WTRG

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2007, for Aqua America, Inc. (Note: The input metadata referenced "Essential Utilities, Inc.", but the filing text explicitly identifies the registrant as Aqua America, Inc.). Aqua America is a holding company for regulated utilities providing water and wastewater services to approximately 2.8 million people across 13 states. The company operates primarily through a reportable "Regulated" segment and a smaller "Other" segment comprising non-regulated services.

Key Financial Metrics (Six Months Ended June 30, 2007)

Margins: Operating margin was approximately 34.2% for the six months ended June 30, 2007, compared to 36.3% in the prior year period. The effective income tax rate was 39.8%.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 15.3% ($38.2 million) year-over-year. This was driven by rate increases ($20.5 million), acquisitions ($15.4 million), and additional sewer revenues ($1.2 million).
• Acquisitions: The company completed the acquisition of New York Water Service Corporation on January 1, 2007, for $28.9 million in cash plus the assumption of $23 million in debt. This added 44,792 customers and significantly impacted property taxes and operating expenses.
• Expense Increases: Operations and maintenance expenses rose 15.8%, largely due to acquisition-related costs ($8.1 million) and increased water production costs (power and chemicals). Property taxes increased 76.9% ($5.2 million) primarily due to the New York Water acquisition.
• Debt Structure: Long-term debt increased by approximately $91 million. In January 2007, the company issued $50 million in tax-exempt bonds, and in March 2007, issued $30 million in unsecured notes to repay short-term borrowings.
• Liquidity: Cash and cash equivalents decreased from $44.0 million at year-end 2006 to $11.5 million at June 30, 2007, due to significant capital expenditures and acquisition costs.

Guidance, Outlook, and Risks

• Rate Cases:
  • Florida: An application to increase rates by $7.3 million annually is pending. The company began billing for a portion of these rates in April 2007, subject to refund if denied. As of June 30, $571,000 of revenue is recognized subject to refund.
  • Texas: A multi-year rate increase application seeking $11.9 million in annual revenue is pending. The company has recognized $20.2 million in revenue subject to refund based on the final ruling.
• Legal Proceedings: The City of Fort Wayne, Indiana, has authorized the acquisition of approximately 1% of the company's customer base via eminent domain. The company is challenging the valuation of these assets.
• Capital Needs: Management expects internally generated funds, existing credit facilities ($62 million available), and debt/equity issuances to be adequate for future capital requirements.
• Accounting Changes: The company adopted FASB Interpretation No. 48 (FIN 48) regarding uncertainty in income taxes on January 1, 2007. The impact was deemed insignificant.

Investor Verification Checklist

• Verify the final outcome of the pending Florida and Texas rate cases, as significant revenue recognized ($20.8 million combined) is subject to potential refund.
• Monitor the resolution of the eminent domain proceeding in Fort Wayne, Indiana, regarding the valuation of the 1% asset portion.
• Review the integration progress and cost synergies of the New York Water Service Corporation acquisition.
• Assess the impact of rising water production costs (power and chemicals) on future operating margins.
• Confirm the settlement terms of the forward equity sale agreement for 3.5 million shares, which could impact share count or cash flow depending on the settlement method.