UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 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 June 30, 2006
[_] 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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [_] Non-Accelerated Filer [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 26, 2006.
131,396,751.
Part I - Financial Information
Item 1. Financial Statement
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
June 30, December 31,
2006 2005
----------- ------------
Assets
Property, plant and equipment, at cost $3,024,974 $2,900,585
Less: accumulated depreciation 656,068 620,635
---------- ----------
Net property, plant and equipment 2,368,906 2,279,950
---------- ----------
Current assets:
Cash and cash equivalents 9,299 11,872
Accounts receivable and unbilled revenues, net 67,900 62,690
Income tax receivable 10,598 8,321
Inventory, materials and supplies 8,471 7,798
Prepayments and other current assets 9,662 7,596
---------- ----------
Total current assets 105,930 98,277
---------- ----------
Regulatory assets 133,589 130,953
Deferred charges and other assets, net 55,366 57,241
Funds restricted for construction activity 49,003 68,625
---------- ----------
$2,712,794 $2,635,046
========== ==========
Liabilities and Stockholders' Equity
Common stockholders' equity:
Common stock at $.50 par value, authorized 300,000,000 shares,
issued 132,083,539 and 129,658,806 in 2006 and 2005 $ 66,042 $ 64,829
Capital in excess of par value 529,656 478,508
Retained earnings 296,433 285,132
Treasury stock, 696,248 and 688,625 shares in 2006 and 2005 (13,132) (12,914)
Accumulated other comprehensive loss (2,883) (3,082)
Unearned compensation (1,309) (550)
---------- ----------
Total common stockholders' equity 874,807 811,923
---------- ----------
Minority interest 1,672 1,551
Long-term debt, excluding current portion 907,198 878,438
Commitments and contingencies -- --
Current liabilities:
Current portion of long-term debt 21,725 24,645
Loans payable 131,239 138,505
Accounts payable 40,179 55,455
Accrued interest 13,879 13,052
Accrued taxes 7,470 9,432
Other accrued liabilities 26,059 30,571
---------- ----------
Total current liabilities 240,551 271,660
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 255,575 250,346
Customers' advances for construction 77,435 74,828
Regulatory liabilities 12,362 11,751
Other 38,724 31,969
---------- ----------
Total deferred credits and other liabilities 384,096 368,894
---------- ----------
Contributions in aid of construction 304,470 302,580
---------- ----------
$2,712,794 $2,635,046
========== ==========
See notes to consolidated financial statements beginning on page 7 of this
report.
1
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Six Months Ended
June 30,
-------------------
2006 2005
-------- --------
Operating revenues $249,698 $237,088
Costs and expenses:
Operations and maintenance 106,749 98,200
Depreciation 34,085 29,312
Amortization 2,002 2,455
Taxes other than income taxes 16,151 15,757
-------- --------
158,987 145,724
-------- --------
Operating income 90,711 91,364
Other expense (income):
Interest expense, net 28,916 25,336
Allowance for funds used during construction (2,198) (1,064)
Gain on sale of other assets (743) (505)
-------- --------
Income before income taxes 64,736 67,597
Provision for income taxes 25,786 26,508
-------- --------
Net income $ 38,950 $ 41,089
======== ========
Net income $ 38,950 $ 41,089
Other comprehensive income, net of tax:
Unrealized holding gain on investments 199 --
-------- --------
Comprehensive income $ 39,149 $ 41,089
======== ========
Net income per common share:
Basic $ 0.30 $ 0.32
======== ========
Diluted $ 0.30 $ 0.32
======== ========
Average common shares outstanding
during the period:
Basic 129,522 127,602
======== ========
Diluted 130,734 129,214
======== ========
Cash dividends declared per common share $ 0.2138 $ 0.1950
======== ========
See notes to consolidated financial statements on page 7 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
June 30,
-------------------
2006 2005
-------- --------
Operating revenues $131,749 $123,100
Costs and expenses:
Operations and maintenance 55,433 50,891
Depreciation 17,255 14,629
Amortization 888 1,227
Taxes other than income taxes 8,084 7,760
-------- --------
81,660 74,507
-------- --------
Operating income 50,089 48,593
Other expense (income):
Interest expense, net 14,744 12,541
Allowance for funds used during construction (1,280) (700)
Gain on sale of other assets (476) (24)
-------- --------
Income before income taxes 37,101 36,776
Provision for income taxes 14,715 14,558
-------- --------
Net income $ 22,386 $ 22,218
======== ========
Net income $ 22,386 $ 22,218
Other comprehensive income, net of tax:
Unrealized holding gain on investments 199 --
-------- --------
Comprehensive income $ 22,585 $ 22,218
======== ========
Net income per common share:
Basic $ 0.17 $ 0.17
======== ========
Diluted $ 0.17 $ 0.17
======== ========
Average common shares outstanding during the period:
Basic 129,860 127,851
======== ========
Diluted 130,952 129,498
======== ========
Cash dividends declared per common share $ 0.1069 $ 0.0975
======== ========
See notes to consolidated financial statements beginning on page 7 of this
report.
3
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
June 30, December 31,
2006 2005
---------- ------------
Common stockholders' equity:
Common stock, $.50 par value $ 66,042 $ 64,829
Capital in excess of par value 529,656 478,508
Retained earnings 296,433 285,132
Treasury stock (13,132) (12,914)
Accumulated other comprehensive loss (2,883) (3,082)
Unearned compensation (1,309) (550)
---------- ----------
Total common stockholders' equity 874,807 811,923
---------- ----------
Long-term debt:
Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range
0.00% to 2.49% 24,182 21,574
2.50% to 2.99% 25,651 28,684
3.00% to 3.49% 17,292 17,380
3.50% to 3.99% 6,211 6,748
4.00% to 4.49% 1,300 1,300
4.50% to 4.99% 29,395 29,395
5.00% to 5.49% 262,572 262,588
5.50% to 5.99% 79,000 79,000
6.00% to 6.49% 88,360 88,504
6.50% to 6.99% 22,000 32,000
7.00% to 7.49% 13,588 15,878
7.50% to 7.99% 24,897 25,012
8.00% to 8.49% 26,400 26,507
8.50% to 8.99% 9,000 9,000
9.00% to 9.49% 46,676 46,764
9.50% to 9.99% 40,439 40,933
10.00% to 10.50% 6,000 6,000
---------- ----------
722,963 737,267
Unsecured notes payable, 4.87%, maturing in various installments 2010
through 2023 135,000 135,000
Unsecured notes payable, 5.95%, due in 2023 through 2034 40,000 --
Unsecured notes payable, 5.01%, due 2015 18,000 18,000
Unsecured notes payable, 5.20%, due 2020 12,000 12,000
Notes payable, 6.05%, maturing in 2006 through 2008 960 816
---------- ----------
928,923 903,083
Current portion of long-term debt 21,725 24,645
---------- ----------
Long-term debt, excluding current portion 907,198 878,438
---------- ----------
Total capitalization $1,782,005 $1,690,361
========== ==========
See notes to consolidated financial statements beginning on page 7 of this
report.
4
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
(In thousands of dollars)
(UNAUDITED)
Accumulated Unearned
Capital in Other Compensation
Common excess of Retained Treasury Comprehensive on Restricted
Stock par value earnings Stock Loss Stock Total
------- ---------- --------- -------- ------------- ------------- --------
Balance at December 31, 2005 $64,829 $478,508 $285,132 $(12,914) $(3,082) $ (550) $811,923
Net income -- -- 38,950 -- -- -- 38,950
Other comprehensive income:
unrealized holding gain on investments,
net of income tax of $107 -- -- -- -- 199 -- 199
Dividends paid -- -- (27,649) -- -- -- (27,649)
Sale of stock (1,953,012 shares) 969 40,865 -- 474 -- -- 42,308
Repurchase of stock (24,096 shares) -- -- -- (692) -- -- (692)
Equity Compensation Plan (42,200 shares) 21 1,177 -- -- -- (1,198) --
Exercise of stock options (445,994 shares) 223 5,182 -- -- -- -- 5,405
Stock--based compensation -- 1,712 -- -- -- 439 2,151
Employee stock plan tax benefits -- 2,212 -- -- -- -- 2,212
------- -------- -------- -------- ------- ------- --------
Balance at June 30, 2006 $66,042 $529,656 $296,433 $(13,132) $(2,883) $(1,309) $874,807
======= ======== ======== ======== ======= ======= ========
See notes to consolidated financial statements beginning on page 7 of this
report.
5
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
Six Months Ended
June 30,
---------------------
2006 2005
--------- ---------
Cash flows from operating activities:
Net income $ 38,950 $ 41,089
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 36,087 31,767
Deferred income taxes 4,863 3,199
Gain on sale of other assets (743) (505)
Stock-based compensation 1,929 --
Net increase (decrease) in receivables, inventory and prepayments (7,631) 2,911
Net decrease in payables, accrued interest, accrued taxes
and other accrued liabilities (29,941) (14,440)
Other 4,527 (354)
--------- ---------
Net cash flows from operating activities 48,041 63,667
--------- ---------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance
for funds used during construction of $918 and $364 (121,936) (93,197)
Acquisitions of water and wastewater systems, net (2,804) (2,211)
Proceeds from the sale of other assets 753 508
Additions to funds restricted for construction activity (1,544) (72,156)
Release of funds previously restricted for construction activity 21,166 18,708
Other (256) (80)
--------- ---------
Net cash flows used in investing activities (104,621) (148,428)
--------- ---------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction 5,367 6,024
Repayments of customers' advances (1,908) (1,780)
Net proceeds (repayments) of short-term debt (7,266) 38,880
Proceeds from long-term debt 45,814 100,619
Repayments of long-term debt (20,130) (47,657)
Change in cash overdraft position 11,257 (3,402)
Proceeds from exercised stock options 5,405 5,561
Stock-based compensation windfall tax benefits 1,501 --
Proceeds from issuing common stock 42,308 4,821
Repurchase of common stock (692) (424)
Dividends paid on common stock (27,649) (24,881)
--------- ---------
Net cash flows from financing activities 54,007 77,761
--------- ---------
Net decrease in cash and cash equivalents (2,573) (7,000)
Cash and cash equivalents at beginning of period 11,872 14,192
--------- ---------
Cash and cash equivalents at end of period $ 9,299 $ 7,192
========= =========
See notes to consolidated financial statements beginning on page 7 of this
report.
6
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. (the "Company") at June 30, 2006, the consolidated
statements of income and comprehensive income for the six months and
quarter ended June 30, 2006 and 2005, the consolidated statements of cash
flow for the six months ended June 30, 2006 and 2005, and the consolidated
statement of common stockholders' equity for the six months ended June 30,
2006, 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, 2005 and the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006. 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 changed to conform with current year's
presentation. The Company reclassified an $8,321 income tax receivable on
its Consolidated Balance Sheets as of December 31, 2005 from accrued taxes
to a separate line to conform with the current presentation. Prior to the
fourth quarter of 2005, cash overdrafts were reported as components of cash
or loans payable. This presentation was changed to classify cash overdrafts
as accounts payable. Accordingly, applicable historical balance sheet and
cash flow amounts have been revised to conform to the new presentation and
a new line has been added in the cash flow from financing activities
section titled "change in cash overdraft position." This revision had no
impact on the Company's net income, cash flows from operating activities or
cash flows used in investing activities. The revision increased the
Company's net cash flows from financing activities from that which was
previously reported by $751 for the six months ended June 30, 2005. Share
and per share data have been restated to give effect to the 2005 4-for-3
common stock split.
Note 2 Long-term Debt and Loans Payable
In March 2006, the Company's Pennsylvania operating subsidiary issued
$40,000 of unsecured notes at 5.95% of which $10,000 are due in 2023, 2024,
2033 and 2034. Proceeds from the sale of bonds were received on March 31,
2006 and the proceeds were used to repay short-term borrowings in April
2006.
7
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 3 Acquisitions
In May 2006, a subsidiary of the Company, Aqua New York, Inc., entered into
a purchase agreement with Utilities & Industries Corp., LLC to acquire the
capital stock of New York Water Service Corporation, which owns water
systems in Nassau County, Long Island, New York. The purchase agreement
provides for a purchase price of $28,000 in cash, subject to certain
purchase price adjustments, and the assumption of approximately $23,000 in
debt. The acquisition, which is subject to regulatory approval by the New
York Public Service Commission, is expected to close in the fourth quarter
of 2006. This acquisition will add approximately 44,500 customers in
several communities of southeastern Nassau County.
In July 2006, the Company completed one asset acquisition and one stock
acquisition of companies that provide on-site septic tank pumping and
sludge hauling services to customers primarily in Pennsylvania and New
Jersey for an aggregate purchase price of $6,600 in cash, subject to
post-closing adjustments. These transactions will be recorded in the third
quarter of 2006.
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:
Six Months Ended Three Months Ended
June 30, June 30,
----------------- ------------------
2006 2005 2006 2005
------- ------- ------- -------
Average common shares outstanding during
the period for basic computation 129,522 127,602 129,860 127,851
Dilutive effect of employee stock options 1,212 1,612 1,092 1,647
------- ------- ------- -------
Average common shares outstanding during
the period for diluted computation 130,734 129,214 130,952 129,498
======= ======= ======= =======
For the six months and three months ended June 30, 2006, employee stock
options to purchase 610,100 shares of common stock were excluded from the
calculations 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 these periods. For the six months and three months ended June 30,
2005, 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.
8
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 5 Stockholders' Equity
In June 2006, the Company issued 1,750,000 shares of common stock in a
public offering for proceeds of $37,400, net of expenses. The net proceeds
were used to fund the Company's capital expenditure program and
acquisitions, and for working capital and other general corporate purposes.
The Company 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:
2006 2005
------- -------
Balance at January 1, $(3,082) $(1,742)
Other comprehensive income:
Unrealized holding gain arising during the period,
on certain investments, net of tax of $107 199 --
------- -------
Balance at June 30, $(2,883) $(1,742)
======= =======
Note 6 Stock-based Compensation
Under the Company's 2004 Equity Compensation Plan (the "2004 Plan"), as
approved by the shareholders to replace the 1994 Equity Compensation Plan
(the "1994 Plan"), qualified and nonqualified stock options may be granted
to officers, key employees and consultants at prices equal to the market
price of the stock on the day of the grant. Officers and key employees may
also be granted dividend equivalents and restricted stock. Restricted stock
may also be granted to non-employee members of the Board of Directors. The
2004 Plan authorizes 4,900,000 shares for issuance under the plan. A
maximum of 50% of the shares available for issuance under the 2004 Plan may
be issued as restricted stock and the maximum number of shares that may be
subject to grants under the plans to any one individual in any one year is
200,000. Awards under the 2004 Plan are made by a committee of the Board of
Directors. At June 30, 2006, 3,454,006 shares underlying stock option and
restricted stock awards were still available for grant under the 2004 Plan,
although under the terms of the 2004 Plan, terminated, expired or forfeited
grants under the 1994 Plan and shares withheld to satisfy tax withholding
requirements under the plan may be re-issued under the plan.
STOCK OPTIONS-Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment,"
which revised SFAS No. 123, "Accounting for Stock-based Compensation," and
superseded APB No. 25, "Accounting for Stock Issued to Employees." Prior to
January 1, 2006, the Company accounted for stock-based compensation using
the intrinsic value method in accordance with APB Opinion No. 25.
Accordingly, no compensation expense related to granting of stock options
had been recognized in the financial statements prior to adoption of SFAS
No. 123R for stock options that were granted, as the grant price equaled
the market price on the date of grant.
9
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
The Company adopted this standard using the modified prospective method,
and accordingly the financial statement amounts for the prior periods
presented in this Form 10-Q have not been restated to reflect the fair
value method of expensing share-based compensation. Under this transition
method, compensation cost recognized in the three months ended and six
months ended June 30, 2006 includes compensation cost for all share-based
payments granted prior to, but not vested as of January 1, 2006, and
share-based payments granted after January 1, 2006. For the three months
ended and six months ended June 30, 2006, the impact of the adoption of
SFAS No. 123R as compared to if the Company had continued to account for
share-based compensation under APB Opinion No. 25: increased operations and
maintenance expense by $828 and $1,490, increased capitalized compensation
costs within property, plant and equipment, by $125 and $222, lowered
income tax expense by $21 and $183, lowered net income by $807 and $1,307,
lowered diluted net income per share by $0.006 and $0.010, and lowered
basic net income per share by $0.006 and $0.010. SFAS 123R requires the
Company to estimate forfeitures in calculating the compensation expense
instead of recognizing these forfeitures and the resulting reduction in
compensation expense as they occur. As of January 1, 2006, the cumulative
after-tax effect of this change in accounting for forfeitures, if this
adjustment was recorded, would have been to reduce stock-based compensation
by $12. The estimate of forfeitures will be adjusted over the vesting
period to the extent that actual forfeitures differ, or are expected to
differ, from such estimates. The adoption of this standard had no impact on
net cash flows and results in the reclassification on the consolidated cash
flow statements of related tax benefits from cash flows from operating
activities to cash flows from financing activities to the extent these tax
benefits exceeded the associated compensation cost as determined under SFAS
123R.
Options are exercisable in installments of 33% annually, starting one year
from the date of the grant and expire 10 years from the date of the grant.
The fair value of each option is amortized into compensation expense on a
straight-line basis over their respective 36 month vesting period, net of
estimated forfeitures. The fair value of options was estimated at the grant
date using the Black-Scholes option-pricing model. The per share
weighted-average fair value at the date of grant for stock options granted
during the six months ended June 30, 2006 and 2005 was $7.82 and $4.54 per
option, respectively. There were no stock options granted during the three
months ended June 30, 2006 and 2005. The application of this valuation
model relies on the following assumptions that are judgmental and sensitive
in the determination of the compensation expense for the periods reported:
2006 2005
---- ----
Expected term (years) 5.2 5.2
Risk-free interest rate 4.7% 4.0%
Expected volatility 25.8% 27.8%
Dividend yield 1.76% 2.40%
Historical information was the principal basis for the selection of the
expected term and dividend yield. The expected volatility is based on a
weighted-average combination of
10
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
historical and implied volatilities over a time period that approximates
the expected term of the option. The risk-free interest rate was selected
based upon the U.S. Treasury yield curve in effect at the time of grant for
the expected term of the option.
The following table summarizes stock option transactions for the six months
ended June 30, 2006:
Weighted Weighted
Average Average Aggregate
Exercise Remaining Intrinsic
Shares Price Life (years) Value
--------- -------- ------------ ---------
Options:
Outstanding at beginning of period 3,492,363 $13.70
Granted 611,950 $29.46
Forfeited (11,071) $19.85
Expired (122) $18.33
Exercised (445,994) $12.12
--------- ------
Outstanding at end of period 3,647,126 $16.52 7.1 $26,931
========= ====== === =======
Exercisable at end of period 2,265,265 $12.65 5.9 $22,969
========= ====== === =======
The aggregate intrinsic value of options exercised during the three months
ended June 30, 2006 and 2005 was $131 and $4,760, respectively. The
aggregate intrinsic value of options exercised during the six months ended
June 30, 2006 and 2005 was $4,424 and $7,331, respectively. The intrinsic
value of stock options is the amount by which the market price of the stock
on a given date, such as at the end of the period or on the day of
exercise, exceeded the market price of stock on the date of grant.
The following table summarizes information about the options outstanding
and options exercisable as of June 30, 2006:
Options Options
Outstanding Exercisable
----------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Shares Life (years) Price Shares Price
--------- ------------ -------- --------- --------
Range of prices:
$ 5.81 - 9.99 450,694 2.8 $ 7.51 450,694 $ 7.51
$10.00 - 12.99 1,096,612 5.9 12.20 1,096,612 12.20
$13.00 - 15.99 99,161 6.9 13.75 99,161 13.75
$16.00 - 16.99 613,596 7.8 16.15 374,544 16.15
$17.00 - 18.33 776,963 8.7 18.33 244,254 18.33
$29.00 - 29.99 610,100 9.8 29.46 -- --
--------- --- ------ --------- ------
3,647,126 7.1 $16.52 2,265,265 $12.65
========= === ====== ========= ======
As of June 30, 2006, there was $6,553 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted
under the plans. The cost is expected to be recognized over a
weighted-average period of 1.6 years.
11
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
The following table provides the pro forma net income and earnings per
share as if compensation cost for stock-based employee compensation was
determined as of the grant date under the fair value method of SFAS No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148.
Six Months Three Months
Ended Ended
June 30, 2005 June 30, 2005
------------- -------------
Net income, as reported: $41,089 $22,218
Add: stock-based employee compensation
expense included in reported net income,
net of tax 209 151
Less: pro forma expense related to stock
options granted, net of tax effects (1,099) (596)
------- -------
Pro forma $40,199 $21,773
======= =======
Basic net income per share:
As reported $ 0.32 $ 0.17
Pro forma 0.32 0.17
Diluted net income per share:
As reported $ 0.32 $ 0.17
Pro forma 0.31 0.17
For the purposes of this pro forma disclosure, the fair value of the
options at the date of grant was estimated using the Black-Scholes
option-pricing model.
RESTRICTED STOCK-Restricted stock awards provide the grantee with the
rights of a shareholder, including the right to receive dividends and to
vote such shares, but not the right to sell or otherwise transfer the
shares during the restriction period. Restricted stock awards result in
compensation expense which is equal to the fair market value of the stock
on the date of the grant and is amortized ratably over the restriction
period. The adoption of SFAS No. 123R had no impact on the Company's
recognition of stock-based compensation expense associated with restricted
stock awards. The Company expects forfeitures of restricted stock to be de
minimus. There were no forfeitures during the six months ended June 30,
2006 nor have there been forfeitures prior to the adoption of SFAS 123R for
the grants that were under restriction as of January 1, 2006.
12
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
During the three months ended June 30, 2006 and 2005, the Company recorded
stock-based compensation related to restricted stock awards as operations
and maintenance expense in the amounts of $334 and $249, respectively.
During the six months ended June 30, 2006 and 2005, the Company recorded
stock-based compensation related to restricted stock awards as operations
and maintenance expense in the amounts of $439 and $346, respectively. The
following table summarizes nonvested restricted stock transactions for the
six months ended June 30, 2006:
Number Weighted
of Average
Shares Fair Value
------- ----------
Nonvested shares at beginning of period 43,998 $17.70
Granted 42,200 $28.39
Vested (24,310) $19.11
Forfeited -- $ --
------- ------
Nonvested shares at end of period 61,888 $24.43
======= ======
The total value of awards for which restrictions lapsed during the three
and six month periods ended June 30, 2006 was $167 and $655, respectively.
As of June 30, 2006, $1,309 of unrecognized compensation costs related to
restricted stock is expected to be recognized over a weighted-average
period of 1.5 years. The aggregate intrinsic value of restricted stock as
of June 30, 2006 was $1,410. The aggregate intrinsic value of restricted
stock is based on the number of shares of restricted stock and the market
value of the Company's common stock as of the period end date.
Note 7 Pension Plans and Other Postretirement Benefits
The Company maintains a qualified defined benefit plan, nonqualified
pension plans and other postretirement benefit plans for certain of its
employees. The net periodic benefit cost is based on estimated values
provided by independent actuaries. The following tables provide the
components of net periodic benefit costs:
Pension Benefits
--------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
----------------- ------------------
2006 2005 2006 2005
------- ------- ------- -------
Service cost $ 2,550 $ 2,424 $ 1,275 $ 1,164
Interest cost 5,132 4,903 2,566 2,420
Expected return on plan assets (4,750) (4,768) (2,375) (2,383)
Amortization of transition asset (106) (105) (53) (52)
Amortization of prior service cost 116 202 58 102
Amortization of actuarial loss 960 803 480 380
Capitalized costs (998) (911) (526) (482)
------- ------- ------- -------
Net periodic benefit cost $ 2,904 $ 2,548 $ 1,425 $ 1,149
======= ======= ======= =======
13
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Other
Postretirement Benefits
-------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
---------------- ------------------
2006 2005 2006 2005
----- ------ ----- -----
Service cost $ 560 $ 612 $ 280 $ 282
Interest cost 836 941 418 458
Expected return on plan assets (640) (631) (320) (318)
Amortization of transition obligation 406 402 203 202
Amortization of prior service cost (366) (29) (183) (14)
Amortization of actuarial loss 176 110 88 55
Amortization of regulatory asset 76 76 38 38
Capitalized costs (398) (368) (210) (195)
----- ------ ----- -----
Net periodic benefit cost $ 650 $1,113 $ 314 $ 508
===== ====== ===== =====
The Company contributed $2,652 in April 2006 and $682 in July 2006 to its
defined benefit pension plan and intends to contribute $3,066 during the
balance of 2006. In addition, the Company expects to contribute
approximately $2,882 for the funding of its other postretirement benefits
during 2006.
Note 8 Water and Wastewater Rates
On June 22, 2006, the Pennsylvania Public Utility Commission granted the
Company's operating subsidiary in Pennsylvania a $24,900 base water rate
increase, on an annualized basis. The rates in effect at the time of the
filing included $12,397 in Distribution System Improvement Charges ("DSIC")
or 5.0% above the prior base rates. Consequently, the total base rates
increased by $37,297 and the DSIC was reset to zero.
During the first half of 2006, certain of the Company's operating divisions
in Virginia, Ohio, Florida, Maine, Indiana and New York were granted rate
increases designed to increase total operating revenues on an annual basis
by approximately $4,060.
In May 2004, the Company's operating subsidiaries 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 expense over a similar multi-year period, such that the impact on
operating income approximates the requested amount during the first years
that the new rates are in effect. The application is currently pending
before the Commission and several customers and municipalities have joined
the proceeding to challenge the rate request. The Company commenced billing
for the requested rates and implemented the deferral plan in August 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. As of June 30, 2006, the Company has
deferred $11,172 of expenses and recognized $8,534 of revenue that is
subject
14
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
to refund based on the outcome of the final commission order, which is
expected to be issued by December 2006.
Note 9 Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income
Taxes--An Interpretation of FASB Statement No. 109, which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 is effective and will be adopted by the Company on
January 1, 2007. Upon adoption, the Company will record a cumulative effect
adjustment of a change in accounting principle, if necessary, as prescribed
by FIN 48. The Company 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."
SFAS 123R generally requires that the Company 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. Prior to the adoption
of SFAS No. 123R on January 1, 2006, the Company provided pro forma
disclosure of its compensation costs associated with the fair value of
stock options that had been granted, and accordingly, no compensation costs
were recognized in its consolidated financial statements. The Company
adopted this standard using the modified prospective method, and
accordingly, the financial statement amounts for the prior periods
presented in this Form 10-Q have not been restated to reflect the fair
value method of expensing share-based compensation. During the second
quarter of 2006, the adoption of SFAS 123R lowered net income by $807 and
increased operations and maintenance expense by $828. During the six months
ended June 30, 2006, the adoption of SFAS 123R lowered net income by $1,307
and increased operations and maintenance expense by $1,490. The after-tax
impact of adopting SFAS 123R is expected to approximate $2,800 during the
year ending December 31, 2006. The adoption of this standard had no
material impact on the Company's overall financial position, no impact on
cash flow, and results in the reclassification on the consolidated cash
flow statements of related tax benefits from cash flows from operating
activities to cash flows from financing activities to the extent these tax
benefits exceeded the associated compensation cost recognized in the income
statement. See Note 6 for further information and the required disclosures
under SFAS 123R.
15
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)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 timing and annual value of rate increases; the recovery of
certain costs and capital investments through rate increase requests; 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, 2005. 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 one-half of the total number of
people we serve, located in the suburban areas north and west of the City
of Philadelphia and in 22 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, and septage hauling
services, close to our operating companies' service territories. We are the
largest U.S.-based publicly-traded water and wastewater utility based on
number of people served.
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)
Financial Condition
During the first half of 2006, we had $121,936 of capital expenditures,
acquired water and wastewater systems for $2,804, repaid $1,908 of customer
advances for construction and repaid debt and made sinking fund
contributions and other loan repayments of $20,130. 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 and an office building expansion.
During the first half of 2006, 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 March 2006, our Pennsylvania
operating subsidiary issued $40,000 of unsecured notes at 5.95% of which
$10,000 are due in 2023, 2024, 2033 and 2034. Proceeds from the sale of
bonds were used to repay short-term borrowings. In June 2006, Aqua America
issued 1,750,000 shares of common stock in a public offering for proceeds
of $37,400, net of expenses. The net proceeds were used to fund our capital
expenditure program and acquisitions, and for working capital and other
general corporate purposes. At June 30, 2006, we had short-term lines of
credit of $228,000, of which $96,761 was available. Effective with the
September 1, 2006 payment, Aqua America increased the quarterly cash
dividend on common stock from $0.1069 per share to $0.115 per share.
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.
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)
Results of Operations
Analysis of First Six Months of 2006 Compared to First Six Months of 2005
Revenues for the first six months increased $12,610 or 5.3% primarily due
to additional revenues of $5,041 resulting from increased water and
wastewater rates implemented in various operating subsidiaries, $2,283 of
additional revenues from the infrastructure rehabilitation surcharge,
additional water and sewer revenues of $2,827 associated with a larger
customer base due to acquisitions, and increased water consumption as
compared to the first half of 2005.
Operations and maintenance expenses increased by $8,549 or 8.7% primarily
due to increased water production costs of $2,059, a reduction in the
deferral of expenses related to the Texas rate case filing of $1,890,
stock-based compensation expense of $1,490, additional expenses associated
with acquisitions of $1,760, and normal increases in other operating costs,
offset partially by receipt of $1,500 relating to a waiver of certain
contractual rights. The increased water production costs, principally
purchased power and chemicals, were associated with vendor price increases
and increased water production. A portion of the increase in operations and
maintenance expense is associated with the change in the cost deferral
related to the 2004 Texas rate filing. The rate filing was designed and
implemented using a multi-year plan to increase annual revenues in phases,
and to defer and amortize a portion of the Company's operating expense over
a similar multi-year period. The impact, by design, resulted in a lower
expense deferral of $1,890 in the first six months of 2006 than in the same
period of 2005. The lower expense deferral results in an increase in
expense recognized in conjunction with an additional phase increase in the
revenues billed and recognized. The stock-based compensation expense of
$1,490 was associated with stock options and is a component of operations
and maintenance expense beginning on January 1, 2006 as a result of
adopting a new accounting standard.
Depreciation expense increased $4,773 or 16.3% reflecting the utility plant
placed in service since the second quarter of 2005, including the assets
acquired through system acquisitions.
Amortization decreased $453 or 18.5% 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 $394 or 2.5% due to additional
state and local taxes incurred in the first half of 2006.
Interest expense increased by $3,580 or 14.1% primarily due to additional
borrowings to finance capital projects, increased interest rates on
short-term borrowings and lower interest income, offset partially by
decreased interest rates on long-term borrowings due to the refinancing of
certain existing debt issues.
Allowance for funds used during construction ("AFUDC") increased by $1,134
primarily due to an increase in the average balance of utility plant
construction work in progress, to which AFUDC is applied; and an increase
in the AFUDC rate which is based on short-term interest rates.
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)
Gain on sale of other assets totaled $743 in the first half of 2006 and
$505 in the first half of 2005. The increase of $238 is due to the timing
of sales of land.
Our effective income tax rate was 39.8% in the first half of 2006 and 39.2%
in the first half of 2005. The change was due to an increase in our
expenses that are not tax-deductible, including a portion of the
stock-based compensation expense in the first half of 2006.
Net income for the first six months decreased by $2,139 or 5.2%, in
comparison to the same period in 2005 primarily as a result of the factors
described above. On a diluted per share basis, earnings decreased $0.02 or
6.3% reflecting the change in net income and a 1.2% 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 sold or issued
through the dividend reinvestment plan, the employee stock and incentive
plan and the additional shares issued in the June 2006 share offering.
Analysis of Second Quarter of 2006 Compared to Second Quarter of 2005
Revenues for the quarter increased $8,649 or 7.0% primarily due to
additional revenues of $2,665 resulting from increased water and wastewater
rates implemented in various operating subsidiaries, additional water and
sewer revenues of $1,183 associated with a larger customer base due to
acquisitions, $990 of additional revenues from the infrastructure
rehabilitation surcharge, $952 of additional sewer revenues, and increased
water consumption as compared to the second quarter of 2005.
Operations and maintenance expenses increased by $4,542 or 8.9% primarily
due to increased water production costs of $1,167, stock-based compensation
expense of $828, additional expenses associated with acquisitions of $702,
a reduction in the deferral of expenses related to the Texas rate case
filing of $945 and normal increases in other operating costs. The increased
water production costs, principally purchased power and chemicals, were
associated with vendor price increases and increased water production. The
stock-based compensation expense of $828 was associated with stock options
and is a component of operations and maintenance expense beginning on
January 1, 2006 as a result of adopting a new accounting standard. A
portion of the increase in operations and maintenance expense is associated
with the change in the cost deferral related to the 2004 Texas rate filing.
The rate filing was designed and implemented using a multi-year plan to
increase annual revenues in phases, and to defer and amortize a portion of
the Company's operating expense over a similar multi-year period. The
impact, by design, resulted in a lower expense deferral of $945 in the
second quarter of 2006 than in the same period of 2005. The lower expense
deferral results in an increase in expense recognized in conjunction with
an additional phase increase in the revenues billed and recognized.
Depreciation expense increased $2,626 or 18.0% reflecting the utility plant
placed in service since June 30, 2005, including the assets acquired
through system acquisitions.
19
AQUA AMERICA, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Amortization decreased $339 or 27.6% 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 $324 or 4.2% due to additional
state and local taxes incurred in the second quarter of 2006.
Interest expense increased by $2,203 or 17.6% primarily due to additional
borrowings to finance capital projects, increased interest rates on
short-term borrowings and lower interest income.
Allowance for funds used during construction ("AFUDC") increased by $580
primarily due to an increase in the average balance of utility plant
construction work in progress, to which AFUDC is applied; and an increase
in the AFUDC rate which is based on short-term interest rates.
Gain on sale of other assets totaled $476 in the second quarter of 2006 and
$24 in the second quarter of 2005. The increase of $452 is due to the
timing of sales of land.
Our effective income tax rate was 39.7% in the second quarter of 2006 and
39.6% in the second quarter of 2005. The change was due to an increase in
our expenses that are not tax-deductible, including a portion of the
stock-based compensation expense in the second quarter of 2006.
Net income for the quarter increased by $168 or 0.8%, in comparison to the
same period in 2005 primarily as a result of the factors described above.
On a diluted per share basis, earnings were unchanged reflecting the change
in net income and a 1.1% 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 sold or issued through the the employee
stock and incentive plan, dividend reinvestment plan and the additional
shares issued in the June 2006 share offering.
Impact of Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income
Taxes--An Interpretation of FASB Statement No. 109, which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 is effective and will be adopted by us on January
1, 2007. Upon adoption, we will record a cumulative effect of a change in
accounting principle, if necessary, as prescribed by FIN 48. 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."
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. Prior to the adoption of SFAS
No. 123R on January 1, 2006, we provided pro forma disclosure of our
compensation costs associated
20
AQUA AMERICA, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
with the fair value of stock options that had been granted, and
accordingly, no compensation costs were recognized in our consolidated
financial statements. We adopted this standard using the modified
prospective method, and accordingly, the financial statement amounts for
the prior periods presented in this Form 10-Q have not been restated to
reflect the fair value method of expensing share-based compensation. During
the second quarter of 2006, the adoption of SFAS 123R lowered net income by
$807 and increased operations and maintenance expense by $828. During the
six months ended June 30, 2006, the adoption of SFAS 123R lowered net
income by $1,307 and increased operations and maintenance expense by
$1,490. The after-tax impact of adopting SFAS 123R is expected to
approximate $2,800 during the year ending December 31, 2006. The adoption
of this standard had no material impact on our overall financial position,
no impact on cash flow, and results in the reclassification on the
consolidated cash flow statements of related tax benefits from cash flows
from operating activities to cash flows from financing activities to the
extent these tax benefits exceeded the associated compensation cost
recognized in the income statement. See Note 6 to the consolidated
financial statements for further information and the required disclosures
under SFAS 123R.
Recent Events
Economic Regulation - A local-government sanitary district is considering
the acquisition, by eminent domain or otherwise, of all or a portion of the
utility assets of our wastewater operating division located in University
Park, Illinois. The system represents approximately 2,200 customers or less
than 0.5% of our total customer base. We are actively discussing this
matter with the district. We believe that our Illinois operating subsidiary
is entitled to fair market value for its assets.
21
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, 2005. Refer to
Item 7A of the Company's Annual Report on Form 10-K for the year ended
December 31, 2005 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
In May 2004, our subsidiaries in Texas filed an application with the Texas
Commission on Environmental Quality to increase rates over a multi-year
period. In accordance with authorization from the Texas Commission on
Environmental Quality, our subsidiaries commenced billing for the requested
rates and deferred recognition of certain expenses for financial statement
purposes. Several customers and municipalities have joined the proceeding
and challenged the requested rate structure, including our request to
regionalize rates, and the amount of our requested rate increase. In the
event our request is denied completely or in part, we could be required to
refund some or all of the revenue billed to-date, and write-off some or all
of the regulatory asset for the expense deferral. For more information, see
the description under "Results of Operation" in "Management's Discussion
and Analysis of Financial Condition and Results of Operation" in our Annual
Report on Form 10-K for the year ended December 31, 2005, and refer to
"Note 8 - Water
22
AQUA AMERICA, INC. AND SUBSIDIARIES
and Wastewater Rates" to the Consolidated Financial Statements of Aqua
America, Inc. and subsidiaries in this Quarterly Report on Form 10-Q for
the quarter ended June 30, 2006.
There are no other 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Aqua America, Inc. was held on May
17, 2006 at the Drexelbrook Banquet Facility & Corporate Events Center,
Drexelbrook Drive and Valley Road, Drexel Hill, Pennsylvania, pursuant to
the Notice sent on or about April 11, 2006 to all shareholders of record at
the close of business on March 27, 2006. At that meeting the following
nominees were elected as directors of Aqua America, Inc. for terms expiring
in the year 2009 and received the votes set forth after their names below:
Name of Nominee For Withheld
------------------------ ----------- ---------
Nicholas DeBenedictis 104,115,298 2,810,987
Richard H. Glanton, Esq. 103,772,605 3,153,680
Lon R. Greenberg 105,665,550 1,260,735
Since the Board of Directors is divided into three classes with one class
elected each year to hold office for a three-year term, the term of office
for the following directors continued after the Annual Meeting: Mary C.
Carroll; William P. Hankowsky; Dr. Constantine Papadakis; and Richard L.
Smoot.
Item 6. 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 to 18
U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer, pursuant to 18
U.S.C. Section 1350.
23
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.
August 4, 2006
AQUA AMERICA, INC.
Registrant
NICHOLAS DEBENEDICTIS
----------------------------------------
Nicholas DeBenedictis
Chairman, President and
Chief Executive Officer
DAVID P. SMELTZER
----------------------------------------
David P. Smeltzer
Senior Vice President - Finance
and Chief Financial Officer
24
EXHIBIT INDEX
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 to 18
U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer, pursuant to 18
U.S.C. Section 1350.
25