Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2003, for Aqua America, Inc. (formerly Philadelphia Suburban Corporation). The company changed its name and ticker symbol (to WTR) in January 2004 to reflect its position as the largest U.S.-based publicly-traded water utility. Aqua America provides regulated water and wastewater services to approximately 2.5 million people across 14 states, with its largest subsidiary, Aqua Pennsylvania, Inc., accounting for roughly 60% of operating revenues.
Key Financial Metrics
Revenue: Total operating revenues for 2003 were $367,233,000. Residential water customers represented 59% of total water revenues. Supplemental pro forma information, assuming the AquaSource acquisition occurred on January 1, 2003, indicates potential revenues of $407,628,000.
Profitability and Margins: The filing text does not provide specific values for net income, operating profit, or profit margins; these figures are incorporated by reference from the Annual Report to Shareholders.
Debt and Liquidity: As of December 31, 2003, total long-term debt (fixed rate) was $736,052,000, with a weighted average interest rate of 6.19%. The fair value of this debt was $781,502,000. The filing does not explicitly state total cash, cash equivalents, or working capital figures.
Capital Structure: The company completed a 5-for-4 common stock split in December 2003. As of February 17, 2004, there were 92,674,480 shares outstanding. The annualized dividend rate was increased to $0.48 per share effective December 1, 2003.
Material Changes Versus Prior Period
- Acquisition: On July 31, 2003, the company acquired four operating water and wastewater subsidiaries of AquaSource, Inc., for approximately $190.7 million in cash (subject to a $12 million dispute). This acquisition added over 130,000 customer accounts and drove a 23.8% growth in the customer base for 2003.
- Divestiture: In October 2003, the company sold the Connecticut operations acquired from AquaSource, which generated approximately $4,000,000 in annual operating revenues.
- Asset Sale: In December 2002, the company sold water utility assets in Ashtabula County, Ohio, for approximately $12.1 million, recognizing an after-tax gain of $3.7 million. The company continues to operate this system under a multi-year contract.
- Stock Split: A 5-for-4 stock distribution was effected in December 2003, adjusting all per-share data presented in the report.
Guidance, Outlook, Risks, and Contingencies
Outlook and Strategy: Management intends to continue pursuing acquisitions of municipally-owned and investor-owned systems. Future utility construction is estimated to require aggregate expenditures of $779 million over the next five years.
Environmental Contingencies: The company estimates capital expenditures of approximately $65 million over the next five years to address environmental compliance issues associated with the AquaSource acquisition. Specific regulatory compliance costs include up to $2 million for radon, $1 million for radionuclides, $5 million for disinfectants, and $1 million for arsenic.
Legal and Regulatory Risks:
- Condemnation: The City of Geneva, Ohio, and the City of Fort Wayne, Indiana, have initiated or authorized eminent domain proceedings to acquire portions of the company's assets. Management believes fair market value will exceed book value.
- Rate Regulation: Profitability depends on the timeliness and adequacy of rate allowances. Regulatory lag remains a risk, though infrastructure rehabilitation surcharges are utilized in four states to mitigate this.
- Weather: Drought conditions and water use restrictions can reduce consumption and revenues, particularly in summer months.
Forward-Looking Statements: The filing includes standard disclaimers regarding risks such as changes in economic conditions, credit ratings, integration of acquisitions, and potential terrorist threats.
Investor Verification Checklist
- Verify the final resolution of the $12 million purchase price dispute regarding the AquaSource acquisition.
- Confirm the status and potential financial impact of the eminent domain proceedings in Geneva, Ohio, and Fort Wayne, Indiana.
- Review the detailed Consolidated Statements of Income (incorporated by reference) to verify net income and margin trends not explicitly stated in the text.
- Monitor the $65 million environmental compliance budget for the AquaSource assets to ensure it remains within estimates.
- Assess the impact of regulatory lag on cash flow, specifically regarding the timing of rate increases versus capital expenditures.