Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2004, for Aqua America, Inc. (formerly Philadelphia Suburban Corporation). The company is the largest U.S.-based publicly-traded water utility by number of people served, providing water and wastewater services to approximately 2.5 million people across 14 states. On January 16, 2004, the company changed its name and ticker symbol to WTR.
Key Financial Metrics
| Metric | Q1 2004 | Q1 2003 |
|---|---|---|
| Operating Revenues | $99,768 | $80,489 |
| Operating Income | $36,444 | $32,446 |
| Net Income | $15,575 | $13,327 |
| Diluted EPS | $0.17 | $0.16 |
| Operating Cash Flow | $32,969 | $19,546 |
| Capital Expenditures | $29,134 | $24,001 |
| Total Debt (Long-term + Current) | $718,706 | $736,052 |
| Cash and Equivalents | $13,668 | $10,757 |
Note: All figures in thousands of dollars except per share amounts.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 24.0% ($19,279) primarily due to the inclusion of the AquaSource acquisition (closed July 2003) and a Pennsylvania infrastructure rehabilitation surcharge.
- Expense Increases: Operations and maintenance expenses rose 36.4% ($11,167) driven by acquired operations, higher pension costs, and water production expenses. Depreciation increased 20.5% due to new utility plant assets.
- Profitability: Net income increased 16.9% ($2,251). The effective income tax rate decreased slightly to 39.4% from 40.1%.
- Share Count: Diluted earnings per share increased 6.3%, partially offset by a 9.4% increase in average shares outstanding from 2003 stock offerings.
Outlook, Risks, and Management Commentary
- Acquisitions: The company has agreements to acquire 63 systems in Florida ($13.8M) and Heater Utilities in North Carolina ($48M cash + $28M debt assumption). Both are expected to close in mid-2004 pending regulatory approval.
- Rate Increases: An Illinois subsidiary received a rate increase in April 2004 expected to add $2.3M annually to revenues.
- Liquidity and Capital: Management expects internally generated funds and credit facilities to meet financing needs. The company plans to issue approximately $87M in long-term debt in May 2004 to refinance short-term borrowings.
- Accounting Changes: The company elected to defer accounting for the impact of the Medicare Prescription Drug Act (FSP 106-1) pending further guidance.
- Risks: Forward-looking statements are subject to regulatory approvals, abnormal weather, and the ability to assimilate acquired operations.
Investor Verification Checklist
- Verify the closing dates and final purchase prices for the Florida and North Carolina acquisitions, noting potential regulatory adjustments.
- Monitor the arbitration process for the final purchase price of the AquaSource acquisition, expected to conclude in Q3 2004.
- Track the impact of the new Illinois rate increase on future revenue streams.
- Review the company's funding strategy for the $87M debt issuance planned for May 2004.
- Assess the potential financial impact of the Pension Funding Equity Act enacted in April 2004 on future pension contributions.