UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 Commission File
number 1-6659
AQUA AMERICA, INC. (formerly Philadelphia Suburban Corporation)
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1702594
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
--------------------------
Securities registered pursuant to Section
12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------------
Common stock, par value $.50 per share New York Stock Exchange, Inc.
Philadelphia Stock Exchange Inc.
Securities registered pursuant to Section
12(g) of the Act: None
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 filing requirements
for the past 90 days.
Yes x No
------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Section 12(b)-2 of the Securities Exchange Act of 1934). Yes X No .
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2003. $1,687,501,659
For purposes of determining this amount only, registrant has defined
affiliates as including (a) the executive officers named in Part I of
this 10-K report, (b) all directors of registrant, and (c) each
shareholder that has informed registrant by June 30, 2003, that it has
sole or shared voting power of 5% or more of the outstanding common
stock of registrant.
The number of shares outstanding of each of the registrant's classes of common
stock as of February 17, 2004.
92,674,480
Documents incorporated by reference
(1) Portions of registrant's 2003 Annual Report to Shareholders have
been incorporated by reference into Parts I and II of this Form 10-K
Report.
(2) Portions of the Proxy Statement, relative to the May 20, 2004
annual meeting of shareholders of registrant, to be filed within 120
days after the end of the fiscal year covered by this Form 10-K Report,
have been incorporated by reference into Part III of this Form 10-K
Report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
-------------------------------------------------
Certain statements in this Annual Report on Form 10-K ("10-K"), or
incorporated by reference in this 10-K, are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 made based upon, among other things, our current
assumptions, expectations and beliefs concerning future developments and their
potential effect on us. These forward-looking statements involve risks,
uncertainties and other factors, many of which are outside our control, that may
cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
these forward-looking statements. In some cases you can identify forward-looking
statements where statements are preceded by, followed by or include the words
"believes," "expects," "anticipates," "plans," "future," "potential" or the
negative of such terms or similar expressions. Forward-looking statements in
this 10-K, or incorporated by reference in this 10-K, include, but are not
limited to, statements regarding:
o projected capital expenditures and related funding requirements;
o developments and trends in the water and wastewater utility industries;
o dividend payment projections;
o opportunities for future acquisitions and success of pending
acquisitions;
o the capacity of our water supplies and facilities;
o the development of new services and technologies by us or our
competitors;
o the availability of qualified personnel;
o general economic conditions;
o acquisition-related costs and synergies; and
o the forward-looking statements contained under the heading
"Forward-Looking Statements" in the section entitled "Management's
Discussion and Analysis" from the portion of our 2003 Annual Report to
Shareholders incorporated by reference herein and made a part hereof.
Because forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including but
not limited to:
o changes in general economic, business and financial market conditions;
o changes in government regulations and policies, including environmental
and public utility regulations and policies;
o changes in environmental conditions, including those that result in
water use restrictions;
o abnormal weather conditions;
o changes in capital requirements;
o changes in our credit rating;
o our ability to integrate businesses, technologies or services which we
may acquire;
o our ability to manage the expansion of our business;
o the extent to which we are able to develop and market new and improved
services;
2
o the effect of the loss of major customers;
o our ability to retain the services of key personnel and to hire
qualified personnel as we expand;
o unanticipated capital requirements;
o increasing difficulties in obtaining insurance and increased cost of
insurance;
o cost overruns relating to improvements or the expansion of our
operations; and
o civil disturbance or terroristic threats or acts.
Given these uncertainties, you should not place undue reliance on these
forward-looking statements. You should read this 10-K and the documents that we
incorporate by reference in this 10-K completely and with the understanding that
our actual future results may be materially different from what we expect. These
forward-looking statements represent our estimates and assumptions only as of
the date of this 10-K. Except for our ongoing obligations to disclose material
information under the federal securities laws, we are not obligated to update
these forward-looking statements, even though our situation may change in the
future. We qualify all of our forward-looking statements by these cautionary
statements.
3
PART I
------
Item 1. Business
Name Change
On January 16, 2004, Philadelphia Suburban Corporation changed its
corporate name to Aqua America, Inc. to reflect our position as the largest
U.S.-based publicly-traded water utility. In addition, we have changed our
ticker symbol from PSC to WTR on the New York Stock Exchange and Philadelphia
Stock Exchange effective as of the opening of trading on January 20, 2004.
The Company
Aqua America, Inc. (referred to as "Aqua America", "we" or "us") is the
holding company for regulated utilities providing water or wastewater services
to approximately 2.5 million people in Pennsylvania, Ohio, Illinois, Texas, New
Jersey, Indiana, Virginia, Florida, North Carolina, Maine, Missouri, New York,
South Carolina and Kentucky. Our largest operating subsidiary, Aqua
Pennsylvania, Inc. - formerly Pennsylvania Suburban Water Company, accounts for
approximately 60% of our operating revenues and provides water or wastewater
services to approximately 1.3 million residents in the suburban areas north and
west of the City of Philadelphia and in 19 other counties in Pennsylvania. Our
other subsidiaries provide similar services in 13 other states. In addition, we
provide water and wastewater service through operating and maintenance contracts
with municipal authorities and other parties close to our operating companies'
service territories. We are the largest U.S.-based publicly-traded water utility
based on number of people served.
On July 31, 2003, we completed the acquisition of four operating water
and wastewater subsidiaries of AquaSource, Inc. (a subsidiary of DQE, Inc.),
including selected, integrated operating and maintenance contracts and related
assets, for approximately $190.7 million in cash, as adjusted pursuant to the
purchase agreement for the completion of a closing balance sheet and the
finalization of working capital ($195.5 million was paid at closing and refunds
were subsequently received totaling $4.8 million). There remains approximately
$12 million of the above purchase price in dispute, which is subject to an
arbitration process under the terms of the purchase agreement. Accordingly, the
final purchase price is expected to be within the range of $178.7 to $190.7
million. We expect the arbitration process to conclude by mid-year 2004. The
acquired operations of AquaSource serve over 130,000 water and wastewater
customer accounts in 11 states (including the Connecticut operations which we
sold in October 2003).
4
Item 1, Continued
The following table reports our operating revenues, in thousands of
dollars, by principal state for the year ended December 31, 2003:
Supplemental
Pro forma
Results Information
as for Full
Reported Fiscal Year
--------- ---------
Pennsylvania $ 240,628 $ 240,628
Ohio 36,584 36,584
Illinois 30,007 30,007
Texas 12,289 * 26,237
New Jersey 18,078 * 18,954
Maine 9,279 9,279
Indiana 6,292 * 15,524
Florida 4,282 * 10,584
North Carolina 3,769 * 4,777
Virginia 3,096 * 7,853
Other states 2,929 * 7,201
--------- ---------
$ 367,233 $ 407,628
========= =========
*Operating revenues of AquaSource have been included in our consolidated
financial statements beginning August 1, 2003.
Note: Supplemental Pro forma information is presented to illustrate the effects
of the AquaSource acquisition, which was completed on July 31, 2003, on the
operating revenues for 2003 as if the acquisition had occurred on January 1,
2003. The supplemental information is not necessarily representative of the
actual results that may have occurred for these periods or of the results that
may occur in the future. This information is based upon the historical operating
results of AquaSource for periods prior to the acquisition date of July 31, 2003
as provided to us by AquaSource, Inc. and DQE, Inc. management. In October 2003,
we sold the Connecticut operations that we acquired with the AquaSource
acquisition and the annual operating revenues of this unit approximated $4,000.
Supplemental Pro forma information does not reflect adjustment for this
transaction.
The following table indicates by customer class our operating revenues, in
thousands of dollars, for the year ended December 31, 2003:
Operating
Customer class Revenues Percent
-------------- --------- -------
Residential water $ 218,487 59%
Commercial water 61,343 17%
Fire protection 20,294 6%
Industrial water 17,675 5%
Other water 19,754 5%
Wastewater 17,874 5%
Operating contracts and other 11,806 3%
--------- -------
$ 367,233 100%
========= =======
Our customer base is diversified among residential, commercial, industrial,
other and wastewater customers. Residential customers make up the largest
component of our customer base, with these
5
Item 1, Continued
customers representing 59% of our total water revenues. Substantially all of our
water customers are metered, which allows us to measure and bill for our
customers' water consumption. Water consumption per customer is affected by
local weather conditions during the year, especially during the late spring and
early summer in our northern U.S. service territories. In general, during these
seasons, an extended period of dry weather increases consumption, while above
average rainfall decreases water consumption. Also, an increase in the average
temperature generally causes an increase in water consumption. On occasion,
abnormally dry weather in our service areas can result in governmental
authorities declaring drought warnings and water use restrictions in the
affected areas, which could reduce water consumption. See "Water Supplies and
Water Facilities" for a discussion of water use restrictions that may impact
water consumption during abnormally dry weather. The geographic diversity of our
customer base reduces our exposure to extreme or unusual weather conditions in
any one area of our service territory.
The growth in revenues over the past three years is a result of
increases in the customer base and in water rates. The majority of the increase
in customer base is due to customers added through acquisitions. During the
three year period of 2000 through 2002, our customer base increased at an annual
compound rate of 9.9%. The customer growth rate in 2003 was 23.8%, and reflects
the additional customers obtained in the AquaSource acquisition on July 31,
2003.
Available Information
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document we file at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. You may
also obtain our SEC filings from the SEC's website at http://www.sec.gov.
Our internet website address is http://www.aquaamerica.com. We make
available free of charge through our internet website's Investor Relations page
all of our filings with the SEC, including our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and other
information. These reports and information are available as soon as reasonably
practicable after such material is electronically filed or furnished to the SEC.
Our Board of Directors has various committees including an audit
committee, an executive compensation and employee benefits committee and a
corporate governance committee. Each of the three committees named above has a
formal charter. We also have Corporate Governance Guidelines and a Code of
Ethical Business Conduct. Copies of these charters, guidelines and codes, and
any waivers or amendments to such codes which are applicable to our executive
officers, senior financial officers or directors, can be obtained free of charge
from our website, www.aquaamerica.com.
In addition, you may request a copy of the foregoing filings (excluding
exhibits), charters, guidelines and codes, and any waivers or amendments to such
codes which are applicable to our executive officers, senior financial officers
or directors, at no cost by writing or telephoning us at the following address
or telephone number:
Shareholder Relations Department
Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Telephone: 610-527-8000
6
Item 1, Continued
Acquisitions and Water Sale Agreements
With more than 50,000 community water systems in the U.S. (84% of which
serve less than 3,300 customers), the water industry is the most fragmented of
the major utility industries (telephone, natural gas, electric, water and
wastewater). The nation's water systems range in size from large
municipally-owned systems, such as the New York City water system that serves
approximately 9 million people, to small systems, where a few customers share a
common well. In the states where we operate, we believe there are over 22,000
public water systems of widely varying size, with the majority of the population
being served by government-owned water systems.
Although not as fragmented as the water industry, the wastewater
industry in the U.S. also presents opportunities for consolidation. According to
the U.S Environmental Protection Agency's ("EPA") most recent survey of
publicly-owned wastewater treatment facilities in 2000, there are approximately
16,000 such facilities in the nation serving approximately 72% of the U.S.
population. The remaining population represents individual homeowners with their
own treatment facilities; for example, community on-lot disposal systems and
septic tank systems. The vast majority of wastewater facilities are
government-owned rather than privately-owned. The EPA survey also indicated that
there are approximately 6,800 wastewater facilities in operation or planned in
the 14 states where we operate.
Because of the fragmented nature of the water and wastewater utility
industries, we believe that there are many potential water and wastewater system
acquisition candidates throughout the United States. We believe the factors
driving consolidation of these systems are:
o the benefits of economies of scale;
o increasingly stringent environmental regulations;
o the need for capital investment; and
o the need for technological and managerial expertise.
We are actively exploring other opportunities to expand our utility
operations through acquisitions or otherwise. As of December 31, 2003, exclusive
of the Consumers Water Company merger in 1999 and the AquaSource acquisition in
2003, we had completed 97 acquisitions or other growth ventures during the past
five years.
We believe that acquisitions will continue to be an important source of
growth for us. We intend to continue to pursue acquisitions of municipally-owned
and investor-owned water and wastewater systems of all sizes that provide
services in areas adjacent to our existing service territories or in new service
areas. We engage in continuing activities with respect to potential
acquisitions, including calling on perspective sellers, performing analyses and
investigations of acquisition candidates, making preliminary acquisition
proposals and negotiating the terms of potential acquisitions.
7
Item 1, Continued
Water Supplies and Water Facilities
Our water utility operations obtain their water supplies from surface
water sources such as reservoirs, lakes, ponds, rivers and streams, in addition
to obtaining water from wells and purchasing water from other water suppliers.
Less than 10% of our water sales are purchased from other suppliers. It is our
policy to obtain and maintain the permits necessary to obtain the water we
distribute. Our supplies are sufficient for anticipated daily demand and normal
peak demand under normal weather conditions. Our supplies by principal service
area are as follows:
o Suburban Philadelphia - The principal supply of water is surface water from
eight rural streams, two rivers (Schuylkill River and Delaware River), and
the Upper Merion Reservoir, a former quarry now impounding groundwater.
Wells and interconnections with adjacent municipal authorities supplement
these surface supplies.
o Pennsylvania (other than suburban Philadelphia) - The Roaring Creek
Division draws its water from a man-made lake within a 12,000 acre
watershed and two wells also located in the watershed. The Susquehanna
Division obtains its water supply from wells. The Shenango Division draws
its water from the Shenango River. The Waymart and Whitehaven Divisions'
water supply is obtained from wells.
o Ohio - Water supply is obtained for customers in Lake County from Lake
Erie. Customers in Mahoning County obtain their water from man-made lakes
and the Ashtabula division is supplied by purchased water. Water supply is
obtained for customers in Stark and Summit Counties from wells. In Trumbull
County, customers are served through an interconnection from our
Pennsylvania division.
o Illinois - Water supply is obtained for customers in Kankakee County from
the Kankakee River and satellite wells, while customers in Vermilion County
are supplied from Lake Vermilion. In Will, Lee, Boone, Lake and Knox
counties, our customers are served from wells.
o Texas - Water supply in 272 non-contiguous water systems is obtained
principally from wells, supplemented in some cases by purchased water from
adjacent surface water systems.
o New Jersey - Water supply in our three non-contiguous divisions is obtained
principally from wells and is supplemented with purchased water in two
divisions.
o Indiana - Water supply in three water systems is obtained principally from
wells.
o Virginia - Water supply in 124 non-contiguous divisions is obtained
from
wells, one division's supply is from surface water, and one division
supplements its supply with purchased water from a nearby water system.
o Florida - Water supply in 46 water systems is obtained principally from
wells, supplemented in some cases by purchased water from adjacent surface
water systems.
o North Carolina - Water supply in 183 non-contiguous divisions is obtained
principally from wells, with six divisions purchasing water from
neighboring municipalities.
o Maine - Eleven non-contiguous water systems obtain their water supply as
follows: five systems use groundwater, five systems use surface water and
one system purchases water from a neighboring municipal district.
We believe that the capacities of our sources of supply, and our water
treatment, pumping and distribution facilities are generally sufficient to meet
the present requirements of our customers. We make system improvements and
additions to capacity in response to changing regulatory standards, changing
patterns of consumption and increased demand from a growing number of customers.
The various state public utility commissions have generally recognized the
operating and capital costs associated with these improvements in setting water
rates.
8
Item 1, Continued
On occasion, drought warnings and water use restrictions are issued by
governmental authorities for portions of our service territories in response to
extended periods of dry weather conditions. The timing and duration of the
warnings and restrictions can have an impact on our water revenues and net
income. In general, water consumption in the summer months is affected by
drought warnings and restrictions to a higher degree because nonessential and
recreational use of water is at its highest during the summer months. At other
times of the year, warnings and restrictions generally have less of an effect on
water consumption.
In November 2001, a drought warning was declared in nine counties in
Pennsylvania, including one of the five counties we serve in southeastern
Pennsylvania. A drought warning calls for a 10 to 15 percent voluntary reduction
of water use, particularly non-essential uses of water. In February 2002, a
drought emergency was declared in 24 counties in Pennsylvania, including all
five of the counties we serve in southeastern Pennsylvania. A drought emergency
imposes a ban on nonessential water use. In June and July 2002, drought
restrictions were relaxed in three of the five counties we serve in southeastern
Pennsylvania where approximately 275,000 of our customers are located, moving
from drought emergency mandatory restrictions to a drought warning voluntary
restrictions. However, by early September 2002, the Commonwealth of Pennsylvania
had reinstated the drought emergency in the three counties where restrictions
had been relaxed because of hot, dry weather in August. In November and December
2002, the Commonwealth of Pennsylvania removed the drought restrictions in the
counties we serve in Pennsylvania. Water use restrictions were also imposed and
relaxed at various times during 2002 in our service territories in New Jersey.
Economic Regulation
Most of our water and wastewater utility operations are subject to
regulation by their respective state regulatory commissions, which have broad
administrative power and authority to regulate rates and charges, determine
franchise areas and conditions of service and authorize the issuance of
securities. The regulatory commissions also establish uniform systems of
accounts and approve the terms of contracts with affiliates and customers,
business combinations with other utility systems, loans and the sales of
property. Some of our operations are subject to rate regulation by county or
city government. The profitability of our utility operations is influenced a
great extent by the timeliness and adequacy of rate allowances in the various
states in which we operate. Accordingly, we maintain a rate case management
capability to provide that the tariffs of our utility operations reflect, to the
extent practicable, the timely recovery of increases in costs of operations,
capital, taxes, energy, materials and compliance with environmental regulations.
In the states in which we operate, we are subject to regulation by the following
state regulatory commissions:
State Regulatory Commission
----- ---------------------
Pennsylvania Pennsylvania Public Utility Commission
Ohio The Public Utilities Commission of Ohio
Illinois Illinois Commerce Commission
Texas Texas Commission on Environmental Quality
New Jersey New Jersey Board of Public Utilities
Indiana Indiana Utility Regulatory Commission
Virginia Virginia State Corporation Commission
Florida Florida Public Service Commission
North Carolina North Carolina Utilities Commission
Maine Maine Public Utilities Commission
Missouri Missouri Public Service Commission
New York New York Public Service Commission
South Carolina South Carolina Public Service Commission
Kentucky Kentucky Public Service Commission
9
Item 1, Continued
Four states in which we operate permit water utilities, and in some
states wastewater utilities, to add a surcharge to their water or wastewater
bills to offset the additional depreciation and capital costs associated with
certain capital expenditures related to replacing and rehabilitating
infrastructure systems. Prior to these mechanisms being approved, water and
wastewater utilities absorbed all of the depreciation and capital costs of these
projects between base rate increases without the benefit of additional revenues.
The gap between the time that a capital project is completed and the recovery of
its costs in rates is known as regulatory lag. The infrastructure rehabilitation
surcharge mechanism is intended to substantially reduce regulatory lag which
often acted as a disincentive to water and wastewater utilities to rehabilitate
their infrastructure. In addition, our subsidiaries in certain states use a
surcharge or credit on their bill to reflect certain changes in costs until such
time as the costs are incorporated in base rates.
Currently, Pennsylvania, Illinois, Ohio and Indiana allow for the use
of infrastructure rehabilitation surcharges. These mechanisms typically adjust
periodically based on additional qualified capital expenditures completed or
anticipated in a future period. The infrastructure rehabilitation surcharge is
capped as a percentage of base rates, generally 5% of base rates, and is reset
to zero when new base rates that reflect the costs of those additions become
effective or when a utility's earnings exceed a regulatory benchmark.
Infrastructure rehabilitation surcharges provided revenues of $8,147,000 in
2003, $5,518,000 in 2002 and $6,672,000 in 2001. We are currently working to
establish similar mechanisms in the other states in which we operate.
In general, we believe that Aqua America, Inc. and its subsidiaries
have valid authority, free from unduly burdensome restrictions, to enable us to
carry on our business as presently conducted in the franchised or contracted
areas we now serve. The rights to provide water or wastewater service to a
particular franchised service territory are generally non-exclusive, although
the applicable regulatory commissions usually allow only one utility to provide
service to a given area. In some instances, another water utility provides
service to a separate area within the same political subdivision served by one
of our subsidiaries. In the states where our subsidiaries operate, it is
possible that portions of our subsidiaries' operations could be acquired by
municipal governments by one or more of the following methods:
o eminent domain;
o the right of purchase given or reserved by a municipality or political
subdivision when the original franchise was granted; and
o the right of purchase given or reserved under the law of the state in which
the subsidiary was incorporated or from which it received its permit.
The price to be paid upon such an acquisition by the municipal
government is usually determined in accordance with applicable law governing the
taking of lands and other property under eminent domain. In other instances, the
price may be negotiated, fixed by appraisers selected by the parties or computed
in accordance with a formula prescribed in the law of the state or in the
particular franchise or charter.
In December 2002, as a result of the settlement of a condemnation
action, our Ohio operating subsidiary sold its water utility assets in the
unincorporated areas of Ashtabula County and the area within the Village of
Geneva on the Lake to Ashtabula County, Ohio for approximately $12,118,000,
which was in excess of the book value for these assets. The sale resulted in the
recognition in the fourth quarter of 2002 of a gain on the sale of these assets,
net of expenses, of $5,676,000 or an after-tax gain of $3,690,000 (or $.04 per
share). We continue to operate this water system for Ashtabula County under a
10
Item 1, Continued
multi-year operating contract, that was recently renewed, that began upon the
closing of the sale and is expected to provide us with over $300,000 in
operating revenues annually. The water utility assets sold represent less than
1% of our total assets, and the total number of customers included in the water
system sold represents less than 1% of our total customer base. The interest
savings associated with paying off debt with the sale's proceeds and the
operating income generated by the operating contract will offset the loss of
this water system's normal contribution to income.
As part of the Ashtabula County condemnation, the adjacent City of
Geneva in Ashtabula County, Ohio, passed an ordinance seeking authorization to
condemn the assets of our Ohio operating subsidiary that are located in Geneva.
The issue was submitted to a referendum in 2000, whereby voters affirmed the
ordinance by a margin of 16 votes. The City engaged a consulting firm to assist
it in valuing the assets that may be condemned. In December 2002, the City of
Geneva filed a condemnation action. The number of customers included in the
Geneva system represents approximately 0.3% of our total customer base.
The City of Fort Wayne, Indiana has authorized the acquisition, by
eminent domain or otherwise, of a portion of the utility assets of one of the
operating subsidiaries that we acquired in connection with the AquaSource
acquisition in July 2003. The portion of the system under consideration
represents approximately 1% of our total customer base. While we continue to
discuss this matter with officials from the City of Fort Wayne, we continue to
protect our interests in this proceeding.
We believe that our operating subsidiaries will be entitled to fair
market value for any assets that are condemned, and we believe the fair market
value will be in excess of the book value for such assets and may approximate
the multiple to book value of other recent industry business combinations.
Despite these events, our strategy continues to be to acquire additional water
and wastewater systems, maintain our existing systems, and actively oppose
efforts by municipal governments to acquire any of our operations, particularly
for less than the fair market value of our operations or where the municipal
government seeks to acquire more than it is entitled to under the applicable law
or agreement.
Environmental Regulation
Provision of water and wastewater services is subject to regulation
under the federal Safe Drinking Water Act, the Clean Water Act and related state
laws, and under federal and state regulations issued under these laws. These
laws and regulations establish criteria and standards for drinking water and for
wastewater discharges. In addition, we are subject to federal and state laws and
other regulations relating to solid waste disposal, dam safety and other
operations. Capital expenditures and operating costs required as a result of
water quality standards and environmental requirements have been traditionally
recognized by state public utility commissions as appropriate for inclusion in
establishing rates.
There are some environmental compliance issues at various water and
wastewater facilities associated with the AquaSource acquisition that was
completed on July 31, 2003. We estimate that the capital expenditures required
to address these AquaSource compliance issues will be approximately $65,000,000
over the next five years. As a comparison, during the next five years, our
future utility construction is estimated to require aggregate expenditures of
$779,000,000 (representing all of our on-going construction programs). Various
operating subsidiaries that were acquired in the AquaSource acquisition are
parties to agreements with regulatory agencies regarding environmental
compliance. These agreements are intended to provide the regulators with
assurance that problems will be addressed, and they generally provide some
protection to us from fines, penalties and other actions while corrective
measures are being implemented. For the most part, the agreements were
negotiated by AquaSource
11
Item 1, Continued
prior to the acquisition being completed, and we have willingly assumed the
obligations under these agreements. In several cases, we have re-negotiated a
compliance agreement to address conditions that developed prior to completion of
the AquaSource acquisition. We are actively working directly with state
environmental officials to implement or amend these agreements as necessary. The
regulatory agencies may impose some fines and penalties, with respect to
existing compliance issues at the operations acquired from AquaSource, which are
not expected to be material. To the extent such fines and penalties arise from
incidents that occurred prior to our purchase of the AquaSource operations, we
may make an indemnity claim for such amounts against AquaSource, Inc. and its
parent company DQE, Inc. under the purchase agreement.
Safe Drinking Water Act - The Safe Drinking Water Act establishes criteria and
procedures for the U.S. Environmental Protection Agency to develop national
quality standards for drinking water. Regulations issued pursuant to the Safe
Drinking Water Act and its amendments set standards on the amount of certain
microbial and chemical contaminants and radionuclides allowable in drinking
water. Current requirements under the Safe Drinking Water Act are not expected
to have a material impact on our operations or financial condition as we have
already made investments to meet existing water quality standards. We may, in
the future, be required to change our method of treating drinking water at
certain sources of supply if additional regulations become effective.
EPA's issuance of a rule regulating radon in tap water has been
postponed repeatedly since 1991. Limits for radon would probably become
effective 4 or 5 years after issuance of any such rule. We anticipate this rule
may establish a radon level that would require treatment at a few of our wells.
If the states in which we operate elect not to implement general radon reduction
programs (Multi-Media Mitigation), then a more stringent limit for radon may
apply and a larger number of wells would be affected. We anticipate that states
will adopt Multi-Media Mitigation programs. The capital costs to comply with the
anticipated limit are expected to total approximately $2,000,000 or less than 2%
of our typical annual capital expenditures.
The Safe Drinking Water Act provides for the regulation of
radionuclides other than radon, such as radium and uranium. In December 2000,
the EPA issued a final rule regulating certain radionuclides other than radon.
The rule became effective in December 2003, and requires additional testing. It
may require additional treatment at some of our groundwater facilities. The cost
of compliance is expected to be less than $1,000,000. The impact of the new
rulemaking is not expected to have a material impact on our results from
operations or financial condition.
In order to eliminate or inactivate microbial organisms, the Surface
Water Treatment Rule and the Interim Enhanced Surface Water Treatment Rule were
issued by the EPA to improve disinfection or filtration of potable water. The
EPA developed the Stage 1 Disinfectants-Disinfection By-Products Rule to reduce
consumers' exposure to disinfectants and by-products of the disinfection
process. Beginning January 1, 2004, groundwater and smaller surface water
systems had to comply with the Stage 1 Disinfectants-Disinfection By-Products
Rule. In the future, we may be required to install filtration or other treatment
for one surface water supply. The cost of this treatment, should it be required,
is not expected to exceed $5,000,000. Certain small groundwater systems could be
reclassified as being influenced by surface water. This may require additional
treatment or the development of replacement sources of supply over time, the
cost for which is not expected to exceed $3,000,000.
In January 2001, the EPA issued a final rule for arsenic that lowers
the limit on arsenic in potable water to a more stringent level effective in
2006, with a provision for further time extensions for small systems. Currently,
several small well systems slightly exceed the new arsenic levels and may
require additional treatment. The cost of compliance with this new rulemaking is
not expected to exceed $1,000,000.
12
Item 1, Continued
In April 2000, the gasoline additive Methyl tert-Butyl Ether ("MtBE")
was discovered in a production well in one of our operating subsidiaries at
levels exceeding the state drinking water standard. The well was immediately
taken out of service and alternate water supplies were obtained. We have
commenced legal action against the company we believed to be responsible for the
contamination and have reached a settlement in principle subject to certain
conditions being satisfied, pursuant to which we expect to receive an amount
sufficient to cover our estimated costs to purchase alternative water on an
interim basis and to develop a permanent replacement well.
Clean Water Act - The Clean Water Act regulates discharges from drinking water
and wastewater treatment facilities into lakes, rivers, streams, and
groundwater. We operate approximately 200 facilities with such discharges in
twelve states. It is our policy to obtain and maintain all required permits and
approvals for the discharge from these water and wastewater facilities, and to
comply with all conditions of those permits and other regulatory requirements. A
program is in place to monitor facilities for compliance with permitting,
monitoring and reporting for wastewater discharges. From time to time,
violations may occur which may result in fines. As described above, various
operating subsidiaries that were acquired in the AquaSource acquisition had
entered into agreements, prior to the acquisition being completed, to address
compliance issues. Based on AquaSource's previous experience with these
agreements, penalties or fines that may be imposed under these agreements are
not expected to have a material impact on our results of operations or financial
condition.
Solid Waste Disposal - The handling and disposal of residuals and solid waste
generated from water and wastewater treatment facilities is governed by federal
and state laws and regulations. A program is in place to monitor our facilities
for compliance with regulatory requirements, and we do not currently anticipate
any major expenditures in connection with the handling and disposal of waste
material from our water and wastewater operations.
Dam Safety - Our subsidiaries own seventeen major dams that are subject to the
requirements of the Federal and state regulations related to dam safety. All
major dams undergo an annual engineering inspection. We believe that all
seventeen dams are structurally sound and well-maintained.
In Pennsylvania, the Department of Environmental Protection has
recently adopted the use of a new formula for determining the magnitude of the
Probable Maximum Flood. We are studying our dams to determine what improvements
may be needed to our dams as a result of this new calculation. As a result of
the initial results of the studies, we have identified three dams that could
require capital improvements of approximately $7 million in aggregate. We
believe that these capital expenditures that could be required by the new
formulas would be recoverable in our rates. Similarly, in Ohio, the Department
of Natural Resources has adopted the use of the new formula. We have studied our
dams in Ohio and it has been determined that some of the dams will require
improvements. Based on the preliminary results, we believe that capital
expenditures of approximately $4.2 million in aggregate will be required on
three dams in Ohio over the next four years.
Employee Relations
As of December 31, 2003, we employed a total of 1,260 full-time
employees. Our subsidiaries are parties to 10 agreements with labor unions
covering 445 employees that expire at various times between May 2004 and
December 2007. Based on the number of employees covered by each agreement, a
substantial portion of the agreements expire in 2006.
13
Item 1, Continued
Risk Factors
Our business requires significant capital expenditures and the rates we charge
our customers are subject to regulation. If we are unable to obtain government
approval of our requests for rate increases, or if approved rate increases are
untimely or inadequate to cover our investments, our profitability may suffer.
The water utility business is capital intensive. On an annual basis, we
spend significant sums for additions to or replacement of property, plant and
equipment. Our ability to maintain and meet our financial objectives is
dependent upon the rates we charge our customers. These rates are subject to
approval by the public utility commissions or similar regulatory bodies in the
states in which we operate. We file rate increase requests, from time to time,
to recover our investments in utility plant and expenses. Once a rate increase
petition is filed with a public utility commission, the ensuing administrative
and hearing process may be lengthy and costly. The timing of our rate increase
requests are therefore partially dependent upon the estimated cost of the
administrative process in relation to the investments and expenses that we hope
to recover through the rate increase to the extent approved. We can provide no
assurances that any future rate increase request will be approved by the
appropriate state public utility commission; and, if approved, we cannot
guarantee that these rate increases will be granted in a timely or sufficient
manner to cover the investments and expenses for which we initially sought the
rate increase.
Our operating costs could be significantly increased in order to comply with new
or stricter regulatory standards imposed by federal and state environmental
agencies.
Our water and wastewater services are governed by various federal and
state environmental protection and health and safety laws and regulations,
including the federal Safe Drinking Water Act, the Clean Water Act and similar
state laws, and state and federal regulations issued under these laws by the
United States Environmental Protection Agency and state environmental regulatory
agencies. These laws and regulations establish, among other things, criteria and
standards for drinking water and for discharges into the waters of the United
States and states. Pursuant to these laws, we are required to obtain various
environmental permits from environmental regulatory agencies for our operations.
We cannot assure you that we have been or will be at all times in total
compliance with these laws, regulations and permits. If we violate or fail to
comply with these laws, regulations or permits, we could be fined or otherwise
sanctioned by regulators. Environmental laws and regulations are complex and
change frequently. These laws, and the enforcement thereof, have tended to
become more stringent over time. While we have budgeted for future capital and
operating expenditures to maintain compliance with these laws and our permits,
it is possible that new or stricter standards could be imposed that will raise
our operating costs. Although these costs may be recovered in the form of higher
rates, there can be no assurance that the various state public utility
commissions or similar regulatory bodies that govern our business would approve
rate increases to enable us to recover such costs. In summary, we cannot assure
you that our costs of complying with, or discharging liability under, current
and future environmental and health and safety laws will not adversely affect
our business, results of operations or financial condition.
Our business is subject to seasonal fluctuations, which could affect demand for
our water service and our revenues.
Demand for our water during the warmer months is generally greater than
during cooler months due primarily to additional requirements for water in
connection with irrigation systems, swimming pools, cooling systems and other
outside water use. Throughout the year, and particularly during typically warmer
months, demand will vary with temperature and rainfall levels. In the event that
temperatures during the typically warmer months are cooler than normal, or if
there is more rainfall than normal, the demand for our water may decrease and
adversely affect our revenues.
14
Item 1, Continued
Drought conditions may impact our ability to serve our current and future
customers, and may impact our customers' use of our water, which may adversely
affect our financial condition and results of operations.
We depend on an adequate water supply to meet the present and future
demands of our customers. Drought conditions could interfere with our sources of
water supply and could adversely affect our ability to supply water in
sufficient quantities to our existing and future customers. An interruption in
our water supply could have a material adverse effect on our financial condition
and results of operations. Moreover, governmental restrictions on water usage
during drought conditions may result in a decreased demand for our water, even
if our water reserves are sufficient to serve our customers during these drought
conditions, which may adversely affect our revenues and earnings.
An important element of our growth strategy is the acquisition of water and
wastewater systems. Any future acquisitions we decide to undertake may involve
risks.
An important element of our growth strategy is the acquisition and
integration of water and wastewater systems in order to broaden our current, and
move into new, service areas. We will not be able to acquire other businesses if
we cannot identify suitable acquisition opportunities or reach mutually
agreeable terms with acquisition candidates. It is our intent, when practical,
to integrate any businesses we acquire with our existing operations. The
negotiation of potential acquisitions as well as the integration of acquired
businesses could require us to incur significant costs and cause diversion of
our management's time and resources. Future acquisitions by us could result in:
o dilutive issuances of our equity securities;
o incurrence of debt and contingent liabilities;
o fluctuations in quarterly results; and
o other acquisition-related expenses.
Some or all of these items could have a material adverse effect on our
business and our ability to finance our business. The businesses we acquire in
the future may not achieve sales and profitability that justify our investment
and any difficulties we encounter in the integration process could interfere
with our operations and reduce our operating margins. In addition, as
consolidation becomes more prevalent in the water and wastewater industries, the
prices for suitable acquisition candidates may increase to unacceptable levels
and limit our ability to grow through acquisitions.
Contamination to our water supply may result in disruption in our services and
litigation which could adversely affect our business, operating results and
financial condition.
Our water supplies are subject to contamination, including
contamination from the development of naturally-occurring compounds, chemicals
in groundwater systems, pollution resulting from man-made sources and possible
terrorist attacks. In the event that our water supply is contaminated, we may
have to interrupt the use of that water supply until we are able to substitute
the flow of water from an uncontaminated water source. In addition, we may incur
significant costs in order to treat the contaminated source through expansion of
our current treatment facilities, or development of new treatment methods. If we
are unable to substitute water supply from an uncontaminated water source, or to
adequately treat the contaminated water source in a cost-effective manner, there
may be an adverse effect on our revenues, operating results and financial
condition. The costs we incur to decontaminate a water source or an underground
water system could be significant and could adversely affect our business,
15
Item 1, Continued
operating results and financial condition and may be recoverable in rates. We
could also be held liable for consequences arising out of human exposure to
hazardous substances in our water supplies or other environmental damage. For
example, private plaintiffs have the right to bring personal injury or other
toxic tort claims arising from the presence of hazardous substances in our
drinking water supplies. Our insurance policies may not be sufficient to cover
the costs of these claims.
In addition to the potential pollution of our water supply as described
above, in the wake of the September 11, 2001 terrorist attacks and the ensuing
threats to the nation's health and security, we have taken steps to increase
security measures at our facilities and heighten employee awareness of threats
to our water supply. We have also tightened our security measures regarding the
delivery and handling of certain chemicals used in our business. We have and
will continue to bear increased costs for security precautions to protect our
facilities, operations and supplies. These costs may be significant. We are
currently not aware of any specific threats to our facilities, operations or
supplies; however, it is possible that we would not be in a position to control
the outcome of terrorist events should they occur.
We depend significantly on the services of the members of our senior management
team, and the departure of any of those persons could cause our operating
results to suffer.
Our success depends significantly on the continued individual and
collective contributions of our senior management team. The loss of the services
of any member of our senior management or the inability to hire and retain
experienced management personnel could harm our operating results.
16
Item 2. Properties.
Our properties consist of transmission and distribution mains and
conduits, water and wastewater treatment plants, pumping facilities, wells,
tanks, meters, supply lines, dams, reservoirs, buildings, vehicles, land,
easements, rights and other facilities and equipment used for the operation of
our systems, including the collection, treatment, storage and distribution of
water. Substantially all of our properties are owned by our subsidiaries and are
subject to liens of mortgage or indentures. These liens secure bonds, notes and
other evidences of long-term indebtedness of our subsidiaries. For certain
properties that we acquired through the exercise of the power of eminent domain
and certain other properties we purchased, we hold title for water supply
purposes only. We own, operate and maintain several thousand miles of
transmission and distribution mains, 20 water treatment plants and many
wastewater treatment plants. Some properties are leased under long-term leases.
The following table indicates our net utility plant, in thousands of dollars, as
of December 31, 2003 in the principal states where we operate:
Net Property,
Plant and
Equipment
----------
Pennsylvania $1,138,338
Ohio 162,489
Illinois 154,752
Texas 136,407
New Jersey 97,715
Indiana 76,052
Maine 38,518
Florida 30,948
North Carolina 21,551
Virginia 20,423
Missouri 3,016
Inter-company eliminations and other states (55,918)
----------
$1,824,291
==========
We believe that our properties are generally maintained in good
condition and in accordance with current standards of good waterworks industry
practice. We believe that the facilities used in the operation of our business
are in good condition in terms of suitability, adequacy and utilization.
Our corporate offices are leased from Aqua Pennsylvania, Inc. and
located in Bryn Mawr, Pennsylvania.
Item 3. Legal Proceedings
There are various legal proceedings in which we are involved. Although
the results of legal proceedings cannot be predicted with certainty, there are
no pending legal proceedings to which we or any of our subsidiaries is a party
or to which any of our properties is the subject that 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
No matters were submitted to a vote of security holders during the
fourth quarter of 2003.
17
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
Our common stock is traded on the New York Stock Exchange and the
Philadelphia Stock Exchange under the ticker symbol WTR. As of February 17,
2004, there were approximately 22,973 holders of record of our common stock.
The following table shows the high and low intraday sales prices for
our common stock as reported on the New York Stock Exchange composite
transactions reporting system and the cash dividends paid per share for the
periods indicated (all per share data as presented has been adjusted for the
2003 5-for-4 common stock split effected in the form of a stock distribution):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------
2003
- ---------------------------------------------------------------------------------------------------------------
Dividend paid per common share $ 0.112 $ 0.112 $ 0.112 $ 0.120 $ 0.456
Price range of common stock
- high 17.83 19.85 20.07 22.40 22.40
- low 15.77 17.22 18.28 18.71 15.77
2002
- ---------------------------------------------------------------------------------------------------------------
Dividend paid per common share $ 0.106 $ 0.106 $ 0.106 $ 0.112 $ 0.430
Price range of common stock
- high 19.69 20.00 16.24 17.50 20.00
- low 16.88 14.79 12.82 15.44 12.82
We have paid common dividends consecutively for 59 years. Effective
December 1, 2003, our Board of Directors authorized an increase of 7.1% in the
dividend rate over the amount Aqua America, Inc. paid in the previous quarter.
As a result of this authorization, beginning with the dividend payment in
December 2003, the annualized dividend rate increased to $0.48 per share. We
presently intend to pay quarterly cash dividends in the future, on March 1, June
1, September 1 and December 1, subject to our earnings and financial condition,
regulatory requirements and such other factors as our Board of Directors may
deem relevant. During the past five years, our common dividends paid have
averaged 59.4% of net income.
In August 2003, our Board of Directors declared a 5-for-4 common stock
split effected in the form of a 25% stock distribution for all common shares
outstanding, to shareholders of record on November 14, 2003. The new shares were
distributed on December 1, 2003. Aqua America's par value of $0.50 per share
remained unchanged and $9,244,000 was transferred from Capital in Excess of Par
Value to Common Stock to record the split. All share and per share data for all
periods presented have been restated to give effect to the stock split.
Item 6. Selected Financial Data
The information appearing in the section captioned "Summary of Selected
Financial Data" from the portions of our 2003 Annual Report to Shareholders
filed as Exhibit 13.1 to this Form 10-K Report is incorporated by reference
herein.
Item 7. Management's Discussion and Analysis of Financial Condition and \
Results of Operations
The information appearing in the section captioned "Management's
Discussion and Analysis" from the portions of our 2003 Annual Report to
Shareholders filed as Exhibit 13.1 to this Form 10-K Report is incorporated by
reference herein.
18
Item 7A. 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. The exposure to changes
in interest rates is a result of financings through the issuance of fixed-rate,
long-term debt. Such exposure is typically related to financings between utility
rate increases, since generally our rate increases include a revenue level to
allow recovery of our current cost of capital. Interest rate risk is managed
through the use of a combination of long-term debt, which is at fixed interest
rates and short-term debt, which is at floating interest rates. As of December
31, 2003, the debt maturities by period, in thousands of dollars, and the
weighted average interest rate for fixed-rate, long-term debt are as follows:
Fair
2004 2005 2006 2007 2008 Thereafter Total Value
- --------------------------------------------------------------------------------------------------------------------
Long-term
debt (fixed rate) $39,386 $40,418 $16,088 $14,395 $19,438 $606,327 $736,052 $781,502
Weighted average
interest rate 6.39% 7.26% 7.25% 6.94% 7.38% 6.02% 6.19%
From time to time, we make investments in marketable equity securities.
As a result, we are exposed to the risk of changes in equity prices for the
"available-for-sale" marketable equity securities. As of December 31, 2003, our
carrying value of marketable equity securities was $1,019,000, which reflects
the market value of such securities and is in excess of our original cost. The
market risks that we are exposed to are consistent with the risks that we were
exposed to in the prior year.
Item 8. Financial Statements and Supplementary Data
Information appearing under the captions "Consolidated Statements of
Income and Comprehensive Income", "Consolidated Balance Sheets", "Consolidated
Cash Flow Statements" "Consolidated Statements of Capitalization" and "Notes to
Consolidated Financial Statements" from the portions of our 2003 Annual Report
to Shareholders filed as Exhibit 13.1 to this Form 10-K Report is incorporated
by reference herein. Also, the information appearing in the section captioned
"Reports on Financial Statements" from the portions of our 2003 Annual Report to
Shareholders filed as Exhibit 13.1 to this Form 10-K Report is incorporated by
reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report are
functioning effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. A controls system, no matter how
well designed and operated, cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.
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.
19
PART III
Item 10. Directors and Executive Officers of the Registrant
We make available free of charge within the Investor Relations /
Corporate Governance section of our internet website, at www.aquaamerica.com,
and in print to any shareholder who requests, our Corporate Governance
Guidelines, the Charters of each Committee of our Board of Directors, and our
Code of Ethical Business Conduct. Requests for copies may be directed to
Shareholder Relations Department, Aqua America, Inc., 762 W. Lancaster Avenue,
Bryn Mawr, PA 19010-3489. Amendments to the Code, and any grant of waiver from a
provision of the Code requiring disclosure under applicable SEC rules will be
disclosed on the Company's website. The information contained on our Internet
website is not incorporated by reference into this Form 10-K and should not be
considered part of this or any other report that we file with or furnish to the
SEC.
Directors of the Registrant
The information appearing in the section captioned "Information
Regarding Nominees and Directors" of the Proxy Statement relating to our May 20,
2004, annual meeting of shareholders, to be filed within 120 days after the end
of the fiscal year covered by this Form 10-K Report, is incorporated herein by
reference.
Executive Officers of the Registrant
The following table and the notes thereto set forth information with
respect to our executive officers, including their names, ages, positions with
Aqua America, Inc. and business experience during the last five years:
Position with
Name Age Aqua America, Inc. (1)
- ---- --- ----------------------
Nicholas DeBenedictis 58 President and Chairman (May 1993 to
present); President and Chief Executive
Officer (July 1992 to May 1993); Chairman
and Chief Executive Officer, Aqua
Pennsylvania, Inc. (July 1992 to present);
President, Philadelphia Suburban Water
Company (February 1995 to January 1999) (2)
Roy H. Stahl 51 Executive Vice President and General Counsel
(May 2000 to present); Secretary (June 2001
to present); Senior Vice President and
General Counsel (April 1991 to May 2000) (3)
David P. Smeltzer 45 Senior Vice President - Finance and Chief
Financial Officer (December 1999 to
present); Vice President - Finance and Chief
Financial Officer (May 1999 to December
1999); Vice President - Rates and Regulatory
Relations, Philadelphia Suburban Water
Company (March 1991 to May 1999) (4)
Richard R. Riegler 57 Senior Vice President - Engineering and
Environmental Affairs (January 1999 to
present); Senior Vice President -
Operations, Philadelphia Suburban Water
Company (April 1989 to January 1999) (5)
Richard D. Hugus 54 President, Southern Operations (August 2003
to present); Vice President - Corporate
Development, Pennsylvania Suburban Water
Company (March 1991 to August 2003) (6)
20
Item 10, Continued
(1) In addition to the capacities indicated, the individuals named in the
above table hold other offices or directorships with subsidiaries of
the Registrant. Officers serve at the discretion of the Board of
Directors.
(2) Mr. DeBenedictis was Secretary of the Pennsylvania Department of
Environmental Resources from 1983 to 1986. From December 1986 to April
1989, he was President of the Greater Philadelphia Chamber of Commerce.
Mr. DeBenedictis was Senior Vice President for Corporate and Public
Affairs of Philadelphia Electric Company from April 1989 to June 1992.
(3) From January 1984 to August 1985, Mr. Stahl was Corporate Counsel, from
August 1985 to May 1988 he was Vice President - Administration and
Corporate Counsel of Aqua America, Inc., and from May 1988 to April
1991 he was Vice President and General Counsel of Aqua America, Inc..
(4) Mr. Smeltzer was Vice President - Controller of Philadelphia Suburban
Water Company from March, 1986 to March 1991.
(5) Mr. Riegler was Chief Engineer of Philadelphia Suburban Water Company
from 1982 to 1984. He then served as Vice President and Chief Engineer
from 1984 to 1986 and Vice President of Operations from 1986 to 1989.
(6) Mr. Hugus was Vice President and Treasurer of Philadelphia Suburban
Water Company from December 1988 to March 1991.
Item 11. Executive Compensation
The information appearing in the sections captioned "Executive
Compensation" of the Proxy Statement relating to our May 20, 2004, annual
meeting of shareholders, to be filed within 120 days after the end of the fiscal
year covered by this Form 10-K Report, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
related Stockholder matters
Ownership of Common Stock - The information appearing in the section captioned
"Ownership of Common Stock" of the Proxy Statement relating to our May 20, 2004,
annual meeting of shareholders, to be filed within 120 days after the end of the
fiscal year covered by this Form 10-K Report, is incorporated herein by
reference.
21
Item 12, Continued
Securities Authorized for Issuance under Equity Compensation Plans - The
following table provides information for our equity compensation plan as of
December 31, 2003:
EQUITY COMPENSATION PLAN INFORMATION
- --------------------------------------------------------------------------------------------------
Number of Securities
Number of Securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column
- --------------------------------------------------------------------------------------------------
Equity compensation
plans approved
by security holders 2,993,421 $13.31 4,984,151
- --------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders 0 0 0
- --------------------------------------------------------------------------------------------------
Total 2,993,421 $13.31 4,984,151
- --------------------------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
The information appearing in the sections captioned "Certain
Relationships and Related Transactions" of the Proxy Statement relating to our
May 20, 2004, annual meeting of shareholders, to be filed within 120 days after
the end of the fiscal year covered by this Form 10-K Report, is incorporated
herein by reference.
Item 14. Principal Accounting Fees and Services
The information appearing in the section captioned "Independent
Accountants - Services and Fees" of the Proxy Statement relating to our May 20,
2004, annual meeting of shareholders, to be filed within 120 days after the end
of the fiscal year covered by this Form 10-K Report, is incorporated herein by
reference.
22
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements. The following is a list of our consolidated financial
statements and supplementary data incorporated by reference in Item 8 hereof:
Report of Management
Independent Auditors' Report of PricewaterhouseCoopers LLP
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Income and Comprehensive Income - 2003, 2002
and 2001
Consolidated Cash Flow Statements - 2003, 2002, and 2001
Consolidated Statements of Capitalization - December 31, 2003 and 2002
Notes to Consolidated Financial Statements
Financial Statement Schedules. The financial statement schedules, or
supplemental schedules, filed as part of this annual report on Form 10-K are
omitted because they are not applicable or not required, or because the required
information is included in the consolidated financial statements or notes
thereto.
Reports on Form 8-K.
Current Report on Form 8-K furnished on November 5, 2003, responding to Item 9,
Regulation FD Disclosure. (Related to the Company's issuance of a press release
on November 5, 2003 announcing its third quarter 2003 earnings).
Current Report on Form 8-K filed on November 26, 2003, responding to Item 5,
Other Events. (Related to the Company entering into a purchase agreement with
ALLETE Water Services, Inc., a subsidiary of ALLETE, Inc., to acquire the
capital stock of Heater Utilities, Inc., which owns water and wastewater systems
located in North Carolina).
Exhibits, Including Those Incorporated by Reference. The following is a list of
exhibits filed as part of this annual report on Form 10-K. Where so indicated by
footnote, exhibits which were previously filed are incorporated by reference.
For exhibits incorporated by reference, the location of the exhibit in the
previous filing is indicated in parentheses. The page numbers listed refer to
page numbers where such exhibits are located using the sequential numbering
system specified by Rules 0-3 and 403.
23
EXHIBIT INDEX
Exhibit No.
- -----------
3.1 Restated Articles of Incorporation (as of May 17, 2001) (15)
(Exhibit 3.11)
3.2 By-Laws, as amended (9) (Exhibit 3.2)
3.3 Amendment to Section 3.03 and addition of Section 3.17
to Bylaws (11) (Exhibits 1 and 2)
3.4 Amendment to Section 3.03 of the Bylaws (13) (Exhibit 3.8)
3.5 Amendments to Sections 2.01(a), 2.02 and 3.08(b) of the Bylaws
(14) (Exhibit 3.10)
4.1 Indenture of Mortgage dated as of January 1, 1941
between Philadelphia Suburban Water Company and The
Pennsylvania Company for Insurance on Lives and Granting
Annuities(now First Pennsylvania Bank, N.A.), as Trustee, with
supplements thereto through the Twentieth Supplemental
Indenture dated as of August 1, 1983 (2) (Exhibits 4.1 through
4.16)
4.2 Agreement to furnish copies of other long-term debt
instruments (1) (Exhibit 4.7)
4.3 Twenty-fourth Supplemental Indenture dated as of June 1,
1988 (3) (Exhibit 4.5)
4.4 Twenty-fifth Supplemental Indenture dated as of
January 1, 1990 (4) (Exhibit 4.6)
4.5 Twenty-sixth Supplemental Indenture dated as of November
1, 1991 (5) (Exhibit 4.12)
4.6 Twenty-eighth Supplemental Indenture dated as of April 1,
1993 (6) (Exhibit 4.15)
4.7 Twenty-ninth Supplemental Indenture dated as of March 30,
1995 (7) (Exhibit 4.17)
4.8 Thirtieth Supplemental Indenture dated as of August 15,
1995 (8) (Exhibit 4.18)
4.9 Thirty-first Supplemental Indenture dated as of July 1,
1997 (10) (Exhibit 4.22)
4.10 First Amended and Restated Rights Agreement, dated as of
February 20, 2004 between Aqua America, Inc. and
Equiserve Trust Company, N.A., as Rights Agent
4.11 Thirty-second Supplement Indenture, dated as of October 1, 1999 (12)
(Exhibit 4.26)
4.12 Thirty-third Supplemental Indenture, dated as of November 15, 1999.
(13) (Exhibit 4.27)
4.13 Revolving Credit Agreement between Philadelphia Suburban Water
Company and PNC Bank National Association, First Union National
Bank, N.A., Mellon Bank, N.A. dated as of December 22, 1999 (13)
(Exhibit 4.27)
4.14 First Amendment to Revolving Credit Agreement dated as of
November 28, 2000, between Philadelphia Suburban Water Company
and PNC Bank, National Association, First Union National Bank,
N.A., Mellon Bank, N.A. dated as of December 22, 1999 (14)
(Exhibit 4.19)
4.15 Second Amendment to Revolving Credit Agreement dated as of
December 18, 2001, between Philadelphia Suburban Water Company
(and its successor Pennsylvania Suburban Water Company) and
PNC Bank, National Association, Citizens Bank of Pennsylvania,
First Union National Bank, N.A., Fleet National Bank dated as
of December 22, 1999 (15) (4.20)
24
EXHIBIT INDEX
Exhibit No.
- -----------
4.16 Thirty-fourth Supplemental Indenture, dated as of October 15, 2001.
(15) (4.21)
4.17 Thirty-fifth Supplemental Indenture, dated as of January 1, 2002.
(15) (4.22)
4.18 Thirty-sixth Supplemental Indenture, dated as of June 1, 2002. (17)
(4.23)
4.19 Thirty-seventh Supplemental Indenture, dated as of December 15, 2002.
(18) (4.23)
4.20 Credit Agreement dated as of October 25, 2002, between Philadelphia
Suburban Corporation and PNC Bank, National Association. (18)
(4.24)
4.21 Third Amendment to Revolving Credit Agreement dated as of
December 16, 2002, between Philadelphia Suburban Water Company
(and its successor Pennsylvania Suburban Water Company) and
PNC Bank, National Association, Citizens Bank of Pennsylvania,
Fleet National Bank dated as of December 22, 1999. (18) (4.25)
4.22 Fourth Amendment to Revolving Credit Agreement dated as of
December 24, 2002, between Philadelphia Suburban Water Company
(and its successor Pennsylvania Suburban Water Company) and
PNC Bank, National Association, Citizens Bank of Pennsylvania,
Fleet National Bank, National City Bank dated as of December
22, 1999. (18) (4.26)
4.23 Note Purchase Agreement among the note purchasers and Philadelphia
Suburban Corporation, dated July 31, 2003 (19) (4.27)
4.24 Credit Agreement dated as of July 31, 2003, between Philadelphia
Suburban Corporation and PNC Bank, National Association (19)
(4.28)
4.25 Fifth Amendment to Revolving Credit Agreement dated as of
December 14, 2003, between Philadelphia Suburban Water Company
(and its successor Pennsylvania Suburban Water Company) and
PNC Bank, National Association, Citizens Bank of Pennsylvania,
Fleet National Bank, National City Bank dated as of December
22, 1999.
10.1 Excess Benefit Plan for Salaried Employees, effective
December 1, 1989* (4) (Exhibit 10.4)
10.2 Supplemental Executive Retirement Plan, effective
December 1, 1989* (4) (Exhibit 10.5)
10.3 Supplemental Executive Retirement Plan, effective March
15, 1992* (1) (Exhibit 10.6)
10.4 Employment letter agreement with Mr. Nicholas
DeBenedictis* (1) (Exhibit 10.8)
10.5 1994 Equity Compensation Plan, as amended by Amendment
effective August 5, 2003*
10.6 Placement Agency Agreement between Philadelphia
Suburban Water Company and PaineWebber Incorporated
dated as of March 30, 1995 (7) (Exhibit 10.12)
10.7 Bond Purchase Agreement among the Delaware County
Industrial Development Authority, Philadelphia Suburban Water
Company and Legg Mason Wood Walker, ncorporated dated August 24,
1995 (8) (Exhibit 10.13)
10.8 Construction and Financing Agreement between the Delaware County
Industrial Development Authority and Philadelphia Suburban Water
Company dated as of August 15, 1995 (8) (Exhibit 10.14)
25
EXHIBIT INDEX
Exhibit No.
- -----------
10.9 Philadelphia Suburban Corporation Amended and Restated Executive
Deferral Plan*
10.10 Philadelphia Suburban Corporation Deferred Compensation Plan Master
Trust Agreement with PNC Bank, National Association, dated as of
December 31, 1996* (9) (Exhibit 10.24)
10.11 First Amendment to Supplemental Executive Retirement Plan* (9)
(Exhibit 10.25)
10.12 Placement Agency Agreement between Philadelphia Suburban Water
Company and A.G. Edwards and Sons, Inc., Janney Montgomery Scott
Inc., HSBC Securities, Inc., and PaineWebber Incorporated (10)
(Exhibit 10.26)
10.13 The Director Deferral Plan*
(as amended and restated effective January 1, 2003)
10.14 Bond Purchase Agreement among the Delaware County Industrial
Development Authority, Philadelphia Suburban Water Company and
Commerce Capital Markets dated September 29, 1999 (12)
(Exhibit 10.37)
10.15 Construction and Financing Agreement between the Delaware County
Industrial Development Authority and Philadelphia Suburban Water
Company dated as of October 1, 1999 (12) (Exhibit 10.38)
10.16 Placement Agency Agreement between Philadelphia Suburban Water
Company and Merrill Lynch & Co., PaineWebber Incorporated, A.G.
Edwards & Sons, Inc., First Union Securities, Inc., PNC Capital
Markets, Inc. and Janney Montgomery Scott, Inc., dated as of
November 15, 1999 (13) (Exhibit 10.41)
10.17 Bond Purchase Agreement among the Delaware County Industrial
Development Authority, Philadelphia Suburban Water Company and
The GMS Group, L.L.C., dated October 23, 2001 (15) (10.35)
10.18 Construction and Financing Agreement between the Delaware County
Industrial Development Authority and Philadelphia Suburban Water
Company dated as of October 15, 2001 (15) (10.36)
10.19 Agreement among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Nicholas DeBenedictis, dated August 7,
2001* (15) (10.37)
10.20 Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Roy H. Stahl,
dated August 7, 2001* (15) (10.38)
10.21 Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Richard R. Riegler,
dated August 7, 2001* (15) (10.39)
10.22 Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and David P. Smeltzer,
dated August 7, 2001* (15) (10.40)
10.23 Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Richard D. Hugus,
dated August 7, 2001*
26
EXHIBIT INDEX
Exhibit No.
- -----------
10.24 2002 Annual Cash Incentive Compensation Plan* (16) (Exhibit 10.41)
10.25 Bond Purchase Agreement among the Bucks County Industrial
Development Authority, Pennsylvania Suburban Water Company
and Janney Montgomery Scott LLC, dated May 21, 2002
(17) (Exhibit 10.42)
10.26 Construction and Financing Agreement between the Bucks County
Industrial Development Authority and Pennsylvania Suburban
Water Company dated as of June 1, 2002 (17) (Exhibit 10.43)
10.27 Bond Purchase Agreement among the Delaware County Industrial
Development Authority, Pennsylvania Suburban Water Company,
and The GMS Group, L.L.C., dated December 19, 2002 (18)
(Exhibit 10.44)
10.28 Construction and Financing Agreement between the Delaware County
Industrial Development Authority and Pennsylvania Suburban Water
Company dated as of December 15, 2002 (18) (Exhibit 10.45)
10.29 2003 Annual Cash Incentive Compensation Plan* (18) (Exhibit 10.46)
10.30 2004 Annual Cash Incentive Compensation Plan*
13.1 Selected portions of Annual Report to Shareholders for the year ended
December 31, 2003 incorporated by reference in Annual Report on
Form 10-K for the year ended December 31, 2003
21. Subsidiaries of Aqua America, Inc.
23.1 Consent of Independent Accountants - PricewaterhouseCoopers LLP
24. Power of Attorney (set forth as a part of this report)
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
27
Notes -
Documents Incorporated by Reference
(1) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1992.
(2) Indenture of Mortgage dated as of January 1, 1941 with supplements thereto
through the Twentieth Supplemental Indenture dated as of August 1, 1983
were filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1983.
(3) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1988.
(4) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1989.
(5) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1991.
(6) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1993.
(7) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
(8) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(9) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1996.
(10) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
(11) Filed as an Exhibit to Form 8-K filed August 7, 1997.
(12) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
(13) Filed as Exhibit to Annual Report on Form 10-K for the year ended December
31, 1999.
(14) Filed as Exhibit to Annual Report on Form 10-K for the year ended December
31, 2000.
(15) Filed as Exhibit to Annual Report on Form 10-K for the year ended December
31, 2001.
(16) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002.
(17) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002.
(18) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 2002.
(19) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003
*Indicates management contract or compensatory plan or arrangement.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AQUA AMERICA, INC.
By NICHOLAS DEBENEDICTIS
--------------------------
Nicholas DeBenedictis
President and Chairman
Date: March 12, 2004
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Nicholas
DeBenedictis, President and Chairman of Aqua America, Inc., David P. Smeltzer,
Senior Vice President - Finance and Chief Financial Officer of Aqua America,
Inc., and each of them, his or her true and lawful attorneys-in-fact, in his or
her name, place and stead to execute and cause to be filed with the Securities
and Exchange Commission any and all amendments to this report.
29
NICHOLAS DEBENEDICTIS DAVID P. SMELTZER
- ---------------------------------- --------------------------------------
Nicholas DeBenedictis David P. Smeltzer
President and Chairman Senior Vice President - Finance and
(principal executive officer) Chief Financial Officer
and Director
MARY C. CARROLL G. FRED DIBONA, JR.
- ---------------------------------- --------------------------------------
Mary C. Carroll G. Fred DiBona, Jr.
Director Director
RICHARD H. GLANTON ALAN HIRSIG
- ---------------------------------- --------------------------------------
Richard H. Glanton Alan Hirsig
Director Director
JOHN F. MCCAUGHAN JOHN E. MENARIO
- ---------------------------------- --------------------------------------
John F. McCaughan John E. Menario
Director Director
RICHARD L. SMOOT
- ----------------------------------
Richard L. Smoot
Director