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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 September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________________ to _______________________
Commission File Number 1-6659
AQUA AMERICA, INC. (formerly Philadelphia Suburban Corporation)
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1702594
- ------------------------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania 19010 -3489
- ------------------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610)-527-8000
---------------------
- --------------------------------------------------------------------------------
(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
----- -----
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 October 25, 2004.
93,254,277.
- -----------
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)
September 30, December 31,
Assets 2004 2003
------------------------------
Property, plant and equipment, at cost $ 2,560,276 $ 2,302,304
Less accumulated depreciation 540,984 478,013
------------------------------
Net property, plant and equipment 2,019,292 1,824,291
------------------------------
Current assets:
Cash and cash equivalents 18,640 10,757
Accounts receivable and unbilled revenues, net 70,960 62,320
Inventory, materials and supplies 7,595 5,841
Prepayments and other current assets 6,109 5,051
------------------------------
Total current assets 103,304 83,969
------------------------------
Regulatory assets 99,866 98,761
Deferred charges and other assets, net 52,878 34,277
Funds restricted for construction activity 23,443 28,438
------------------------------
$ 2,298,783 $ 2,069,736
==============================
Liabilities and Stockholders' Equity
Stockholders' equity:
Common stock at $.50 par value, authorized 300,000,000 shares,
issued 93,913,343 and 93,270,424 in 2004 and 2003 $ 46,957 $ 46,635
Capital in excess of par value 422,669 413,008
Retained earnings 222,812 210,915
Minority interest 1,087 912
Treasury stock, 670,192 and 681,384 shares in 2004 and 2003 (12,319) (12,611)
Accumulated other comprehensive income - 171
------------------------------
Total stockholders' equity 681,206 659,030
------------------------------
Long-term debt, excluding current portion 772,225 696,666
Commitments - -
Current liabilities:
Current portion of long-term debt 41,145 39,386
Loans payable 147,823 96,459
Accounts payable 15,202 32,321
Accrued interest 10,185 11,126
Accrued taxes 20,452 16,779
Dividends payable 12,209 -
Other accrued liabilities 38,772 35,930
------------------------------
Total current liabilities 285,788 232,001
------------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 202,616 190,395
Customers' advances for construction 73,844 72,500
Other 12,529 9,419
------------------------------
Total deferred credits and other liabilities 288,989 272,314
------------------------------
Contributions in aid of construction 270,575 209,725
------------------------------
$ 2,298,783 $ 2,069,736
==============================
See notes to consolidated financial statements on page 6 of this report.
1
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------
2004 2003
--------------------------
Operating revenues $ 326,597 $ 266,021
Costs and expenses:
Operations and maintenance 132,840 98,470
Depreciation 41,292 35,439
Amortization 3,096 2,251
Taxes other than income taxes 21,455 15,823
--------------------------
198,683 151,983
--------------------------
Operating income 127,914 114,038
Other expense (income):
Interest expense, net 35,584 32,985
Allowance for funds used during construction (2,028) (1,489)
Gain on sale of other assets (967) (4,414)
--------------------------
Income before income taxes 95,325 86,956
Provision for income taxes 37,792 34,769
--------------------------
Net income 57,533 52,187
Dividends on preferred stock - 8
--------------------------
Net income available to common stock $ 57,533 $ 52,179
==========================
Net income $ 57,533 $ 52,187
Other comprehensive income (loss), net of tax:
Unrealized gain on securities 59 156
Reclassification adjustment for gains reported in net income (230) (82)
--------------------------
Comprehensive income $ 57,362 $ 52,261
==========================
Net income per common share:
Basic $ 0.62 $ 0.60
==========================
Diluted $ 0.61 $ 0.59
==========================
Average common shares outstanding during the period:
Basic 92,874 86,853
==========================
Diluted 93,884 87,782
==========================
Cash dividends declared per common share $ 0.49 $ 0.456
==========================
See notes to consolidated financial statements on page 6 of this report.
2
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Three Months Ended
September 30,
--------------------------
2004 2003
--------------------------
Operating revenues $ 120,305 $ 102,153
Costs and expenses:
Operations and maintenance 46,526 36,777
Depreciation 14,112 12,628
Amortization 1,177 889
Taxes other than income taxes 7,493 5,557
--------------------------
69,308 55,851
--------------------------
Operating income 50,997 46,302
Other expense (income):
Interest expense, net 12,346 11,722
Allowance for funds used during construction (695) (613)
Gain on sale of other assets (491) (4,194)
--------------------------
Income before income taxes 39,837 39,387
Provision for income taxes 15,750 15,764
--------------------------
Net income 24,087 23,623
Dividends on preferred stock - 3
--------------------------
Net income available to common stock $ 24,087 $ 23,620
==========================
Net income $ 24,087 $ 23,623
Other comprehensive income (loss), net of tax:
Unrealized gain on securities - 7
Reclassification adjustment for gains reported in net income - (71)
--------------------------
Comprehensive income $ 24,087 $ 23,559
==========================
Net income per common share:
Basic $ 0.26 $ 0.26
==========================
Diluted $ 0.26 $ 0.26
==========================
Average common shares outstanding during the period:
Basic 93,065 89,528
==========================
Diluted 94,023 90,350
==========================
Cash dividends declared per common share $ 0.25 $ 0.232
==========================
See notes to consolidated financial statements on page 6 of this report.
3
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
September 30, December 31,
2004 2003
---------------------------------
Stockholders' equity:
Common stock, $.50 par value $ 46,957 $ 46,635
Capital in excess of par value 422,669 413,008
Retained earnings 222,812 210,915
Minority interest 1,087 912
Treasury stock (12,319) (12,611)
Accumulated other comprehensive income - 171
---------------------------------
Total stockholders' equity 681,206 659,030
---------------------------------
Long-term debt:
Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range
0.00% to 2.49% 21,031 16,868
2.50% to 2.99% 25,266 18,913
3.00% to 3.49% 17,612 5,618
3.50% to 3.99% 7,191 2,800
4.00% to 4.99% 8,135 8,135
5.00% to 5.49% 137,805 110,875
5.50% to 5.99% 89,260 76,260
6.00% to 6.49% 124,360 119,360
6.50% to 6.99% 42,000 42,000
7.00% to 7.49% 44,210 46,716
7.50% to 7.99% 24,957 23,000
8.00% to 8.49% 25,090 17,500
8.50% to 8.99% 9,000 9,000
9.00% to 9.49% 53,405 53,805
9.50% to 9.99% 42,088 43,242
10.00% to 10.50% 6,000 6,000
---------------------------------
677,410 600,092
Notes payable, 6.05%, due 2006 960 960
Unsecured notes payable, 4.87%, maturing in various installments through 2023 135,000 135,000
---------------------------------
813,370 736,052
Current portion of long-term debt 41,145 39,386
---------------------------------
Long-term debt, excluding current portion 772,225 696,666
---------------------------------
Total capitalization $ 1,453,431 $ 1,355,696
=================================
See notes to consolidated financial statements on page 6 of this report.
4
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------
2004 2003
---------------------------
Cash flows from operating activities:
Net income $ 57,533 $ 52,187
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 44,388 37,690
Deferred income taxes 18,318 7,526
Gain on sale of other assets (967) (4,414)
Net increase in receivables, inventory and prepayments (8,592) (2,978)
Net increase (decrease) in payables, accrued interest, accrued taxes
and other accrued liabilities (759) 6,642
Other 2,570 (4,625)
---------------------------
Net cash flows from operating activities 112,491 92,028
---------------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $2,028 and $1,489 (125,825) (105,948)
Acquisitions of water and wastewater systems, net (53,586) (196,099)
Proceeds from the sale of other assets 1,788 4,993
Net decrease in funds restricted for construction activity 4,995 13,880
Other (412) (403)
---------------------------
Net cash flows used in investing activities (173,040) (283,577)
---------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 7,345 6,462
Repayments of customers' advances (2,569) (1,306)
Net proceeds (repayments) of short-term debt 30,160 (5,264)
Proceeds from long-term debt 98,288 145,404
Repayments of long-term debt (40,932) (40,467)
Proceeds from issuing common stock 10,097 131,609
Repurchase of common stock (529) (774)
Dividends paid on preferred stock - (8)
Dividends paid on common stock (33,428) (28,824)
Other - (401)
---------------------------
Net cash flows from financing activities 68,432 206,431
---------------------------
Net increase in cash and cash equivalents 7,883 14,882
Cash and cash equivalents at beginning of period 10,757 5,915
---------------------------
Cash and cash equivalents at end of period $ 18,640 $ 20,797
===========================
See notes to consolidated financial statements on page 6 of this report.
5
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 September 30, 2004, the
consolidated statements of income and comprehensive income for the
nine months and quarter ended September 30, 2004 and 2003, and the
consolidated statements of cash flow for the nine months ended
September 30, 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 and the Quarterly Reports on Form 10-Q for the quarters
ended June 30, 2004 and March 31, 2004. 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
Pursuant to our strategy to grow through acquisitions, on June 1,
2004, the Company completed its acquisition of the capital stock of
Heater Utilities, Inc. ("Heater") for $48,000 in cash and the
assumption of long-term debt of $19,219 and short-term debt of
$8,500. The acquired operation provides water and wastewater
service to over 50,000 customers primarily in the areas of suburban
Raleigh, Charlotte, Gastonia and Fayetteville, North Carolina. The
results of Heater have been included in our consolidated financial
statements beginning June 1, 2004. For the fiscal year ended
December 31, 2003, Heater had operating revenues of $19,489. Under
the purchase method of accounting, the purchase price is allocated
to the net tangible and intangible assets based upon their
estimated fair values at the date of the acquisition. The Company
is in the process of obtaining third-party valuations of these
assets and liabilities, and thus has not completed the allocation
of the purchase price. The preliminary purchase price allocation
is as follows:
June 1,
2004
----------
Property, plant and equipment, net $ 96,807
Current assets 4,133
Other long-term assets 2,864
Goodwill 18,814
----------
Total assets acquired 122,618
----------
Current liabilities 3,063
Loans payable 8,500
Long-term debt 19,219
Other long-term liabilities 43,836
----------
Total liabilities assumed 74,618
----------
Net assets acquired $ 48,000
==========
6
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
The Company has recorded goodwill of $18,814 which is reported in
the consolidated balance sheet as deferred charges and other
assets, and a substantial portion of the goodwill is expected to be
deductible for tax purposes. The purchase price was arrived at
through arms-length negotiations with the seller and is consistent
with the multiples paid in other comparable transactions. Aqua
America considered important regulatory, strategic and valuation
considerations in arriving at the final purchase price. Through the
North Carolina Utilities Commission approval process, a mechanism
has been developed through which the Company could recover up to
two-thirds of the goodwill through customer rates in the future
upon achieving certain objectives. The Company intends to pursue
these objectives to facilitate a timely recognition of this premium
in customer rates. However, there can be no assurance that the
Company will be able to recover such amount of goodwill, if any.
On June 30, 2004, the Company acquired certain utility assets of
Florida Water Services Corporation, comprised of 63 water and
wastewater systems located in central Florida for $13,820 in cash,
which is less than the book value of these assets. The results of
Florida Water Services Corporation have been included in our
consolidated financial statements beginning June 30, 2004. In
accordance with Florida procedures, the completed acquisition
remains subject to regulatory approval by the Florida Public
Service Commission and it may take up to a year to obtain the
necessary approval. Under the terms of the purchase agreement, the
Commission's review process may result in an adjustment of the
final purchase price based on the Commission's determination of
plant investment for the systems. The final purchase price is not
expected to result in the recognition of goodwill.
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
based on working capital at closing. On August 27, 2004, Aqua
America was awarded and received $12,289 plus interest in an
arbitration related to the final purchase price, which resulted in
a final purchase price of $178,428. In the consolidated statement
of cash flow for the nine months ended September 30, 2004, the
$12,289 award has been reported as proceeds on the line titled
acquisitions of water and wastewater systems, net. 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 and Kentucky
operations which were subsequently sold to other parties).
7
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 3 Dispositions
In October 2004, as a result of a settlement of a condemnation
action, Aqua America's Ohio operating subsidiary entered into an
agreement with the City of Geneva, Ohio for the sale of our
subsidiary's water utility assets within the municipal boundaries
of the City of Geneva. The agreement specifies that the City will
pay approximately $4,970, which is in excess of the book value for
these assets. Closing is expected to occur by the end of the fourth
quarter of 2004 and is subject to several conditions, including the
Public Utilities Commission of Ohio approval and the City's ability
to obtain financing. These water utility assets represent less than
one-half of 1% of Aqua America's total assets, and the total number
of customers included in the City of Geneva water system discussed
above represents less than one-half of 1% of Aqua America's total
customer base. Aqua America intends to enter into an agreement with
the City to operate the water system for a period through December
2006. Despite this transaction, Aqua America's strategy continues
to be to acquire additional water and wastewater systems, to
maintain its existing systems where there is a business or a
strategic benefit, and to actively oppose unilateral efforts by
municipal governments to acquire any of its operations.
In July 2004, the Company sold its only operation located in
Kentucky, which was acquired as part of the AquaSource transaction.
The sale price approximates our investment in this operation. The
operation represented approximately 0.2% of the operations acquired
from AquaSource, Inc.
Note 4 Long-term Debt and Loans Payable
In May 2004, an unsecured note of $70,000 was issued by Aqua
America. Interest under this note is based, at the borrower's
option, on either a defined base rate or an adjusted London
Interbank Offered Rate corresponding to the interest period
selected. The proceeds of this financing were used to fund
acquisitions and to refinance existing debt. As of September 30,
2004, the interest rate on the note was 2.3%.
In May 2004, our Pennsylvania operating subsidiary issued $87,000
of long-term debt with a weighted-average maturity of 13.7 years
and a weighted-average interest rate of approximately 5.1%. The
proceeds of these issuances were used to refinance short-term
borrowings and to fund long-term debt maturities.
Note 5 Stockholders' Equity
In May 2004, Aqua America's shareholders approved an increase in
the number of shares of common stock authorized, par value $0.50
per share, from 100,000,000 shares to 300,000,000 shares.
8
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
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 $83 in 2003 59 156
Less: reclassification adjustment for gains included in
net income, net of tax of $173 in 2004 and $44 in 2003 (230) (82)
-----------------------
Other comprehensive income (loss), net of tax (171) 74
-----------------------
Balance at September 30, $ - $ 137
=======================
Note 6 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:
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------------------- ----------------------
Average common shares outstanding during
the period for basic computation 92,874 86,853 93,065 89,528
Dilutive effect of employee stock options 1,010 929 958 822
---------------------- ----------------------
Average common shares outstanding during
the period for diluted computation 93,884 87,782 94,023 90,350
====================== ======================
For the quarter and nine months ended September 30, 2004, employee
stock options outstanding to purchase 573,900 shares of common
stock were excluded from the calculation of diluted net income per
share as the options' exercise price was greater than the average
market price of the Company's common stock during those periods.
For the nine months ended September 30, 2003, employee stock
options outstanding to purchase 119,375 shares of common stock were
excluded from the calculation of diluted net income per share as
the options' exercise price was greater than the average market
price of the Company's common stock during this period.
9
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 7 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-based employee compensation was
determined as of the grant date under the fair value method:
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
2004 2003 2004 2003
------------------------- -------------------------
Net income available to common
stock, as reported: $ 57,533 $ 52,179 $ 24,087 $ 23,620
Add: stock-based employee compensation
expense included in reported net income,
net of tax 217 183 49 32
Less: pro forma expense related to stock-based
employee compensation, net of tax effects (1,588) (1,399) (506) (437)
------------------------- -------------------------
Pro forma $ 56,162 $ 50,963 $ 23,630 $ 23,215
========================= =========================
Basic net income per share:
As reported $ 0.62 $ 0.60 $ 0.26 $ 0.26
Pro forma 0.60 0.59 0.25 0.26
Diluted net income per share:
As reported $ 0.61 $ 0.59 $ 0.26 $ 0.26
Pro forma 0.60 0.58 0.25 0.26
The fair value of options at the date of grant was estimated
using the Black-Scholes option-pricing model.
10
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 8 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 tables provide the components of net periodic benefit
costs:
Pension Benefits
--------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------------------------------
2004 2003 2004 2003
---------------------- -------------------------
Service cost $ 3,265 $ 2,359 $ 1,004 $ 754
Interest cost 7,203 5,854 2,215 1,872
Expected return on plan assets (6,943) (5,058) (2,135) (1,617)
Amortization of transition
obligation (asset) (158) (136) (49) (44)
Amortization of prior service cost 331 257 102 82
Amortization of actuarial loss 764 834 235 267
Capitalized costs (816) (190) (292) (76)
---------------------- -------------------------
Net periodic benefit cost $ 3,646 $ 3,920 $ 1,080 $1,238
====================== =========================
Other
Postretirement Benefits
--------------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------------------------------
2004 2003 2004 2003
---------------------- -------------------------
Service cost $ 783 $ 724 $ 261 $ 236
Interest cost 1,293 1,249 431 406
Expected return on plan assets (754) (673) (251) (219)
Amortization of transition
obligation (asset) 558 589 186 192
Amortization of prior service cost (39) (42) (13) (14)
Amortization of actuarial loss 87 45 29 15
Amortization of regulatory asset 102 102 34 34
Capitalized costs (485) (461) (164) (158)
---------------------- -------------------------
Net periodic benefit cost $ 1,545 $ 1,533 $ 513 $ 492
====================== =========================
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. The 2004
contribution required to fund the plan was reduced to $4,949 based
on revised estimates provided by our actuary. Aqua America
contributed $4,071 during the first nine months of 2004 and expects
to contribute the remaining contribution of $878 in 2005. We
evaluated the impact of the Pension Funding Equity Act enacted in
April 2004 and concluded it had no material impact on our required
funding. See Footnote 10 for a discussion of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003.
11
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 9 Water and Wastewater Rates
On August 5, 2004, the Pennsylvania Public Utility Commission
granted the Company's operating subsidiary in Pennsylvania a
$13,800 base rate increase. The rates in effect at the time of the
filing included $11,200 in Distribution System Improvement Charges
("DSIC") or 5.0% above the prior base rates. Consequently, the
total base rates increased by $25,000 and the DSIC was reset to
zero.
In May 2004, the Company's operating subsidiary in Texas filed an
application with the Texas Commission on Environmental Quality to
increase rates by $11,920 over a multi-year period. The application
seeks to increase annual revenues in phases and is accompanied by a
plan to defer and amortize a portion of the Company's depreciation,
operating and other tax expenses over a similar multi-year period,
such that the annual impact on operating income approximates the
requested amount. The application is currently pending before the
Commission and a final ruling is anticipated by May 2005. The
Company commenced billing for the requested rates and implemented
the deferral plan in August 2004, in accordance with authorization
from the Texas Commission on Environmental Quality in July 2004.
The additional revenue billed and collected prior to the final
ruling are subject to refund based on the outcome of the ruling.
The revenue recognized and the expenses deferred by the Company
reflect an estimate of the final outcome of the ruling. Two other
rate filings, which in aggregate represent $4,758 in annualized
revenues, are in process in North Carolina and Illinois.
In April 2004, the Company's operating subsidiary in Illinois was
granted a rate increase intended to increase annual revenues by
approximately $2,261. In June 2004, the Company's operating
subsidiary in New Jersey was granted a rate increase intended to
increase annual revenues by approximately $1,047. During the first
nine months of 2004, other operating subsidiaries were granted rate
increases intended to increase total revenues by approximately
$2,287 on an annual basis.
12
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 10 Recent Accounting Pronouncements
In May 2004, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position ("FSP") No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003." FSP 106-2 supersedes
FSP 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003," which was issued in January 2004 and permitted 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 Act until more authoritative guidance on the
accounting for the federal subsidy was issued. The Company had
elected the one-time deferral allowed under FSP 106-1 and as a
result any measures of the accumulated postretirement benefit
obligation and net periodic postretirement benefit cost in the
consolidated financial statements and footnotes for the prior
periods did not reflect the effects of the Act. The adoption of FSP
106-2 as required beginning in the quarter ended September 30, 2004
did not have a material impact on the Company's results of
operations or financial position.
13
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 regulatory approval of the Florida Water
Services acquisition and the City of Geneva, Ohio water system sale; the
deductibility for tax purposes of goodwill associated with the Heater
Utilities, Inc. 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. In addition to these uncertainties or factors, our future results
may be affected by the factors and risk factors set forth in our annual report
on Form 10-K for the fiscal year ended December 31, 2003. 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 more than 2.5 million people in Pennsylvania, Ohio, North
Carolina, Illinois, Texas, New Jersey, Florida, Indiana, Virginia, Maine,
Missouri, New York and South Carolina. 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 21 other counties in
Pennsylvania. Our other subsidiaries provide similar services in 12 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.
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)
Financial Condition
-------------------
During the first nine months of 2004, we had $125,825 of capital expenditures,
acquired water and wastewater systems for $65,875, repaid $2,569 of customer
advances for construction and repaid debt and made sinking fund contributions
and other loan repayments of $40,932. The capital expenditures were related to
improvements to treatment plants, new and rehabilitated water mains, tanks,
hydrants, and service lines, in addition to well and booster improvements.
During the first nine months of 2004, the proceeds from the issuance of
long-term debt, the proceeds of $12,289 from the arbitration award over the
final purchase price for the AquaSource acquisition, the 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. In May 2004, an unsecured note of $70,000 was issued by Aqua America
and the proceeds of this financing were used to fund acquisitions and to
refinance existing debt. In May 2004, our Pennsylvania operating subsidiary
issued $87,000 of long-term debt with a weighted-average maturity of 13.7 years
and a weighted-average interest rate of 5.1%. The proceeds of these issuances
were used to refinance short-term borrowings and to fund long-term debt
maturities.
At various times during the first nine months of 2004, our operating
subsidiaries issued long-term notes payable in aggregate of $11,972 at various
interest rates. In connection with the Heater acquisition completed in June
2004, $19,219 of long-term debt was assumed with a weighted-average interest
rate of 7.7% that is due in various years. At September 30, 2004, we had
short-term lines of credit of $259,000, of which $117,642 was available. On
August 3, 2004, Aqua America's Board of Directors increased the quarterly cash
dividend on common stock from $0.12 per share to $0.13 per share effective upon
the December 1, 2004 payment.
On June 1, 2004, the Company completed its acquisition of the capital stock of
Heater Utilities, Inc. for $48,000 in cash and the assumption of long-term debt
of $19,219 and short-term debt of $8,500 which resulted in a preliminary
recognition of goodwill of $18,814. Through the North Carolina Utilities
Commission approval process, a mechanism has been developed through which the
Company could recover up to two-thirds of the goodwill through customer rates in
the future upon achieving certain objectives. The Company intends to pursue
these objectives to facilitate a timely recognition of this premium in customer
rates. However, there can be no assurance that the Company will be able to
recover such amount of goodwill, if any. The acquired operation provides water
and wastewater service to over 50,000 customers primarily in the areas of
suburban Raleigh, Charlotte, Gastonia and Fayetteville, North Carolina. On June
30, 2004, the Company acquired certain utility assets of Florida Water Services
Corporation, comprised of 63 water and wastewater systems located in central
Florida for $13,820 in cash, which is less than the book value of these assets.
In accordance with Florida procedures, the completed acquisition remains subject
to regulatory approval by the Florida Public Service Commission and may take up
to a year to obtain the necessary approval. Under the terms of the purchase
agreement, the Commission's review process may result in an adjustment of the
final purchase price based on the Commission's determination of plant investment
for the system. The final purchase price is not expected to result in the
recognition of goodwill.
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)
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.
Results of Operations
---------------------
Analysis of First Nine Months of 2004 Compared to First Nine Months of 2003
---------------------------------------------------------------------------
Revenues for the first nine months increased $60,576 or 22.8% primarily due to
additional water and sewer revenues of $48,100 associated with a larger customer
base due to acquisitions, principally the AquaSource acquisition which closed in
July 2003, the Heater acquisition which closed in June 2004, and the Florida
Water acquisition which closed in June 2004; and additional revenues of $6,800
resulting from increased water rates granted to our operating subsidiaries in
Pennsylvania and five other states. Additional water revenues were generated by
the infrastructure rehabilitation surcharge in Pennsylvania of $1,851.
Operations and maintenance expenses increased by $34,370 or 34.9% primarily due
to the additional operating costs associated with acquisitions, principally the
AquaSource and Heater acquisitions, increased pension costs, additional
professional services fees, and higher water production expenses.
Depreciation expense increased $5,853 or 16.5% reflecting the utility plant
placed in service since the third quarter of 2003, including the assets acquired
through system acquisitions.
Amortization increased $845 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 $5,632 or 35.6% due to the additional
taxes associated with the AquaSource acquisition and an increase in state taxes
other than income.
Interest expense increased by $2,599 or 7.9% primarily due to additional
borrowings to finance the AquaSource acquisition and capital projects, offset
partially by decreased interest rates on borrowings due to the refinancing of
certain existing debt issues.
Allowance for funds used during construction ("AFUDC") increased by $539
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.
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)
Gain on sale of other assets totaled $967 in the first nine months of 2004 and
$4,414 in the first nine months of 2003. The decrease is due to a decrease in
the gain on sale of land realized of $3,718 partially offset by an increase in
the gain on sale of marketable securities of $271.
Our effective income tax rate was 39.6% in the first nine months of 2004 and
40.0% in the first nine months of 2003. The change was due to an increase in our
tax-deductible expenses.
Net income available to common stock for the first nine months increased by
$5,354 or 10.3%, 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
$.02 or 3.4% reflecting the change in net income and a 7.0% 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.
Analysis of Third Quarter of 2004 Compared to Third Quarter of 2003
-------------------------------------------------------------------
Revenues for the quarter increased $18,152 or 17.8% primarily due to additional
water and sewer revenues of $12,900 associated with a larger customer base due
to acquisitions, principally the Heater acquisition which closed in June 2004,
the AquaSource acquisition which closed in July 2003, and the Florida Water
acquisition which closed in June 2004; and the effect of increased rates granted
to our operating subsidiaries in Pennsylvania and five other states of $4,846.
Operations and maintenance expenses increased by $9,749 or 26.5% primarily due
to the additional operating costs associated with acquisitions, principally the
AquaSource and Heater acquisitions, and increased pension costs, offset
partially by lower insurance claims.
Depreciation expense increased $1,484 or 11.8% reflecting the utility plant
placed in service since the third quarter of 2003, including the assets acquired
through system acquisitions.
Amortization increased $288 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 $1,936 or 34.8% due to the additional
taxes associated with the AquaSource acquisition and an increase in state taxes
other than income.
Interest expense increased by $624 or 5.3% primarily due to additional
borrowings to finance acquisitions and capital projects, offset partially by
decreased interest rates on borrowings due to the refinancing of certain
existing debt issues and $532 of interest income in connection with the
arbitration award related to the final purchase price for the AquaSource
acquisition received during the third quarter of 2004.
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)
Allowance for funds used during construction ("AFUDC") increased by $82
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 $491 in the third quarter of 2004 and
$4,194 in the third quarter of 2003. The decrease is primarily due to a decrease
in the gain on sale of land as compared to the second quarter of 2003.
Our effective income tax rate was 39.5% in the third quarter of 2004 and 40.0%
in the third quarter of 2003. The change was due to an increase in our
tax-deductible expenses.
Net income available to common stock for the quarter increased by $467 or 2.0%,
in comparison to the same period in 2003 primarily as a result of the factors
described above. On a diluted per share basis, earnings equaled the amount
reported in the third quarter of 2003 due to the increase in net income and a
4.1% increase in the average number of common shares outstanding. The increase
in the number of shares outstanding is primarily a result of the 5,000,000
additional shares issued in the August 2003 share offerings.
Impact of Recent Accounting Pronouncements
------------------------------------------
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position ("FSP") No. 106-2, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP
106-2 supersedes FSP 106-1, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003,"
which was issued in January 2004 and permitted 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 Act until more authoritative
guidance on the accounting for the federal subsidy was issued. The Company had
elected the one-time deferral allowed under FSP 106-1 and as a result any
measures of the accumulated postretirement benefit obligation and net periodic
postretirement benefit cost in the consolidated financial statements and
footnotes for the prior periods did not reflect the effects of the Act. The
adoption of FSP 106-2 as required beginning in the quarter ended September 30,
2004 did not have a material impact on the Company's results of operations or
financial position.
18
AQUA AMERICA, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Recent Events
-------------
In April 2000, the gasoline additive Methyl tert-Butyl Ether ("MtBE") was
discovered in a production well in one of our operating subsidiaries at levels
exceeding the state drinking water standard. The well was immediately taken out
of service and alternate water supplies were obtained. Pursuant to a legal
settlement reached with the company believed to be responsible for the
contamination, we received the settlement amount in September 2004 and it was
sufficient to cover our costs to develop a permanent replacement well and to
cover our purchased water costs incurred on an interim basis. The replacement
well was completed and placed in service in October 2004.
19
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 rates 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.
20
AQUA AMERICA, INC. AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes Aqua America's purchases of its
common stock for the quarter ending September 30, 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)
------------- ------------ ----------- ------------
July 1-31, 2004 502 $ 20.10 - 411,209
August 1-31, 2004 16,996 $ 20.18 - 411,209
September 1-30, 2004 6,399 $ 21.85 - 411,209
------------- ------------ ----------- ------------
Total 23,897 $ 20.62 - 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.
21
AQUA AMERICA, INC. AND SUBSIDIARIES
Item 6. Exhibits
(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.
22
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.
November 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
23