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, 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 April 21, 2006.
129,512,881.
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,
2006 2005
---------- ------------
Assets
Property, plant and equipment, at cost $2,950,523 $2,900,585
Less: accumulated depreciation 638,352 620,635
---------- ----------
Net property, plant and equipment 2,312,171 2,279,950
---------- ----------
Current assets:
Cash and cash equivalents 51,445 11,872
Accounts receivable and unbilled revenues, net 57,600 62,690
Inventory, materials and supplies 8,796 7,798
Prepayments and other current assets 7,919 7,596
---------- ----------
Total current assets 125,760 89,956
---------- ----------
Regulatory assets 132,316 130,953
Deferred charges and other assets, net 58,364 57,241
Funds restricted for construction activity 62,522 68,625
---------- ----------
$2,691,133 $2,626,725
========== ==========
Liabilities and Stockholders' Equity
Common stockholders' equity:
Common stock at $.50 par value, authorized 300,000,000 shares,
issued 130,210,197 and 129,658,806 in 2006 and 2005 $ 65,105 $ 64,829
Capital in excess of par value 489,110 478,508
Retained earnings 287,893 285,132
Treasury stock, 704,076 and 688,625 shares in 2006 and 2005 (13,356) (12,914)
Accumulated other comprehensive loss (3,082) (3,082)
Unearned compensation (1,476) (550)
---------- ----------
Total common stockholders' equity 824,194 811,923
---------- ----------
Minority interest 1,609 1,551
Long-term debt, excluding current portion 916,459 878,438
Commitments and contingencies -- --
Current liabilities:
Current portion of long-term debt 24,666 24,645
Loans payable 167,150 138,505
Accounts payable 29,910 55,455
Accrued interest 11,750 13,052
Accrued taxes 6,777 1,111
Other accrued liabilities 28,257 30,571
---------- ----------
Total current liabilities 268,510 263,339
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits 252,521 250,346
Customers' advances for construction 76,327 74,828
Regulatory liabilities 11,852 11,751
Other 34,701 31,969
---------- ----------
Total deferred credits and other liabilities 375,401 368,894
---------- ----------
Contributions in aid of construction 304,960 302,580
---------- ----------
$2,691,133 $2,626,725
========== ==========
See notes to consolidated financial statements beginning on page 6 of this
report.
1
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
Three Months Ended
March 31,
-------------------
2006 2005
-------- --------
Operating revenues $117,949 $113,988
Costs and expenses:
Operations and maintenance 51,316 47,309
Depreciation 16,830 14,683
Amortization 1,114 1,228
Taxes other than income taxes 8,067 7,997
-------- --------
77,327 71,217
-------- --------
Operating income 40,622 42,771
Other expense (income):
Interest expense, net 14,172 12,795
Allowance for funds used during construction (918) (364)
Gain on sale of other assets (267) (481)
-------- --------
Income before income taxes 27,635 30,821
Provision for income taxes 11,071 11,950
-------- --------
Net income $ 16,564 $ 18,871
======== ========
Net income per common share:
Basic $ 0.13 $ 0.15
======== ========
Diluted $ 0.13 $ 0.15
======== ========
Average common shares outstanding
during the period:
Basic 129,181 127,361
======== ========
Diluted 130,893 128,886
======== ========
Cash dividends declared per common share $ 0.1069 $ 0.0975
======== ========
See notes to consolidated financial statements beginning 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,
2006 2005
---------- ------------
Common stockholders' equity:
Common stock, $.50 par value $ 65,105 $ 64,829
Capital in excess of par value 489,110 478,508
Retained earnings 287,893 285,132
Treasury stock (13,356) (12,914)
Accumulated other comprehensive loss (3,082) (3,082)
Unearned compensation (1,476) (550)
---------- ----------
Total common stockholders' equity 824,194 811,923
---------- ----------
Long-term debt:
Long-term debt of subsidiaries (substantially secured by
utility plant):
Interest Rate Range
0.00% to 2.49% 22,166 21,574
2.50% to 2.99% 29,070 28,684
3.00% to 3.49% 17,356 17,380
3.50% to 3.99% 6,680 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% 262,580 262,588
5.50% to 5.99% 79,000 79,000
6.00% to 6.49% 88,504 88,504
6.50% to 6.99% 32,000 32,000
7.00% to 7.49% 13,734 15,878
7.50% to 7.99% 24,955 25,012
8.00% to 8.49% 26,454 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
---------- ----------
735,309 737,267
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 816 816
---------- ----------
941,125 903,083
Current portion of long-term debt 24,666 24,645
---------- ----------
Long-term debt, excluding current portion 916,459 878,438
---------- ----------
Total capitalization $1,740,653 $1,690,361
========== ==========
See notes to consolidated financial statements beginning on page 6 of this
report.
3
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 -- -- 16,564 -- -- -- 16,564
Dividends paid -- -- (13,803) -- -- -- (13,803)
Sale of stock (91,288 shares) 41 2,054 -- 250 -- -- 2,345
Repurchase of stock (24,096 shares) -- -- -- (692) -- -- (692)
Equity Compensation Plan (35,000 shares) 18 1,013 -- -- -- (1,031) --
Exercise of stock options (433,748 shares) 217 5,040 -- -- -- -- 5,257
Stock-based compensation -- 759 -- -- -- 105 864
Employee stock plan tax benefits -- 1,736 -- -- -- -- 1,736
------- -------- -------- -------- ------- ------- --------
Balance at March 31, 2006 $65,105 $489,110 $287,893 $(13,356) $(3,082) $(1,476) $824,194
======= ======== ======== ======== ======= ======= ========
See notes to consolidated financial statements beginning 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,
-------------------
2006 2005
-------- --------
Cash flows from operating activities:
Net income $ 16,564 $ 18,871
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 17,944 15,911
Deferred income taxes 2,026 740
Gain on sale of other assets (267) (481)
Stock-based compensation 662 --
Net increase in receivables, inventory and
prepayments 3,321 14,421
Net decrease in payables, accrued interest,
accrued taxes and other accrued liabilities (28,229) (8,942)
Other 1,088 (1,527)
-------- --------
Net cash flows from operating activities 13,109 38,993
-------- --------
Cash flows from investing activities:
Property, plant and equipment additions, including
allowance for funds used during construction of
$918 and $364 (46,888) (34,341)
Acquisitions of water and wastewater systems, net (2,506) (1,661)
Proceeds from the sale of other assets 267 484
Additions to funds restricted for construction
activity (972) (43)
Release of funds previously restricted for
construction activity 7,075 7,860
Other (372) (52)
-------- --------
Net cash flows used in investing activities (43,396) (27,753)
-------- --------
Cash flows from financing activities:
Customers' advances and contributions in aid of
construction 2,167 2,559
Repayments of customers' advances (747) (1,001)
Net proceeds (repayments) of short-term debt 28,645 (1,575)
Proceeds from long-term debt 41,624 29,918
Repayments of long-term debt (3,718) (24,583)
Change in cash overdraft position 7,329 (6,543)
Proceeds from exercised stock options 5,257 2,674
Stock-based compensation windfall tax benefits 1,453 --
Proceeds from issuing common stock 2,345 2,174
Repurchase of common stock (692) (124)
Dividends paid on common stock (13,803) (12,411)
-------- --------
Net cash flows from (used in) financing activities 69,860 (8,912)
-------- --------
Net increase in cash and cash equivalents 39,573 2,328
Cash and cash equivalents at beginning of period 11,872 14,192
-------- --------
Cash and cash equivalents at end of period $ 51,445 $ 16,520
======== ========
See notes to consolidated financial statements beginning 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. (the "Company") at March 31,
2006, the consolidated statements of income, and cash flow for the
three months ended March 31, 2006 and 2005, and the consolidated
statement of common stockholders' equity for the three months ended
March 31, 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. 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. 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 used in financing activities
from that which was previously reported by $1,971 for the three months
ended March 31, 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.
6
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 3 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,
------------------
2006 2005
------- -------
Average common shares outstanding during
the period for basic computation 129,181 127,361
Dilutive effect of employee stock options 1,712 1,525
------- -------
Average common shares outstanding during
the period for diluted computation 130,893 128,886
======= =======
For the quarters ended March 31, 2006 and 2005, employee stock options
to purchase 611,350 and 829,867 shares of common stock, respectively,
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.
Note 4 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 March 31, 2006, 3,456,803 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.
7
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
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.
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 March 31, 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 March 31, 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 $662, increased capitalized
compensation costs by $97, lowered income tax expense by $162, lowered
net income by $500 and lowered basic and diluted net income per share
by $0.004. 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 recognized in the income statement.
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 three months ended
March 31, 2006 and the year ended December 31, 2005 was $7.82 and
$4.54 per option, respectively. The application of this valuation
model relies on the following assumptions that are judgmental and
sensitive in the determination of the compensation expense:
8
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
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 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 three
months ended March 31, 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 6.9
Granted 611,950 $29.46
Forfeited (6,790) $18.85
Expired -- $ --
Exercised (433,748) $12.13
--------- ------
Outstanding at end of period 3,663,775 $16.51 7.3 $42,430
========= ====== === =======
Exercisable at end of period 2,223,565 $12.62 6.2 $33,796
========= ====== === =======
The aggregate intrinsic value of options exercised during the first
quarter of 2006 and 2005 was $6,986 and $3,451, 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 March 31, 2006:
9
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Options Outstanding Options 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 3.0 $ 7.51 450,694 $ 7.51
$10.00 - 12.99 1,108,191 6.2 12.20 1,108,191 12.20
$13.00 - 15.99 99,161 7.2 13.75 44,993 13.76
$16.00 - 16.99 614,530 8.0 16.15 375,211 16.15
$17.00 - 18.33 779,849 8.9 18.33 244,476 18.33
$29.00 - 29.99 611,350 9.9 29.46 -- --
--------- --- ------ --------- ------
3,663,775 7.3 $16.51 2,223,565 $12.62
========= === ====== ========= ======
As of March 31, 2006, there was $8,555 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 1.7 years.
The following table provides the pro forma net income and earnings per
share for the three months ended March 31, 2005 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.
Net income, as reported: $18,871
Add: stock-based employee compensation
expense included in reported net income, net of tax 58
Less: pro forma expense related to stock
options granted, net of tax effects (503)
-------
Pro forma $18,426
=======
Basic net income per share:
As reported $ 0.15
Pro forma 0.14
Diluted net income per share:
As reported $ 0.15
Pro forma 0.14
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.
10
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
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 three months ended March 31, 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.
During the three months ended March 31, 2006 and 2005, the Company
recorded stock-based compensation related to restricted stock awards
as amortization expense in the amounts of $105 and $96, respectively.
The following table summarizes non-vested restricted stock
transactions for the three months ended March 31, 2006:
Number Weighted
of Average
Shares Fair Value
------- ----------
Nonvested shares at beginning of period 43,998 $17.70
Granted 35,000 $29.46
Vested (17,110) $17.41
Forfeited -- $ --
------ ------
Nonvested shares at end of period 61,888 $24.43
====== ======
The total value of awards for which restrictions lapsed during the
three months ended March 31, 2006 was $488. As of March 31, 2006,
$1,476 of unrecognized compensation costs related to restricted stock
is expected to be recognized over a weighted-average period of 1.7
years. The aggregate intrinsic value of restricted stock as of March
31, 2006 was $1,722. 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.
11
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 5 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,
------------------
2006 2005
------- -------
Service cost $ 1,275 $ 1,260
Interest cost 2,566 2,483
Expected return on plan assets (2,375) (2,385)
Amortization of transition
obligation (asset) (53) (53)
Amortization of prior service cost 58 100
Amortization of actuarial loss 480 423
Capitalized costs (472) (429)
------- -------
Net periodic benefit cost $ 1,479 $ 1,399
======= =======
Other
Postretirement Benefits
-----------------------
Three Months Ended
March 31,
-----------------------
2006 2005
----- -----
Service cost $ 280 $ 330
Interest cost 418 483
Expected return on plan assets (320) (313)
Amortization of transition
obligation (asset) 203 200
Amortization of prior service cost (183) (15)
Amortization of actuarial loss 88 55
Amortization of regulatory asset 38 38
Capitalized costs (188) (173)
----- -----
Net periodic benefit cost $ 336 $ 605
===== =====
The Company contributed $2,652 in April 2006 to its defined benefit
pension plan and intends to contribute $3,748 during the balance of
2006. In addition, the Company expects to contribute approximately
$2,882 for the funding of its other postretirement benefits.
12
AQUA AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts) (continued)
(UNAUDITED)
Note 6 Recent Accounting Pronouncements
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 first quarter of 2006, the
adoption of SFAS 123R lowered net income by $500 and increased
operations and maintenance expense by $662. The after-tax impact of
adopting SFAS 123R is expected to approximate $3,000 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 4 for further information
and the required disclosures under SFAS 123R.
Note 7 Water and Wastewater Rates
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 March 31, 2006,
the Company has deferred $10,329 of expenses and recognized $6,868 of
revenue that is subject to refund based on the outcome of the final
commission order, which is not expected to be issued prior to
December 2006.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
AQUA AMERICA, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
Forward-looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report contain, in addition to
historical information, forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements address, among other things: our use of cash; projected capital
expenditures; liquidity; possible acquisitions and other growth ventures; the
completion of various construction projects; the projected 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 close to our operating companies' service territories. We are
the largest U.S.-based publicly-traded water utility based on number of people
served.
14
AQUA AMERICA, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Financial Condition
During the first quarter of 2006, we had $46,888 of capital expenditures,
acquired water and wastewater systems for $2,506, repaid $747 of customer
advances for construction and repaid debt and made sinking fund contributions
and other loan repayments of $3,718. 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 quarter 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 received on March 31,
2006 and the proceeds were used to repay short-term borrowings in April 2006. At
March 31, 2006, we had short-term lines of credit of $220,000, of which $52,850
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.
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)
Results of Operations
Analysis of First Quarter of 2006 Compared to First Quarter of 2005
Revenues for the quarter increased $3,961 or 3.5% primarily due to additional
revenues of $2,376 resulting from increased water and wastewater rates
implemented in various operating subsidiaries, $1,268 of additional revenues
from the infrastructure rehabilitation surcharge, and additional water and sewer
revenues of $1,644 associated with a larger customer base due to acquisitions,
offset partially by decreased water consumption compared to the first quarter of
2005.
Operations and maintenance expenses increased by $4,007 or 8.5% primarily due to
increased water production costs of $1,234, stock-based compensation expense of
$662, additional expenses associated with acquisitions of $1,077, a reduction in
the deferral of expenses related to the Texas rate case filing of $945 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. The stock-based compensation expense of $662 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 first 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 $2,147 or 14.6% reflecting the utility plant
placed in service since the first quarter of 2005, including the assets acquired
through system acquisitions.
Amortization decreased $114 or 9.3% 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 $70 or 0.9% due to additional state
and local taxes incurred in the first quarter of 2005.
Interest expense increased by $1,377 or 10.8% primarily due to additional
borrowings to finance capital projects and increased interest rates on
short-term borrowings, 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 $554
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.
16
AQUA AMERICA, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Gain on sale of other assets totaled $267 in the first quarter of 2006 and $481
in the first quarter of 2005. The change is due to the timing of sales of land.
Our effective income tax rate was 40.0% in the first quarter of 2006 and 38.8%
in the first 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 first quarter of 2006.
Net income for the quarter decreased by $2,307 or 12.2%, 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 13.3% reflecting the change
in net income and a 1.6% 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 and the employee stock and incentive plan.
Impact of Recent Accounting Pronouncements
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 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 first quarter of 2006, the adoption of SFAS
123R lowered net income by $500 and increased operations and maintenance expense
by $662. The after-tax impact of adopting SFAS 123R is expected to approximate
$3,000 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 4
to the consolidated financial statements for further information and the
required disclosures under SFAS 123R.
17
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 by 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 7 - Water and Wastewater
Rates in this Quarterly Report on Form 10-Q for the quarter ended
March 31, 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.
18
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, 2006:
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, 2006 1,765 $27.77 -- 548,278
February 1 - 28, 2006 463 $27.88 -- 548,278
March 1 - 31, 2006 21,868 $28.79 -- 548,278
------ ------ --- -------
Total 24,096 $28.69 -- 548,278
====== ====== === =======
(1) These amounts consist of shares we purchased from our employees who elected
to pay the exercise price of their stock options (and then hold shares of
the stock) 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
1,007,351 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.
19
AQUA AMERICA, INC. AND SUBSIDIARIES
Item 6. Exhibits
Exhibit No. Description
----------- -----------
10.1 2006 Salaries; Annual Incentive Compensation Earned in
2005 (filed as Exhibit 10.1 to the Company's
Current Report of Form 8-K filed on March 13,
2006, File No. 001-06659, and incorporated by
reference herein).
10.2 Acceleration of Payout of 2004 and 2005 Dividend
Equivalent Awards; Grants of 2006 Dividend
Equivalent Awards; Performance Criteria for
Acceleration of Payout of Dividend Equivalent
Awards (filed as Exhibit 10.2 to the Company's
Current Report of Form 8-K filed on March 13,
2006, File No. 001-06659, and incorporated by
reference herein).
10.3 Vesting of Restricted Stock Granted in 2004 and 2005;
Grants of Restricted Stock (filed as Exhibit 10.3
to the Company's Current Report of Form 8-K filed
on March 13, 2006, File No. 001-06659, and
incorporated by reference herein).
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.
20
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 8, 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
21
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 2006 Salaries; Annual Incentive Compensation Earned in 2005 (filed
as Exhibit 10.1 to the Company's Current Report of Form 8-K filed
on March 13, 2006, File No. 001-06659, and incorporated by
reference herein).
10.2 Acceleration of Payout of 2004 and 2005 Dividend Equivalent
Awards; Grants of 2006 Dividend Equivalent Awards; Performance
Criteria for Acceleration of Payout of Dividend Equivalent Awards
(filed as Exhibit 10.2 to the Company's Current Report of Form 8-K
filed on March 13, 2006, File No. 001-06659, and incorporated by
reference herein).
10.3 Vesting of Restricted Stock Granted in 2004 and 2005; Grants of
Restricted Stock (filed as Exhibit 10.3 to the Company's Current
Report of Form 8-K filed on March 13, 2006, File No. 001-06659,
and incorporated by reference herein).
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.
22