York Stock Exchange and Philadelphia Stock Exchange to
WTR).
Current Report on Form 8-K furnished on February 4, 2004,
responding to Item 9, Regulation FD Disclosure. (Related
to the Company's issuance of a press release on February
4, 2004 announcing its fourth quarter 2003 earnings).
Current Report on Form 8-K filed on February 25, 2004,
responding to Item 5, Other Events. (Related to the
Company entering into a First Amended and Restated Rights
Agreement with Equiserve Trust Company, N.A., as Rights
Agent, to amend certain of the provisions of its Rights
Agreement, dated as of March 1, 1998).
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be executed on its behalf by the
undersigned thereunto duly authorized.
May 5, 2004
AQUA AMERICA, INC.
----------------------------------
Registrant
NICHOLAS DEBENEDICTIS
----------------------------------
Nicholas DeBenedictis
Chairman and President
DAVID P. SMELTZER
----------------------------------
David P. Smeltzer
Senior Vice President - Finance
and Chief Financial Officer
18