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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, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _____________________ to ________________________
Commission File Number 1-6659
AQUA AMERICA, INC.
------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1702594
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania 19010-3489
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
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 April 20, 2005.
95,796,874.
- -----------
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 2005 2004
--------------------------------
Property, plant and equipment, at cost $ 2,659,056 $ 2,626,151
Less accumulated depreciation 570,257 556,339
--------------------------------
Net property, plant and equipment 2,088,799 2,069,812
--------------------------------
Current assets:
Cash and cash equivalents 17,415 13,116
Accounts receivable and unbilled revenues, net 57,180 64,538
Inventory, materials and supplies 7,257 6,903
Prepayments and other current assets 4,461 5,570
--------------------------------
Total current assets 86,313 90,127
--------------------------------
Regulatory assets 112,876 110,993
Deferred charges and other assets, net 51,185 52,120
Funds restricted for construction activity 9,379 17,196
--------------------------------
$ 2,348,552 $ 2,340,248
================================
Liabilities and Stockholders' Equity
Stockholders' equity:
Common stock at $.50 par value, authorized 300,000,000 shares,
issued 96,433,749 and 96,071,580 in 2005 and 2004 $ 48,217 $ 48,036
Capital in excess of par value 473,529 468,524
Retained earnings 251,575 245,115
Minority interest 1,296 1,237
Treasury stock, 684,044 and 686,747 shares in 2005 and 2004 (12,638) (12,702)
Accumulated other comprehensive loss (1,742) (1,742)
--------------------------------
Total stockholders' equity 760,237 748,468
--------------------------------
Long-term debt, excluding current portion 811,000 784,461
Commitments - -
Current liabilities:
Current portion of long-term debt 29,211 50,195
Loans payable 78,968 85,115
Accounts payable 11,853 23,534
Accrued interest 10,156 12,029
Accrued taxes 19,596 8,975
Other accrued liabilities 33,209 37,534
--------------------------------
Total current liabilities 182,993 217,382
--------------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 222,186 223,887
Customers' advances for construction 73,338 73,095
Other 15,715 15,147
--------------------------------
Total deferred credits and other liabilities 311,239 312,129
--------------------------------
Contributions in aid of construction 283,083 277,808
--------------------------------
$ 2,348,552 $ 2,340,248
================================
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)
Three Months Ended
March 31,
------------------------
2005 2004
------------------------
Operating revenues $ 113,988 $ 99,768
Costs and expenses:
Operations and maintenance 47,309 41,831
Depreciation 14,683 13,674
Amortization 1,228 670
Taxes other than income taxes 7,997 7,149
------------------------
71,217 63,324
------------------------
Operating income 42,771 36,444
Other expense (income):
Interest expense, net 12,795 11,802
Allowance for funds used during construction (364) (609)
Gain on sale of other assets (481) (450)
------------------------
Income before income taxes 30,821 25,701
Provision for income taxes 11,950 10,126
------------------------
Net income $ 18,871 $ 15,575
========================
Net income $ 18,871 $ 15,575
Other comprehensive income (loss), net of tax:
Unrealized gain on securities - 59
Reclassification adjustment for gains reported in net income - (230)
------------------------
Comprehensive income $ 18,871 $ 15,404
========================
Net income per common share:
Basic $ 0.20 $ 0.17
========================
Diluted $ 0.20 $ 0.17
========================
Average common shares outstanding
during the period:
Basic 95,521 92,688
========================
Diluted 96,665 93,806
========================
Cash dividends declared per common share $ 0.13 $ 0.12
========================
See notes to consolidated financial statements on page 6 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,
2005 2004
-------------------------------
Stockholders' equity:
Common stock, $.50 par value $ 48,217 $ 48,036
Capital in excess of par value 473,529 468,524
Retained earnings 251,575 245,115
Minority interest 1,296 1,237
Treasury stock (12,638) (12,702)
Accumulated other comprehensive loss (1,742) (1,742)
-------------------------------
Total stockholders' equity 760,237 748,468
-------------------------------
Long-term debt:
Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range
0.00% to 2.49% 19,833 20,051
2.50% to 2.99% 29,563 29,924
3.00% to 3.49% 17,481 17,546
3.50% to 3.99% 7,054 7,123
4.00% to 4.99% 9,435 9,435
5.00% to 5.49% 165,615 165,615
5.50% to 5.99% 89,260 89,260
6.00% to 6.49% 110,360 110,360
6.50% to 6.99% 42,000 42,000
7.00% to 7.49% 27,971 45,105
7.50% to 7.99% 25,178 25,231
8.00% to 8.49% 26,664 26,714
8.50% to 8.99% 9,000 9,000
9.00% to 9.49% 47,244 53,244
9.50% to 9.99% 41,593 42,088
10.00% to 10.50% 6,000 6,000
-------------------------------
674,251 698,696
Notes payable, 6.05%, due 2006 960 960
Unsecured notes payable, 4.87%, maturing in various installments through 2023 135,000 135,000
Unsecured notes payable, 5.01%, due 2015 18,000 -
Unsecured notes payable, 5.20%, due 2020 12,000 -
-------------------------------
840,211 834,656
Current portion of long-term debt 29,211 50,195
-------------------------------
Long-term debt, excluding current portion 811,000 784,461
-------------------------------
Total capitalization $ 1,571,237 $ 1,532,929
===============================
See notes to consolidated financial statements on page 6 of this report.
3
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
(In thousands of dollars)
(UNAUDITED)
Accumulated
Capital in Other
Common excess of Retained Treasury Comprehensive
Stock par value earnings Stock Loss Total
--------------------------------------------------------------------------
Balance at December 31, 2004 $48,036 $468,524 $245,115 $(12,702) $ (1,742) $747,231
Net income - - 18,871 - - 18,871
Dividends - - (12,411) - - (12,411)
Sale of stock (97,863 shares) 45 1,919 - 188 - 2,152
Repurchase of stock (5,049 shares) - - - (124) - (124)
Equity Compensation Plan (22,000 shares) 11 537 - - - 548
Exercise of stock options (250,058 shares) 125 2,549 - - - 2,674
--------------------------------------------------------------------------
Balance at March 31, 2005 $48,217 $473,529 $251,575 $(12,638) $ (1,742) $758,941
==========================================================================
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)
Three Months Ended
March 31,
-----------------------
2005 2004
-----------------------
Cash flows from operating activities:
Net income $ 18,871 $ 15,575
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 15,911 14,344
Deferred income taxes 740 3,595
Gain on sale of other assets (481) (450)
Net decrease (increase) in receivables, inventory and prepayments 14,421 (178)
Net decrease in payables, accrued interest, accrued taxes
and other accrued liabilities (8,942) (653)
Other (1,527) 736
-----------------------
Net cash flows from operating activities 38,993 32,969
-----------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $364 and $609 (34,341) (29,134)
Acquisitions of water and wastewater systems, net (1,661) (1,277)
Proceeds from the sale of other assets 484 1,215
Net decrease in funds restricted for construction activity 7,817 4,516
Other (52) (231)
-----------------------
Net cash flows used in investing activities (27,753) (24,911)
-----------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 2,559 1,712
Repayments of customers' advances (1,001) (676)
Net proceeds (repayments) of short-term debt (6,147) 18,935
Proceeds from long-term debt 29,918 5,689
Repayments of long-term debt (24,583) (23,041)
Proceeds from issuing common stock 4,848 3,433
Repurchase of common stock (124) (79)
Dividends paid on common stock (12,411) (11,120)
Other - -
-----------------------
Net cash flows from financing activities (6,941) (5,147)
-----------------------
Net increase in cash and cash equivalents 4,299 2,911
Cash and cash equivalents at beginning of period 13,116 10,757
-----------------------
Cash and cash equivalents at end of period $ 17,415 $ 13,668
=======================
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 March 31, 2005, the consolidated
statements of income and comprehensive income, and cash flow for the
three months ended March 31, 2005 and 2004, and the consolidated
statement of common stockholders' equity for the three months ended
March 31, 2005, 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 changes in common stockholders' equity, the consolidated
results of operations, and the consolidated cash flow for the periods
presented. Because they cover interim periods, the statements and
related notes to the financial statements do not include all disclosures
and notes normally provided in annual financial statements and,
therefore, should be read in conjunction with the Aqua America Annual
Report on Form 10-K for the year ended December 31, 2004. The results of
operations for interim periods may not be indicative of the results that
may be expected for the entire year. Certain prior year amounts have
been reclassified to conform with current year's presentation.
Note 2 Long-term Debt and Loans Payable
In February 2005, Aqua America issued $30,000 of unsecured notes of
which $18,000 are due in 2015 with an interest rate of 5.01% and $12,000
are due in 2020 with an interest rate of 5.20%. The proceeds of this
financing were used to refinance existing short-term debt.
Note 3 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 (loss):
2005 2004
----------------------
Balance at January 1, $(1,742) $ 171
Unrealized holding gain arising during the period,
net of tax of $32 in 2004 - 59
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)
---------------------
Balance at March 31, $(1,742) $ -
=====================
6
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 4 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,
--------------------
2005 2004
--------------------
Average common shares outstanding during
the period for basic computation 95,521 92,688
Dilutive effect of employee stock options 1,144 1,118
--------------------
Average common shares outstanding during
the period for diluted computation 96,665 93,806
====================
For the quarter ended March 31, 2005, employee stock options outstanding
to purchase 622,400 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. For the three months ended March 31, 2004,
there were no outstanding employee stock options excluded from the
calculation of diluted net income per share as the average market price
of the Company's common stock was greater than the options' exercise
price.
7
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 5 Stock-Based Compensation
Aqua America currently 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, as the
grant price is equal to the market price on the date of grant. Please
refer to Note 8 - Recent Accounting Pronouncements for information
concerning changes to Aqua America's accounting for stock-based
compensation. Pursuant to the current disclosure requirements of SFAS
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, pro forma net income 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:
Three Months Ended
March 31,
----------------------
2005 2004
----------------------
Net income, as reported: $ 18,871 $ 15,575
Add: stock-based employee compensation
expense included in reported net income,
net of tax 58 32
Less: pro forma expense related to stock options
granted, net of tax effects (503) (489)
---------------------
Pro forma $ 18,426 $ 15,118
=====================
Basic net income per share:
As reported $ 0.20 $ 0.17
Pro forma 0.19 0.16
Diluted net income per share:
As reported $ 0.20 $ 0.17
Pro forma 0.19 0.16
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 6 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
----------------------
Three Months Ended
March 31,
----------------------
2005 2004
----------------------
Service cost $ 1,260 $ 1,078
Interest cost 2,483 2,378
Expected return on plan assets (2,385) (2,292)
Amortization of transition
obligation (asset) (53) (52)
Amortization of prior service cost 100 105
Amortization of actuarial loss 423 252
Capitalized costs (429) (237)
---------------------
Net periodic benefit cost $ 1,399 $ 1,232
=====================
Other
Postretirement Benefits
-----------------------
Three Months Ended
March 31,
---------------------
2005 2004
---------------------
Service cost $ 330 $ 278
Interest cost 483 456
Expected return on plan assets (313) (272)
Amortization of transition
obligation (asset) 200 201
Amortization of prior service cost (15) (14)
Amortization of actuarial loss 55 31
Amortization of regulatory asset 38 34
Capitalized costs (173) (149)
---------------------
Net periodic benefit cost $ 605 $ 565
=====================
The Company expects to contribute $878 to its defined benefit pension
plan during 2005 and intends to fund its estimated 2005 contribution of
$6,400 in 2006. In addition, the Company expects to contribute
approximately $2,804 for the funding of its other postretirement
benefits.
9
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 7 Water and Wastewater Rates
In April 2005, the Company's operating subsidiaries in Illinois and
North Carolina's Heater division were granted rate increases intended to
increase total revenue on an annual basis by approximately $1,287 and
$1,489, respectively.
Note 8 Recent Accounting Pronouncements
In March 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations," which clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement
obligation if the fair value can be reasonably estimated. The obligation
to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Aqua
America intends to adopt this standard as required in 2006. Aqua America
is currently evaluating the provisions of this statement and has not yet
determined the effect of adoption on its results of operations or
financial position.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
which revises SFAS No. 123, "Accounting for Stock-based Compensation,"
and supersedes APB No. 25, "Accounting for Stock Issued to Employees."
In April 2005, the effective date for this standard was changed to
require adoption of the standard at the beginning of the next fiscal
year after June 15, 2005. As noted in Note 5 - Stock-based Compensation,
the Company currently provides pro forma disclosure of its compensation
costs associated with the fair value of stock options that have been
granted. The Company currently accounts for stock-based compensation
associated with stock options using the intrinsic method, and
accordingly, no compensation costs have been recognized in its
consolidated financial statements. SFAS 123R generally requires that we
measure the cost of employee services received in exchange for
stock-based awards on the grant-date fair value and this cost will be
recognized over the period during which an employee provides service in
exchange for the award. The fair value of the option grant will be
estimated using an option-pricing model. The Company is currently
evaluating this standard to determine the impact on its consolidated
financial statements, including the selection of an appropriate
option-pricing model as permitted under SFAS No. 123R, and the method by
which we will adopt SFAS No. 123R. The impact of adoption of SFAS No.
123R on the Company's earnings cannot be predicted at this time because
it will depend on a number of variables including the level of
share-based payments granted in the future. However, had the Company
adopted SFAS No. 123R in prior periods, the impact of the standard would
not have been materially different from the impact of SFAS 123 as
described in the disclosure of pro forma net income and net income per
share in Note 5 - Stock-based Compensation. The Company believes the
adoption will have no impact on its overall financial position or cash
flow, but will result in the reclassification of related tax benefits
from operating cash flow to financing cash flow to the extent these tax
benefits exceed the associated compensation cost recognized in the
income statement. The Company is currently evaluating the change in the
cash flow reporting and has not yet determined the effect of adoption on
our cash flow statement presentation.
10
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
In November 2004, the FASB approved Statement of Financial Accounting
Standards ("SFAS") No. 151, "Inventory Costs - An Amendment of ARB No.
43, Chapter 4." SFAS No. 151 requires the exclusion of certain costs
from inventories and the allocation of fixed production overheads to
inventories to be based on the normal capacity of the production
facilities. The standard is effective for the Company for costs incurred
after December 31, 2005. The Company believes this statement will not
have a material impact on its results of operations or financial
position.
In November 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29." SFAS No. 153
eliminates the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153
specifies that a nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS No. 153 is effective for fiscal periods
beginning after June 15, 2005. The Company believes this statement will
not have a material impact on its results of operations or financial
position.
On October 22, 2004, the American Jobs Creation Act ("AJCA") was signed
into law. Among other provisions, the AJCA creates a new deduction for
qualified domestic production activities. Certain activities of the
Company, such as our water treatment activity, are considered as
qualifying production activities for purposes of determining the
deduction for qualified production activities. In December 2004, the
FASB issued FSP 109-1, "Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of
2004." In accordance with FSP 109-1, the Company will treat the
deduction for qualified domestic production activities as a reduction of
the income tax provision in the period as realized. The Company adopted
this statement in the first quarter of 2005 and the effect was to reduce
the provision for income taxes by approximately $340 in the first
quarter of 2005.
11
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, 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, 2004. We
undertake no obligation to update or revise forward-looking statements, whether
as a result of new information, future events or otherwise.
General Information
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 what we estimate to be 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., provides water or wastewater
services to approximately 1.3 million residents 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.
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)
Financial Condition
During the quarter, we had $34,341 of capital expenditures, acquired water and
wastewater systems for $1,661, repaid $1,001 of customer advances for
construction and repaid debt and made sinking fund contributions and other loan
repayments of $24,583. 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 quarter, the proceeds from the issuance of long-term debt, 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 February 2005, Aqua America issued unsecured
notes of $30,000 and the proceeds of this financing were used to refinance
existing short-term debt. At March 31, 2005, we had short-term lines of credit
of $198,000, of which $130,765 was available.
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 Quarter of 2005 Compared to First Quarter of 2004
Revenues for the quarter increased $14,220 or 14.3% primarily due to additional
revenues of $8,330 resulting from increased water rates implemented in various
operating subsidiaries in Pennsylvania and other states in which we operate, and
additional water and sewer revenues of $6,100 associated with a larger customer
base due to acquisitions, principally the Heater acquisition which closed in
June 2004 and the Florida Water acquisition which occurred in June 2004.
Operations and maintenance expenses increased by $5,478 or 13.1% primarily due
to the additional operating costs associated with acquisitions, principally the
Heater and Florida Water acquisitions, increased pension costs and higher
purchased water expenses.
Depreciation expense increased $1,009 or 7.4% reflecting the utility plant
placed in service since the first quarter of 2004, including the assets acquired
through system acquisitions.
Amortization increased $558 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 $848 or 11.9% due to the additional
taxes associated with acquisitions.
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)
Interest expense increased by $993 or 8.4% primarily due to additional
borrowings to finance the Heater and Florida Water acquisitions, 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") decreased by $245
primarily due to a decrease in the average balance of utility plant construction
work in progress, to which AFUDC is applied.
Gain on sale of other assets totaled $481 in the first quarter of 2005 and $450
in the first quarter of 2004. The change is due to timing of sales of land and
marketable securities.
Our effective income tax rate was 38.8% in the first quarter of 2005 and 39.4%
in the first quarter of 2004. The change was due to the recognition of the
American Jobs Creation Act tax deduction for qualified domestic production
activities that reduced our tax provision beginning in the first quarter of 2005
by approximately $340.
Net income for the quarter increased by $3,296 or 21.2%, in comparison to the
same period in 2004 primarily as a result of the factors described above. On a
diluted per share basis, earnings increased $0.03 or 17.6% reflecting the change
in net income and a 3.0% increase in the average number of common shares
outstanding. The increase in the number of shares outstanding is primarily a
result of the additional shares issued in the November 2004 share offering, and
the additional shares sold or issued through the dividend reinvestment plan and
the employee stock and incentive plan.
Impact of Recent Accounting Pronouncements
In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations," which clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value can be reasonably estimated. The obligation to perform the asset
retirement activity is unconditional even though uncertainty exists about the
timing and (or) method of settlement. We intend to adopt this standard as
required in 2006. We are currently evaluating the provisions of this statement
and have not yet determined the effect of adoption on our results of operations
or financial position.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
revises SFAS No. 123, "Accounting for Stock-based Compensation," and supersedes
APB No. 25, "Accounting for Stock Issued to Employees." In April 2005, the
effective date for this standard was changed to require adoption of the standard
at the beginning of the next fiscal year after June 15, 2005. As noted in Note 5
- - Stock-based Compensation, we currently provide pro forma disclosure
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)
of our compensation costs associated with the fair value of stock options that
have been granted. We currently account for stock-based compensation associated
with stock options using the intrinsic method, and accordingly, no compensation
costs have been recognized in our consolidated financial statements. SFAS 123R
generally requires that we measure the cost of employee services received in
exchange for stock-based awards on the grant-date fair value and this cost will
be recognized over the period during which an employee provides service in
exchange for the award. The fair value of the option grant will be estimated
using an option-pricing model. We are currently evaluating this standard to
determine the impact on our consolidated financial statements, including the
selection of an appropriate option-pricing model as permitted under SFAS No.
123R, and the method by which we will adopt SFAS No. 123R. The impact of
adoption of SFAS No. 123R on our earnings cannot be predicted at this time
because it will depend on a number of variables including the level of
share-based payments granted in the future. However, had we adopted SFAS No.
123R in prior periods, the impact of the standard would not have been materially
different from the impact of SFAS 123 as described in the disclosure of pro
forma net income and net income per share in Note 5 - Stock-based Compensation.
We believe the adoption will have no impact on our overall financial position or
cash flow, but will result in the reclassification of related tax benefits from
operating cash flow to financing cash flow to the extent these tax benefits
exceed the associated compensation cost recognized in the income statement. We
are currently evaluating the change in the cash flow reporting and have not yet
determined the effect of adoption on our cash flow statement presentation.
In November 2004, the FASB approved Statement of Financial Accounting Standards
("SFAS") No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4."
SFAS No. 151 requires the exclusion of certain costs from inventories and the
allocation of fixed production overheads to inventories to be based on the
normal capacity of the production facilities. The standard is effective for Aqua
America for costs incurred after December 31, 2005. We believe this statement
will not have a material impact on our results of operations or financial
position.
In November 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29." SFAS No. 153 eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
fiscal periods beginning after June 15, 2005. We believe this statement will not
have a material impact on our results of operations or financial position.
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)
On October 22, 2004, the American Jobs Creation Act ("AJCA") was signed into
law. Among other provisions, the AJCA creates a new deduction for qualified
domestic production activities. Certain of our activities, such as our water
treatment activity, are considered as qualifying production activities for
purposes of determining the deduction for qualified production activities. In
December 2004, the FASB issued FSP 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004." In accordance
with FSP 109-1, we will treat the deduction for qualified domestic production
activities as a reduction of the income tax provision in the period as realized.
We adopted this statement in the first quarter of 2005 and the effect was to
reduce the provision for income taxes by approximately $340 in the first quarter
of 2005.
16
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, 2004. Refer to Item 7A of the Company's Annual Report on Form 10-K
for the year ended December 31, 2004 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
(i) recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and (ii) accumulated
and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding disclosure.
(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 material or are expected to have a material effect on
our financial position, results of operations or cash flows.
17
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 ended March 31, 2005:
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, 2005 2,207 $ 24.21 - 411,209
February 1 - 28, 2005 84 $ 24.98 - 411,209
March 1 - 31, 2005 2,758 $ 24.68 - 411,209
---------------- ----------- -------------- -----------------
Total 5,049 $ 24.48 - 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.
18
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.
19
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 9, 2005
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
20