Aqua America DEF 14A 2006
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Filed by the Registrant [x]
AQUA AMERICA, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
1) Title of each class of securities to which transaction applies:
AQUA AMERICA, INC.
TO THE SHAREHOLDERS OF
Notice is hereby given that the Annual Meeting of Shareholders of AQUA AMERICA, INC. will be held at the Drexelbrook Banquet Facility & Corporate Events Center, Drexelbrook Drive and Valley Road, Drexel Hill, PA 19026, at 10:00 A.M., local time, on Wednesday, May 17, 2006, for the following purposes:
Only shareholders of record at the close of business on March 27, 2006 will be entitled to notice of, and to vote at, the Annual Meeting and at any adjournments thereof.
April 11, 2006
REGARDLESS OF WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, AS A SHAREHOLDER YOU ARE URGED TO COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, OR VOTE ELECTRONICALLY, THROUGH THE INTERNET OR BY TELEPHONE, BY FOLLOWING THE INSTRUCTIONS SET OUT ON THE PROXY CARD.
AQUA AMERICA, INC.
This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Aqua America, Inc. (Aqua America or the Company) to be used at the Annual Meeting of Shareholders to be held Wednesday, May 17, 2006 and at any adjournments thereof. This proxy statement and the enclosed proxy card are being mailed to shareholders on or about April 11, 2006.
The cost of soliciting proxies will be paid by the Company, which has arranged for reimbursement, at the rate suggested by the New York Stock Exchange, of brokerage houses, nominees, custodians and fiduciaries for the forwarding of proxy materials to the beneficial owners of shares held of record. In addition, the Company has retained The Altman Group to assist in the solicitation of proxies from (i) brokers, bank nominees and other institutional holders, and (ii) individual holders of record. The fee paid to The Altman Group for normal proxy solicitation is $4,000 plus expenses, which will be paid by the Company. Directors, officers and regular employees of the Company may also solicit proxies, although no additional compensation will be paid by the Company for such efforts.
The proxy statement and Annual Report to Shareholders for the year ended December 31, 2005, including financial statements and other information with respect to the Company and its subsidiaries, are being mailed by standard mail, to shareholders of record as of March 27, 2006. The proxy statement and Annual Report are being sent electronically to those shareholders of record as of March 27, 2006 who requested electronic delivery of these materials. Additional copies of the Annual Report may be obtained by writing to the Company.
PURPOSE OF THE MEETING
As the meeting is the Annual Meeting of Shareholders, the shareholders of the Company will be requested to elect three directors to hold office as provided by law and the Companys Bylaws.
VOTING AT THE MEETING
Holders of shares of the Companys Common Stock of record at the close of business on March 27, 2006 are entitled to vote at the meeting. As of that date, there were 129,495,960 shares of Common Stock outstanding and entitled to be voted at the meeting. Each shareholder entitled to vote shall have the right to one vote on each matter presented at the meeting for each share of Common Stock outstanding in such shareholders name.
The holders of a majority of the shares entitled to vote, present in person or represented by proxy at the meeting, constitute a quorum. Directors are to be elected by a plurality of the votes cast at the meeting. The affirmative vote of a majority of the votes cast by those shareholders present in person or represented by proxy at the meeting is required to take action with respect to any matter properly brought before the meeting on the recommendation of a vote of a majority of the entire Board of Directors. The affirmative vote of at least three quarters of the votes which all shareholders, voting as a single class, are entitled to cast is required to take action with respect to any other matter properly brought before the meeting. Shares cannot be voted at the meeting unless the holder of record is present in person or by proxy. The enclosed proxy card is a means by which a shareholder may authorize the voting of his or her shares at the meeting if they are unable to attend in person. Alternatively, under the Pennsylvania Business Corporation Law and the Pennsylvania Electronic Transaction Act, you may vote electronically, over the Internet or by telephone, following the instructions set out on the proxy card. The shares of Common Stock represented by each properly executed proxy card or electronic proxy will be voted at the meeting in accordance with each shareholders direction. Shareholders are urged to specify their choices by marking the appropriate boxes on the enclosed proxy card or electronic proxy; if the proxy card or electronic proxy is signed, but no choice has been specified, the shares will be voted as recommended by the Board of Directors. If any other matters are properly presented at the meeting for action, the proxy holders will vote the proxies (which confer discretionary authority to vote on such matters) in accordance with their best judgment.
With regard to the election of directors, votes may be cast in favor or withheld; votes that are withheld will be excluded entirely from the vote and will have no effect, other than for purposes of determining the presence of a quorum. Abstentions may not be specified for the election of directors. Brokers that are member firms of the New York Stock Exchange (NYSE) and who hold shares in street name for customers, but have not received instructions from a beneficial owner, have the authority under the rules of the NYSE to vote those shares with respect to the election of
directors, but not for any other matter. Proxies received from brokers with respect to shares held in street name, even if such shares are not voted by brokers, will be considered present and entitled to vote at the meeting.
Execution of the accompanying proxy or voting electronically will not affect a shareholders right to attend the meeting and vote in person. Any shareholder giving a proxy or voting electronically has the right to revoke the proxy or the electronic vote by giving written notice of revocation to the Secretary of the Company at any time before the proxy is voted by executing a proxy bearing a later date, which is voted at the meeting, or by attending the meeting and voting in person.
Your proxy vote is important. Accordingly, you are asked to complete, sign and return the accompanying proxy card or vote electronically regardless of whether or not you plan to attend the meeting.
(PROPOSAL NO. 1)
ELECTION OF DIRECTORS
VOTING ON PROPOSAL NO. 1
The Board of Directors is divided into three classes. One class is elected each year to hold office for a three-year term and until successors of such class are duly elected and qualified, except in the event of death, resignation or removal. The Company is required by its Articles of Incorporation and Bylaws to maintain the size of its classes of directors as nearly equal in number as possible.
Mr. John F. McCaughan and Mr. John E. Menario have reached the Companys retirement age for directors and have retired from the Board of Directors. In October, 2005, the Board of Directors, on the recommendation of the Corporate Governance Committee, appointed Mr. Lon R. Greenberg, Chairman and Chief Executive Officer of UGI Corporation, to the Board of Directors in the class of directors to be elected at the 2006 Annual Meeting of Shareholders. In accordance with the Companys Corporate Governance Guidelines, Mr. Glanton, Chairman of the Corporate Governance Committee and an independent director reported to the Corporate Governance Committee that he, Nicholas DeBenedictis and Lon R. Greenberg, the three directors with terms expiring at the 2006 Annual Meeting would be willing to serve on the Board of Directors for an additional three-year term. The Committee reviewed the qualifications of the three directors in relation to the criteria for candidates for nomination for election to the Board under the Companys
Corporate Governance Guidelines. The Corporate Governance Committee, with Mr. Glanton abstaining with respect to his nomination, voted to recommend to the Board of Directors, and the Board of Directors approved, the nomination of Mr. DeBenedictis, Mr. Glanton and Mr. Greenberg for election to the class of directors to be elected at the 2006 Annual Meeting of Shareholders.
Therefore, three directors, Messrs. DeBenedictis, Glanton and Greenberg, will stand for election by a plurality of the votes cast at the 2006 Annual Meeting, and four directors will continue to serve until either the 2007 or 2008 Annual Meetings, depending on the period remaining in each of their terms. At the 2006 Annual Meeting, proxies in the accompanying form, properly executed, will be voted for the election of the three nominees listed below, unless authority to do so has been withheld in the manner specified in the instructions on the proxy card. Discretionary authority is reserved to cast votes for the election of a substitute should any nominee be unable or unwilling to serve as a director. Each nominee has stated his willingness to serve and the Company believes that the nominees will be available to serve.
The Board of Directors recommends that the shareholders vote FOR the election of Messrs. DeBenedictis, Glanton and Greenberg as directors.
INFORMATION REGARDING NOMINEES AND DIRECTORS
For each of the three nominees for election as directors at the 2006 Annual Meeting and the four directors in the classes of directors whose terms of office are to expire either at the 2007 Annual Meeting or the 2008 Annual Meeting, as set forth herein, there follows information as to the positions and offices with the Company held by each, the principal occupation of each during the past five years, and directorships of public companies and other organizations held by each.
The Board of Directors operates pursuant to a set of written Corporate Governance Guidelines. Copies of these Guidelines can be obtained free of charge from the Corporate Governance portion of the Investor Relations section of the Companys Web site, www.aquaamerica.com, or by contacting the Company at the address appearing on the first page of this proxy statement, attention Investor Relations Department. (See Additional Information on page 36).
The Board of Directors is, among other things, responsible for determining whether each of the directors is independent in light of any relationship each director may have with the Company The Board has adopted Corporate Governance Guidelines that contain categorical standards of director independence that are consistent with the listing standards of the NYSE. Under the Companys Corporate Governance Guidelines, a director will not be deemed independent if:
In addition to these categorical standards, no director will be considered independent unless the Board of Directors affirmatively determines that the director has no material relationship with the Company (either directly, or as a partner, stockholder, director or officer, of an organization that has a relationship with the Company). When making independence determinations, the Board broadly considers all relevant facts and circumstances surrounding any relationship between a director or nominee and the Company.
Based on a review applying the categorical standards set forth in the Companys Corporate Governance Guidelines and considering the relevant facts and circumstances, the Board of Directors has affirmatively determined that each nominee for director, other than Mr. DeBenedictis, the Companys Chief Executive Officer, and each of the Companys other directors, is independent.
The Board of Directors has appointed Mr. Glanton as the presiding independent director. As the presiding independent director, Mr. Glantons responsibilities include: presiding at all meetings of the Board of Directors at which the Chairman is not present, including executive sessions of the independent directors; serving as liaison between the Chairman and the independent directors; reviewing information sent to the Board; reviewing meeting agendas for the Board; reviewing meeting schedules to assure that there is sufficient time for discussion of all agenda items; calling meetings of the independent directors, if appropriate; and, if requested by major shareholders, ensuring that he is available for consultation and direct communications with such shareholders.
The Board of Directors held five meetings in 2005. The Companys Bylaws provide that the Board of Directors, by resolution adopted by a majority of the whole Board, may designate an Executive Committee and one or more other committees, with each such committee to consist of two or more directors. The Board of Directors annually elects from its members the Executive, Audit, Executive Compensation and Employee Benefits and Corporate Governance Committees. The Board may also from time to time appoint an ad hoc Finance Committee to approve the terms of the Companys financings. The Pension Committee of the Board has been replaced by a Pension Committee of senior management of the Company, who report periodically to the Board of Directors. Ms. Carroll, who was a member of the former Pension Committee, serves as an advisor to the Pension Committee. Each director attended at least 75% of the aggregate of all meetings of the Board and the Committees on which each such director served in 2005. The Board of Directors
encourages all directors to attend the Companys Annual Meeting of Shareholders. All the directors except Mr. Hankowsky and Dr. Papadakis were in attendance at the 2005 Annual Meeting of Shareholders.
Each of the Committees of the Board of Directors operates pursuant to a written Committee Charter. Copies of these Charters can be obtained free of charge from the Corporate Governance portion of the Investor Relations section of the Companys Web site, www.aquaamerica.com, or by contacting the Company at the address appearing on the first page of this proxy statement to the attention of the Investor Relations Department.
The current members of the Committees of the Board of Directors are as follows:
The Companys Bylaws provide that the Executive Committee shall have and exercise all of the authority of the Board in the management of the business and affairs of the Company, with specific exceptions. The Executive Committee is intended to serve in the event that action by the Board of Directors is necessary or desirable between regular meetings of the Board, or at a time when convening a meeting of the entire Board is not practical, and to make recommendations to the entire Board with respect to various matters. The Executive Committee did not meet in 2005. The Executive Committee currently has four members, and the Chairman of the Company serves as Chairman of the Executive Committee.
The Audit Committee is composed of three directors, whom the Board of Directors has affirmatively determined meet the standards of independence required of audit committee members by the NYSE and applicable Securities and Exchange Commission (SEC) rules. Based on a review of the background and experience of the members of the Audit Committee, the Board of Directors has determined that all members of the Audit Committee are financially literate and are audit committee financial experts within the meaning of applicable SEC rules. The Audit Committee was required to meet at least four times during the year and met seven times during 2005. The primary responsibilities of the Audit Committee are to monitor the integrity of the Companys financial reporting process and systems of internal controls, including the review of the Companys annual audited financial statements, and to monitor the independence of the Companys independent registered public accounting firm. The Audit Committee has the exclusive authority to select, evaluate and, where appropriate, replace the Companys independent registered public accounting firm.
The Audit Committee has considered the extent and scope of non-audit services provided to the Company by its independent registered public accounting firm and has determined that such services are compatible with the independent registered public accounting firm maintaining its independence. For more information, see the Audit Committee Report on pages 14-15.
Executive Compensation and Employee Benefits Committee
The Executive Compensation and Employee Benefits Committee is composed of two directors, whom the Board of Directors has affirmatively determined are independent directors as defined by the NYSE. The Executive Compensation and Employee Benefits Committee has the power to administer and make awards of stock options, dividend equivalents and restricted stock under the Companys 2004 Equity Compensation Plan and to administer awards under the Companys 1994 Equity Compensation Plan. In addition, the Executive Compensation and Employee Benefits Committee reviews the recommendations of the Companys Chief Executive Officer as to appropriate compensation of the Companys senior executives (other than the Chief Executive Officer) and determines the compensation of such senior executives and the Companys Chief Executive Officer for the ensuing year. The Executive Compensation and Employee Benefits Committee held three meetings in 2005.
Corporate Governance Committee
The Corporate Governance Committee is composed of three directors, whom the Board of Directors has affirmatively determined are independent directors as defined by the NYSE. The Corporate Governance Committee is responsible for identifying and considering qualified nominees for directors and developing and periodically reviewing the Corporate Governance Guidelines by which the Board of Directors is organized and executes its responsibilities. In addition, the Chair of the Corporate Governance Committee conducts corporate governance discussions in executive sessions with the Board of Directors. The Corporate Governance Committee met twice during 2005.
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information as of January 31, 2006 with respect to shares of Common Stock of the Company beneficially owned by each director, nominee for director and executive officer named in the Summary Compensation Table and by all directors, nominees and executive officers of the Company as a group. This information has been provided by each of the directors, executive officers and nominees at the request of the Company. Beneficial ownership of securities as shown below has been determined in accordance with applicable guidelines issued by the SEC. Beneficial ownership includes the possession, directly or indirectly, through any formal or informal arrangement, either individually or in a group, of voting power (which includes the power to vote, or to direct the voting of, such security) and/or investment power (which includes the power to dispose of, or to direct the disposition of, such security).
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees the Companys financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal control. In fulfilling its oversight responsibilities, the Committee reviewed the audited financial statements included in the Annual Report with management, including: the quality of the accounting principles, practices and judgments; the reasonableness of significant judgments; the clarity of disclosures in the financial statements; the integrity of the Companys financial reporting processes and controls; and the selection and evaluation of the independent registered public accounting firm, including the review of all relationships between the independent registered public accounting firm and the Company.
The Committee reviewed with the independent registered public accounting firm, who is responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles in the United States of America, their judgments as to the quality of the Companys accounting principles and such other matters as are required to be discussed with the Committee under auditing standards of the Public Company Accounting Oversight Board (including Statement on Auditing Standards No. 61). In addition, the Committee has discussed with the independent registered public accounting firm the firms independence from management and the Company, including the matters in the written disclosures required by Independence Standards Board Standard No. 1, and considered the compatibility of non-audit services with the accountants independence.
The Committee discussed with the Companys internal auditors and independent registered public accounting firm, the overall scope and plans for their respective audits. The Committee meets with the internal auditors and independent registered public accounting firm, with and without management present, to discuss the results of their examinations, their evaluations of the Companys internal controls, and the overall quality of the Companys financial reporting. The Committee held seven meetings during 2005.
In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors, and the Board of Directors approved, the inclusion of the Companys audited financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2005 for filing with the SEC.
The Audit Committee has the authority to select, evaluate and, where appropriate, replace the Companys Director of Internal Audit and the Companys independent registered public accounting firm. The Committee has selected PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for the year ending December 31, 2006.
REPORT OF THE EXECUTIVE COMPENSATION AND EMPLOYEE BENEFITS COMMITTEE
William P. Hankowsky and Lon R. Greenberg currently serve on the Executive Compensation and Employee Benefits Committee. In addition, John F. McCaughan served on the Executive Compensation and Employee Benefits Committee during 2005 and until his retirement in March 2006.
Aqua Americas executive compensation program is designed to motivate its senior executives to achieve the Companys goals of providing its customers with high quality, cost-effective, reliable water services and providing the Companys shareholders with a long-term, above market return on their investment.
Toward that end, the program:
In administering the executive compensation program, the Executive Compensation and Employee Benefits Committee (the Committee) attempts to strike an appropriate balance among the above-mentioned objectives, each of which is discussed in greater detail below.
At present, the executive compensation program is comprised of three components: base salary, annual cash incentive opportunities and equity incentive opportunities. In determining the relative weighting of compensation components and the target level of compensation for the Companys executives, the Committee considers size-adjusted survey data from companies in the utility industry and general business (Composite Market) compiled by a nationally recognized compensation consulting firm retained by the Committee.
Competitive compensation levels for salaries and annual incentive awards are targeted at the 50th percentile of compensation levels for utility companies in the Composite Market. Equity incentives are targeted at the 50th percentile of the entire Composite Market.
To ensure that its pay levels are competitive, the Company, with the assistance of its compensation consultant, regularly compares its executive compensation levels with those of other companies and sets its salary structure in line with competitive data from the utility companies in the Composite Market. Individual salaries are considered for adjustment annually and any adjustments are based on general movement in external salary levels, individual performance, and changes in individual duties and responsibilities.
Cash Incentive Awards
The annual cash incentive plan is based on target incentive awards for each executive, which are stated as a percentage of their base salaries. Annual incentive awards for executive officers are calculated by a formula that multiplies the executives target incentive percentage by a Company rating factor based on the Companys overall financial performance and an individual rating factor based on the executives performance against established objectives. These factors can range from 0% to 125% for the Company rating factor and 0% to 150% for the individual rating factor. Each of these percentages are correlated with defined objectives and reviewed by the Committee for the Chief Executive Officer and other senior executives each year. Regardless of the Companys financial performance, the Committee retains the authority to determine the final Company rating factor, and the actual payment and amount of any bonus is always subject to the discretion of the Committee.
As part of its review of the total compensation package for the Companys officers, the Committee, with the assistance of its compensation consultant, reviewed the Companys equity incentive compensation program. The Committee uses a combination of stock options, dividend equivalents and restricted stock with vesting subject to performance criteria established by the Committee to best link executive long-term incentives to corporate performance and shareholder interests.
Under the terms of the Companys 2004 Equity Compensation Plan, the Committee and the Board of Directors may grant stock options, dividend equivalents and restricted stock to officers, directors and key employees, and stock options to key consultants of the Company and its subsidiaries who are in a position to contribute materially to the successful operation of the business of the Company. The purpose of the Plan is to help align executive compensation with shareholder interests by providing the participants with a long-term equity interest in the Company. The Plan, we believe, provides the Company the ability to attract and retain employees of significant abilities.
In 2005, the Board of Directors established stock ownership guidelines for the executive officers named in the Summary Compensation Table. These executive officers will be expected to hold shares of the Company equal in value to at least five times base salary for the Chief Executive Officer and three times base salary for the other named executive officers. Shareholdings will include shares held under the Companys 401(k) plans. These executive officers are expected to have shareholdings consistent with these guidelines by the fifth anniversary of the adoption of the guidelines or within five years after their appointment as a named executive officer, if later. Each of the executive officers, except the most recently elected executive officer, met these guidelines as of the end of 2005.
Summary of Actions Taken by the Committee
Under the Companys salary program, the base salary budget is based on salary levels for comparable positions among the utility companies in the Composite Market. The projected overall annual increase is based on annual salary budget increase data reported by published surveys. Under these guidelines, actual salary increases are determined based on a combination of an assessment of the individuals performance and the individuals salary compared to the market. In the case of executive officers named in the Summary Compensation Table, the determination of salary levels is made by the Committee.
Mr. DeBenedictis salary for 2005 was consistent with the target level for the CEO position for companies within the Composite Market. Mr. DeBenedictis salary for 2006, which was approved by the Committee and effective on April 1, 2006, is consistent with published salary survey information on salary levels and projected annual salary increases for 2006 and is based on the Committees favorable assessment of his and the Companys performance and his excellent leadership in growing the Company.
Annual Cash Incentive Awards
The Committee determined the annual cash incentive awards to be made to the participants in the cash incentive plan. The awards were based on the Companys performance compared to its financial goal for 2005 as well as the participants achievement of their individual objectives. Mr. DeBenedictis cash incentive compensation for 2005 was based on the Companys earnings and the Committees assessment of Mr. DeBenedictis individual performance. Mr. DeBenedictis achievements in 2005 included: completing a Company record number of acquisitions; achieving new Company records for revenues and net income; controlling costs; lowering the Companys overall cost of debt; and investing a Company record amount of capital to improve service, enhance water quality and maintain environmental compliance.
Effective March 7, 2006, the Committee approved the 2006 grants of incentive stock options and dividend equivalents under the Companys 2004 Equity Compensation Plan to certain of its executive officers and key employees at the fair market value on the date of grant for such stock options of $29.46. The options are exercisable in installments of one-third each year starting on the first anniversary of the date of grant and expire at the end of ten years from the date of grant. The dividend equivalents will accumulate dividends over a period of four years and will begin to be paid at the end of the performance period of between two years and eight years from the date of grant depending on the Committees determination of the Companys achievement of certain performance criteria established at the date of grant. For 2006, Mr. DeBenedictis received a grant of 55,000 stock options and dividend equivalents on March 7, 2006. The Committee, with the Boards concurrence, also approved managements recommendation to reduce the performance period for the dividend equivalents granted in 2004 and 2005 by one year based on the Companys performance against the 2005 measurement criteria established by the Committee for this purpose at its February 28, 2005 meeting. The measurement criteria involve targets for earnings per share, dividends, total return to shareholders over a five-year period and customer growth, all of which were met or exceeded in 2005. As part of the equity incentive portion of the Companys executive compensation package, the Committee at its March 7, 2006 meeting approved awards of the following shares of restricted stock under the 2004 Equity Compensation Plan: 15,000 shares to Mr. DeBenedictis, 5,000 shares to Mr. Stahl, 5,000 shares to Mr. Smeltzer and 5,000 shares to Mr. Hugus. The share grants to Messrs. DeBenedictis, Stahl and Smeltzer are subject to a three-year restricted period, with one-third of each such grant to be released to the grantee each year on the
anniversary of the date of grant, and the share grant to Mr. Hugus is subject to a two-year restriction period with the full amount of the grant to be released at the end of the two-year period, subject in each case to the Companys achievement of performance criteria established by the Committee.
Section 162(m) of the Internal Revenue Code generally precludes the deduction for federal income tax purposes of more than $1 million in compensation (including long-term incentives) paid to the Chief Executive Officer and the other officers named in the Summary Compensation Table in any one year, subject to certain specified exceptions. While Aqua Americas executive compensation program is structured to be sensitive to the deductibility of compensation for federal income tax purposes, the program is principally designed to motivate senior executives to achieve the Companys goals. Therefore, the Company has determined that it may be appropriate for the Chief Executive Officers compensation to be at a level such that a portion is not deductible for federal income tax purposes. However, no part of the Companys executive compensation package for 2005 was subject to the limitation on the federal tax deduction for such compensation under Section 162(m).
The foregoing reports of the Audit Committee and the Executive Compensation and Employee Benefits Committee and the Comparative Stock Performance Chart below shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table shows compensation paid by the Company for services rendered during the years 2005, 2004 and 2003 for the Companys Chief Executive Officer and the other four most highly compensated executive officers of the Company.
Summary Compensation Table
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total shareholder return on the Common Stock of the Company for the last five years with the average cumulative total return of a peer group of companies and the cumulative total return on the S&P 500 over the same period, assuming a $100 investment on December 31, 2000 and the reinvestment of all dividends. The Dow Jones Utility Index consists of the following companies: American Electric Power Company; Consolidated Edison, Inc.; NiSource Inc.; Exelon Corporation; TXU Corporation; Edison International; Public Service Enterprise Group Incorporated; Dominion Resources, Inc.; Williams Companies, Inc.; Duke Energy Corporation; PG&E Corporation; AES Corporation; The Southern Company; FirstEnergy Corp.; and CenterPoint Energy, Inc.
COMPARARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG AQUA AMERICA, S&P
STOCK OPTION GRANTS IN 2005
The following table sets forth information concerning individual grants of stock options under the Companys 2004 Equity Compensation Plan during 2005 to each executive officer identified in the Summary Compensation Table who received options during the period.
Option Grants in Last Fiscal Year
STOCK OPTION EXERCISES IN 2005 AND VALUE OF OPTIONS AT YEAR-END 2005
The following table sets forth information concerning the number of stock options exercised during 2005 by each executive officer listed below and the number and value of unexercised options as of December 31, 2005, indicating in each case the number and value of those options that were exercisable and unexercisable as of that date.
Aggregate Option Exercises in Last Fiscal Year
CERTAIN COMPENSATION PLANS
The Retirement Plan for certain employees of the Company and certain of its subsidiaries (the Retirement Plan) is a defined benefit pension plan. In general, the Retirement Plan applies to employees hired prior to certain dates in 2003 and the participants are eligible for normal pension benefits upon retirement at age 65 and are eligible for early retirement benefits upon retirement at age 55 with ten years of credited service. Under the terms of the Retirement Plan, a Company participant becomes fully vested in his or her accrued pension benefit after five years of credited service. Benefits payable to employees under the Retirement Plan are based upon final average compensation, which is defined as the average cash compensation through the five highest consecutive years of the last ten full years preceding retirement.
The Employee Retirement Income Security Act of 1974, as amended, (ERISA) imposes maximum limitations on the annual amount of pension benefits that may be paid under, and the amount of compensation that may be taken into account in calculating benefits under, a qualified, funded defined benefit pension plan such as the Retirement Plan. The Retirement Plan complies with these ERISA limitations. Effective December 1, 1989, the Board of Directors adopted an Excess Benefits Plan for Salaried Employees of the Company (the Excess Plan). The Excess Plan is a nonqualified pension benefit plan that is intended to provide an additional pension benefit to Company participants in the Retirement Plan and their beneficiaries whose benefits under the Retirement Plan are adversely affected by these ERISA limitations. In addition, deferred compensation is excluded from the Retirement Plan Compensation, but is included in the calculation of the Excess Plan. The benefit under the Excess Plan is equal to the difference between (i) the amount of the benefit the Company participant would have been entitled to under the Retirement Plan absent such ERISA limitations and including deferred compensation, and (ii) the amount of the benefit actually payable under the Retirement Plan.
The following tabulation shows the estimated annual pension payable pursuant to the Retirement Plan and the Excess Plan to Company employees, including employees who are directors or officers of the Company, upon retirement after selected periods of service. This table is provided for illustrative purposes only and does not reflect pension benefits presently due under the Retirement Plan or Excess Plan.
Pension Plan Table
The Companys contributions to the Retirement Plan are computed on the basis of straight life annuities. The following executive officers listed in the Summary Compensation Table have the indicated number of completed years of service under the Retirement Plan, and would, upon retirement at age 65 on March 31, 2006, be entitled to a pension based on the remuneration level listed in the following table:
A Supplemental Executive Retirement Plan or SERP has been established for Mr. De Benedictis. This Plan, which is nonqualified and unfunded, was approved by the Board of Directors in 1992 and is intended to provide Mr. DeBenedictis with a total retirement benefit, in combination with the Retirement Plan and Excess Plan, that is commensurate with the retirement benefits for the chief executive officers of other companies. Under the terms of the SERP, Mr. DeBenedictis will be eligible to receive a benefit at normal retirement equal to the difference between (i) the benefit to which he would otherwise be entitled under the Retirement Plan assuming he had 25 years of service and absent the ERISA limitations referred to above, and (ii) the benefit payable to him under the Retirement Plan and the Excess Plan. Under the terms of Mr. DeBenedictis SERP, if his employment is terminated for any reason prior to age 65, he is entitled to receive a supplemental retirement benefit equal to the difference between (i) the benefit to which he would otherwise be entitled under the Retirement Plan assuming he was credited with two years of service for each of his first seven years of credited service and (ii) the benefit payable to him under the Retirement Plan and the Excess Plan. If Mr. DeBenedictis retires from the Company at age 65, the SERP is projected to provide an annual benefit of $113,031.
CODE OF ETHICS
The Company maintains a Code of Ethical Business Conduct for its directors, officers and employees, including the Companys Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as defined by the SECs rules adopted pursuant to Section 406(a) of the Sarbanes-Oxley Act of 2002. The Code covers a number of important subjects, including: conflicts of interest; corporate opportunities; fair dealing; confidentiality; protection and proper use of Company assets; compliance with laws, rules and regulations (including insider trading laws); and encouraging the reporting of illegal or unethical behavior. Copies of the Companys Code of Ethical Business Conduct can be obtained free of charge from the Corporate Governance portion of the Investor Relations section of the Companys Web site, www.aquaamerica.com, or by contacting the Company at the address appearing on the first page of this proxy statement, attention Investor Relations Department. The Company intends to post amendments to or waivers from the Code of Ethical Business Conduct (to the extent applicable to the Companys executive officers, senior financial officers or directors) on its Web site.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
Under the terms of Mr. DeBenedictis employment arrangement, if his employment is terminated by the Company for any reason other than his disability, death or for cause, he will be entitled to receive a severance payment equal to twelve months of his base compensation paid in twelve equal monthly installments without offset. In the event that the employment of any of the executive officers named in the Summary Compensation Table set forth above is terminated, actually or constructively, within two years following a change of control of the Company, the executive officers will be entitled to certain payments and benefits under agreements with the Company. Under the terms of these agreements, the Chief Executive Officer will be entitled to three times his average annual compensation and the other executive officers will be entitled to two times their average annual compensation, plus certain benefits for a period of three years for the Chief Executive Officer and two years for the other executive officers. The agreement with the Chief Executive Officer also provides for reimbursement to him for the tax effects of certain payments and the transfer to him of a split dollar life insurance policy maintained by the Company on his life. Under the terms of the 1994 Equity Compensation Plan and 2004 Equity Compensation Plan, each of which were approved by the Companys shareholders, outstanding stock options will become immediately exercisable, accrued dividend equivalents will become immediately payable and the restrictions on restricted stock grants will immediately lapse upon certain change of control events.
COMPENSATION OF DIRECTORS
Directors who are full-time employees of the Company do not receive a retainer or fees for service on the Board of Directors or Committees of the Board. Effective January 1, 2006, members of the Board of Directors who are not full-time employees of the Company or any of its subsidiaries (Non-employee Directors) receive an annual cash retainer fee of $15,000, plus an annual grant of 1,200 shares of restricted stock payable on the first of the month following the Annual Meeting of Shareholders. Directors also receive a fee of $1,500 for attendance at each meeting of the Board of Directors of the Company and a meeting fee for attendance at each Committee meeting of $1,250 for the Audit Committee and $1,000 for other Committees. In addition, each Committee Chair
who is a Non-employee Director receives an annual retainer fee of $7,500 for the Chair of the Audit Committee and $5,000 for the Chairs of the Corporate Governance Committee and Executive Compensation and Employee Benefits Committee. All directors are reimbursed for reasonable expenses incurred in connection with attendance at Board or Committee meetings. Directors are eligible to defer part or all of their fees under the Companys Director Deferral Plan. Amounts deferred accrue interest at the prime interest rate plus 1.0%. Amounts deferred are not funded. In 2005, Mr. Glanton deferred $29,000 of his fees and accrued earnings of $11,192 on his accumulated deferred fees. The Board of Directors in 2005 approved share ownership guidelines for the directors based on the number of shares having a value equal to five times the annual cash retainer for the directors. Directors will have up to five years to attain this guideline ownership level. As of December 31, 2005, only three of the directors, including the two directors elected in 2005, did not meet these guidelines.
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
The Audit Committee of the Companys Board of Directors has selected Pricewaterhouse Coopers LLP (PwC) as the Companys independent registered public accounting firm for the year ending December 31, 2006. Representatives of PwC are expected to be present at the Annual Meeting of Shareholders, will have the opportunity to make a statement at the meeting if they desire to do so, and will be available to respond to appropriate questions.
SERVICES AND FEES
The following table presents the fees for professional services billed by PwC:
Under the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), the Audit Committee is responsible for the appointment, compensation and oversight of the work of the independent registered public accountants. As a result, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent registered public accountants in order to assure that such services do not impair the auditors independence from the Company.
The Audit Committee has established a procedure to pre-approve all auditing and non-auditing fees proposed to be provided by the Companys independent registered public accountants prior to engaging the accountants for that purpose. Consideration and approval of such services occurs at the Audit Committees regularly scheduled meetings. All fees were approved by the Audit Committee for fiscal year 2005.
SHAREHOLDER PROPOSALS FOR 2007 ANNUAL MEETING
Shareholders may submit proposals, which are proper subjects for inclusion in the Companys proxy statement and form of proxy (Proxy Materials) for consideration at an Annual Meeting of Shareholders, by following the procedures prescribed by Rule 14a-8 of the Securities and Exchange Commission (the SEC). To be eligible for inclusion in the Companys Proxy Materials relating to the 2007 Annual Meeting of Shareholders, proposals must be submitted in writing and received by the Company at the address below by December 12, 2006.
In addition, a shareholder of the Company may wish to propose business to be considered at an Annual Meeting of Shareholders, but not to have the proposed business included in the Companys Proxy Materials relating to that meeting. Section 3.17 of the Companys bylaws requires that the Company receive written notice of business that a shareholder wishes to present for consideration at the 2007 Annual Meeting of Shareholders (other than matters included in the Companys Proxy Materials pursuant to the preceding paragraph) no earlier than January 17, 2007 nor later than February 16, 2007. The notice must meet certain other requirements set forth in Section 3.17 of the Companys bylaws. Copies of the Companys bylaws can be obtained by submitting a written request to the Secretary of the Company at the address below.
Proposals, notices and request for a copy of our bylaws should be addressed as follows:
Roy H. Stahl
PROCEDURES FOR NOMINATING OR RECOMMENDING FOR NOMINATION
Nominations for election of directors may be made at the Annual Meeting by any shareholder entitled to vote for the election of directors, provided that written notice (the Notice) of the shareholders intent to nominate a director at the meeting is filed with the Secretary of the Company prior to the Annual Meeting in accordance with provisions of the Companys articles of incorporation and bylaws.
Section 4.13 of the Companys Bylaws requires the Notice to be received by the Secretary of the Company not less than 14 days nor more than 50 days prior to any meeting of the shareholders called for the election of directors, with certain exceptions. These notice requirements do not apply to nominations for which proxies are solicited under applicable regulations of the SEC. The Notice must contain or be accompanied by the following information:
Pursuant to the above requirements, appropriate Notices in respect of nominations for directors must be received by the Secretary of the Company no later than May 3, 2006.
In addition, the Corporate Governance Committee of our Board of Directors will consider candidates for director recommended by shareholders under certain circumstances. Recommendations of candidates by shareholders should be submitted to the Chairman of the Corporate Governance Committee at least 120 days before the date on which the Company first mailed its Proxy Materials for the prior years Annual Meeting of Shareholders that is, with respect to the 2007 Annual Meeting, no later than December 12, 2006. In considering candidates
for director, the Corporate Governance Committee will consider the candidates personal abilities and qualifications, independence and the diversity of their background, expertise and experience in fields and disciplines relevant to the Company. In addition, candidates should have experience in positions with a high degree of responsibility, be leaders in the companies or institutions with which they are affiliated and be selected based upon contributions that they can make to the Company. The Corporate Governance Committee considers all of these qualities when selecting, subject to ratification by our Board of Directors, candidates for director.
The Company receives many shareholder suggestions which are not in the form of proposals. All are given careful consideration. We welcome and encourage your comments and suggestions. Your correspondence should be addressed as follows:
Roy H. Stahl
In addition, shareholders may communicate directly with the independent directors or the presiding independent director by writing to the address set forth below. The Company will review all such correspondence and provide any comments along with the full text of the shareholders communication to the independent directors or the presiding independent director.
The Independent Directors or Presiding Independent Director
The Company will provide without charge, upon written request, a copy of the Companys Annual Report on Form 10-K for 2005, Corporate Governance Guidelines, Committee Charters and Code of Ethical Business Conduct. Please direct your requests to Investor Relations Department, Aqua America, Inc., 762 W. Lancaster Avenue, Bryn Mawr, PA 19010.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the Act) requires the Companys officers and directors, and persons who own more than 10% of a registered class of the Companys equity securities (a 10% Shareholder), to file reports of ownership and changes in ownership with the SEC. Officers, directors and 10% Shareholders are required by the SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it during 2005, the Company believes that all filings required to be made by the reporting persons were made on a timely basis, except for late Form 4s with respect to the February 28, 2005 stock options granted to executive officers and a Form 4 that was filed late for the sale of shares by Mr. Menario.
The Board of Directors is not aware of any other matters which may come before the meeting. However, if any further business should properly come before the meeting, the persons named in the enclosed proxy will vote upon such business in accordance with their judgment.
April 11, 2006
VOTE BY INTERNET - www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the Web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Aqua America, Inc., c/o ADP, 51 Mercedes Way, Edgewood, NY 11717.
AQUA AMERICA, INC.
Proxy for Annual Meeting of Shareholders, May 17, 2006
The undersigned hereby appoints Roy H. Stahl, David P. Smeltzer and Robert A. Rubin, or a majority of them or anyone of them acting singly in absence of the others, with full power of substitution, the proxy or proxies of the undersigned, to attend the Annual Meeting of Shareholders of Aqua America, Inc., to be held at the Drexelbrook Banquet and Corporate Events Center, Drexelbrook Drive & Valley Road, Drexel Hill, Pennsylvania 19026, located within the Drexelbrook Community at 10:00 a.m. on Wednesday, May 17, 2006 and any adjournments thereof, and, with all powers the undersigned would possess, if present, to vote all shares of Common Stock of the undersigned in Aqua America, Inc. including any shares held in the Dividend Reinvestment Plan of Aqua America, Inc. as designated on the reverse side.
The proxy when properly executed will be voted in the manner directed herein by the undersigned. If the proxy is signed, but no vote is specified, this proxy will be voted: FOR the nominees listed in Item 1 on the reverse side, and in accordance with the proxies best judgment upon other matters properly coming before the meeting and any adjournments thereof.
PLEASE MARK, SIGN, DATE AND PROPERLY RETURN THE PROXY CARD USING THE ENLOSED ENVELOPE, OR VOTE ELECTRONICALLY THROUGH THE INTERNET OR BY TELEPHONE BY FOLLOWING THE INSTRUCTIONS SET OUT ON THE PROXY CARD.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE