WTRG

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, 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 the largest U.S.-based publicly-traded water utility, serving over 2.5 million people across 13 states through regulated subsidiaries. The company provides water and wastewater services and operates under the regulatory oversight of various state public utility commissions.

Key Financial Metrics

Note: All figures in thousands of dollars except per share amounts and percentages.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 14.5% ($47.3 million) for the nine-month period. This was driven by rate increases ($24.6 million), a larger customer base from acquisitions ($12.5 million), and higher water consumption due to normal weather conditions compared to the unfavorable weather in Q3 2004.
• Profitability: Net income rose 19.9% ($11.5 million) year-over-year. Operating income increased 17.6% to $150.5 million.
• Expense Increases: Operations and maintenance expenses grew 13.6% due to acquisition-related costs, higher pension costs, and increased water production costs. Interest expense increased 8.5% due to borrowings for acquisitions and capital projects, partially offset by lower rates on refinanced debt.
• Capital Structure: Long-term debt increased by approximately $44 million. The company issued $30 million in unsecured notes in February 2005 and $93.3 million in tax-exempt bonds in May and September 2005 to refinance debt and fund capital projects.

Guidance, Outlook, and Risks

• Dividends: The Board declared a quarterly cash dividend of $0.2725 per share for Q3 2005. Effective December 1, 2005, the quarterly dividend will increase from $0.13 to $0.1425 per share (pre-split basis).
• Stock Split: A four-for-three common stock split (33.3% distribution) was declared on August 2, 2005, with distribution scheduled for December 1, 2005. Historical per-share data in this report has not been restated for the split.
• Regulatory Risks: A significant rate increase application in Texas ($11.9 million annual revenue increase) is pending. The company has recognized $3.5 million in revenue and deferred $8.6 million in expenses subject to refund if the request is denied. Management believes no additional reserve is currently required.
• Accounting Changes: The company is evaluating the impact of SFAS No. 123R (Share-Based Payment), expected to be adopted in 2006. The estimated after-tax impact on 2006 earnings is approximately $3 million. SFAS No. 154 and FASB Interpretation No. 47 are also scheduled for adoption in 2006.
• Liquidity: Management believes internally generated funds, existing credit facilities ($100 million available), and debt/equity issuances will be adequate to meet financing requirements.

Investor Verification Checklist

• Texas Rate Case Outcome: Verify the final ruling on the Texas rate increase application, as a denial could require revenue refunds and regulatory asset write-offs.
• Stock Split Mechanics: Confirm the pro forma impact of the 4-for-3 stock split on share count and per-share metrics for future reporting periods.
• Capital Expenditure Funding: Monitor the utilization of restricted funds from the May and September 2005 bond issuances for specific capital projects.
• Weather Sensitivity: Assess the impact of weather conditions on water consumption and revenue, given the variance noted between 2004 and 2005.
• Acquisition Integration: Review the ongoing integration costs and revenue realization from the Heater and Florida Water acquisitions.