Aqua America DEF 14A 2007
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 Springfield Country Club, 400 West Sproul Road, Springfield, PA 19064 at 10:00 A.M., local time, on Thursday, May 24, 2007, for the following purposes:
Only shareholders of record at the close of business on April 2, 2007 will be entitled to notice of, and to vote at, the Annual Meeting and at any adjournments thereof.
April 10, 2007
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 Thursday, May 24, 2007 and at any adjournments thereof. This proxy statement and the enclosed proxy card are being mailed to shareholders on or about April 10, 2007.
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. Directors, officers and regular employees of the Company may solicit proxies, although no compensation will be paid by the Company for such efforts.
The proxy statement and Annual Report to Shareholders for the year ended December 31, 2006, 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 April 2, 2007. The proxy statement and Annual Report are being sent electronically to those shareholders of record as of April 2, 2007 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 April 2, 2007 are entitled to vote at the meeting. As of that date, there were 132,571,410 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, 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 or by telephone will not affect a shareholders right to attend the meeting and vote in person. Any shareholder giving a proxy or voting electronically or by telephone has the right to revoke the proxy or the electronic or telephonic 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, by making a later-dated vote electronically or by telephone 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 or telephonically 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.
In August 2006, the Board of Directors, on the recommendation of the Corporate Governance Committee, appointed Mr. Andrew J. Sordoni, III, Chairman of Sordoni Construction Services, Inc., and Ms. Ellen T. Ruff, President of Duke Energy Carolinas, to the Board of Directors. Mr. Sordoni and Ms. Ruff were recommended to the Corporate Governance Committee by Mr. Glanton, Chairman of the Corporate Governance Committee and an independent director. In accordance with the requirements of the Companys Articles of Incorporation and Bylaws to maintain the size of its classes of directors as nearly equal in number as possible, Mr. Sordoni was appointed to the class of directors to be elected at the 2007 Annual Meeting of Shareholders and Ms. Ruff was appointed to the class of directors to be elected at the 2008 Annual Meeting of Shareholders. In accordance with the Companys Corporate Governance Guidelines, the Chairman of the Corporate Governance Committee reported to the Corporate Governance Committee that Richard L. Smoot, William P. Hankowsky and Andrew J. Sordoni, III, the three directors with terms expiring at the 2007 Annual Meeting would be willing to serve on the Board of Directors for an additional three-year term. The Corporate Governance 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 voted to recommend to the Board of Directors, and the Board of Directors approved, the nomination of Mr. Smoot, Mr. Hankowsky and Mr. Sordoni for election to the class of directors to be elected at the 2007 Annual Meeting of Shareholders.
Therefore, three directors, Messrs. Smoot, Hankowsky and Sordoni, will stand for election by a plurality of the votes cast at the 2007 Annual Meeting, and six directors will continue to serve until either the 2008 or 2009 Annual Meetings, depending on the period remaining in each of their terms. At the 2007 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. Smoot, Hankowsky and Sordoni as directors.
INFORMATION REGARDING NOMINEES AND DIRECTORS
For each of the three nominees for election as directors at the 2007 Annual Meeting and the six directors in the classes of directors whose terms of office are to expire either at the 2008 Annual Meeting or the 2009 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 37).
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. Transactions, relationships and arrangements between directors or members of their immediate family and the Company that are not addressed by the categorical
standards may be material depending on the relevant facts and circumstances of such transactions, relationships and arrangements. The Board of Directors considered the following transactions, relationships and arrangements in connection with making the independence determinations:
Based on a review applying the categorical standards set forth in the Companys Corporate Governance Guidelines and considering the relevant facts and circumstances of the transactions, relationships and arrangements between the directors and the Company described above, the Board of Directors has affirmatively determined that each nominee for director and each of the Companys other directors, other than Mr. DeBenedictis, the Companys Chief Executive Officer, 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 non-management 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.
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 rules adopted by the Securities and Exchange Commission (SEC) pursuant to Section 406(a) of the Sarbanes-Oxley Act of 2002. The Code of Ethical Business Conduct 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.
POLICIES AND PROCEDURES FOR APPROVAL OF RELATED PERSON TRANSACTIONS
In February 2007, the Board formally adopted a written policy with respect to Related Person Transactions to document procedures pursuant to which such transactions are reviewed, approved or ratified. The policy applies to any transaction in which (1) the Company is a participant, (2) any related person has a direct or indirect material interest and (3) the amount involved exceeds $120,000, but excludes any transaction that does not require disclosure under SEC regulations. The Corporate Governance Committee, with assistance from the Companys General Counsel, is responsible for reviewing, approving and ratifying any related party transaction. The Corporate Governance Committee intends to approve only those related person transactions that are in, or are not inconsistent with, the best interests of the Company and its stockholders.
The Board of Directors held five meetings in 2006. 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, which is comprised of senior management of the Company, reports periodically to the Board of Directors. Ms. Carroll 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 2006. The Board of Directors encourages all directors to attend the Companys Annual Meeting of Shareholders. All the directors except Dr. Papadakis were in attendance at the 2006 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. (See Additional Information on page 37).
The current members of the standing 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 met once in 2006. 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 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 four times during 2006. 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 page 34.
Executive Compensation and Employee Benefits Committee
The Executive Compensation and Employee Benefits Committee is composed of three 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 2006.
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 also reviews and approves, ratifies or rejects related person transactions under the Companys written policy with respect to related person transactions. The Corporate Governance Committee met twice during 2006.
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information as of January 31, 2007 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).
COMPENSATION DISCUSSION AND ANALYSIS
In this Compensation Discussion and Analysis, we address the compensation paid or awarded to our executive officers listed in the Summary Compensation Table that immediately follows this discussion. We refer to these executive officers as our named executive officers.
Objectives of Aqua Americas Compensation Programs
Our executive compensation program is designed to motivate our senior executives to achieve our goals of providing our customers with high quality, cost-effective and reliable water and wastewater services and providing our shareholders with a long-term, above-market return on their investment.
Toward that end, our compensation program is designed to meet the following objectives:
In administering the executive compensation program, the Executive Compensation and Employee Benefits Committee (the Compensation Committee) attempts to strike an appropriate balance among the elements of our compensation program to achieve the objectives described above. Each of the elements of the program is discussed in greater detail below.
Our compensation program is designed to reward specific qualities and achievements. Our compensation program rewards:
In addition, our compensation program attempts to attain stability and dedication to shareholder value in the event of a fundamental transaction affecting the ownership of Aqua America through certain change-in-control agreements with selected senior executives.
Elements of Aqua Americas Compensation Program
Our executive compensation program is comprised of the following six elements:
As used in this description, the total of base salary, annual cash incentive compensation and equity incentive compensation for each executive is referred to as Total Direct Compensation. We believe that the elements of our compensation program are important components of a well-designed, balanced, competitive compensation program.
Determination of Competitive Compensation
The Compensation Committee has retained Towers Perrin, a nationally-recognized compensation consulting firm, to assist the Committee in designing and assessing the competitiveness of our executive compensation program. In determining the relative weighting of salary, annual cash incentives and equity incentive elements of the compensation program and the target level of these elements of compensation for our executives, the Compensation Committee considers survey data from companies in the water utility industry, the broader utility industry and general industry (the Composite Market) compiled by Towers Perrin. The water utility industry data was drawn from the SAJE Consulting Compensation Survey, and the broader utility industry and general industry data was drawn from Towers Perrins executive compensation database. The Composite Market represents an equal blending of the utility and general industry data. Due to the relatively limited number of investor-owned water utility companies, the Compensation Committee believes that this broad survey data approach provides reasonable and reliable data for use in determining competitive compensation levels. Towers Perrin develops competitive compensation benchmarks for each of the named executive officers using this survey data. Towers Perrin uses regression analysis to size-adjust the survey data for each named executive officers scope of responsibilities, where possible.
The Compensation Committee has targeted competitive compensation levels for salaries and annual cash incentive awards at the 50th percentile of compensation levels for utility companies and competitive compensation levels for equity incentives at the 50th percentile of a 50/50 mix of utility companies and general businesses in the Composite Market. We believe that a blended approach is appropriate for equity incentives in order to place a strong focus on creating value for Aqua Americas shareholders and to enable us to compete for talent both within and outside of the traditional utility industry.
We emphasize pay for performance, especially for our higher level executives. Therefore, the named executive officers tend to receive a sizable portion of their total annual compensation from annual cash incentives and equity incentives. For 2006, the portion of the target annual Total Direct Compensation for the named executive officers attributable to base salary ranges from 29% for our Chief Executive Officer to 62% for other executives, and the portion attributable to cash and equity incentives ranges from 71% for our Chief Executive Officer to 38% for other executives. Since it is impossible to predict the extent to which performance objectives and financial targets will be achieved, annual cash incentives are valued at their target value and equity awards are valued at their fair market value at the time of grant for purposes of setting the portion of the executives total compensation package represented by these elements. Payouts of prior cash incentives and changes in the value of equity incentives granted in previous years are not taken into account in determining the amounts of current awards.
The senior executive officers of Aqua America, including the named executive officers, are divided into five salary grades. A salary grade midpoint, a range of target annual cash incentives as a percentage of salary and a range of target equity incentive awards as a percentage of base salary are established for each salary grade based on information provided by Towers Perrin regarding competitive levels in the Composite Market for these elements of the compensation program.
A competitive base salary is necessary to attract and retain a talented and experienced workforce. Individual salaries are considered for adjustment annually and adjustments are based on general movement in external salary levels, the executives salary in relation to the midpoint of his or her salary grade, individual performance, and changes in individual duties and responsibilities. We use external salary surveys and competitive salary benchmarks from the 50th percentile of utility companies in the Composite Market to determine the appropriate annual target merit increase percentage for executives.
Annual Cash Incentive Awards
Annual cash incentives under the Annual Cash Incentive Compensation Plan are intended to motivate management to focus on the achievement of annual objectives that will, among other things, improve the level of service to our customers, control the cost of service and enhance our financial performance. The annual cash incentive portion of the compensation package is based on an incentive award for each executive, which is stated as a percentage of their base salary. The Compensation Committee selects a target annual incentive percentage for each executive so that the executives target total cash compensation, consisting of base salary and target annual cash incentive, is generally within 15% of the total cash compensation of the 50th percentile of the utility companies in the Composite Market.
Actual annual incentive awards for executive officers are calculated using the following formula:
Salary x Target Incentive Percentage x Company Factor x Individual Factor
The Individual Factor is a percentage based on the executives performance against individual objectives established each year. The Company Factor is a percentage based on performance against an annual financial target.
The Company Factor ranges from 50%, if 90% of the annual financial target is achieved, to 125%, if 110% or more of the annual financial target is achieved. If we fail to achieve at least 90% of the financial target, the Company Factor would be 0% and the participant would not receive an annual incentive award.
The financial performance target for executives with overall corporate responsibilities has been Aqua Americas budgeted annual net income. The financial performance target for executives with operating unit responsibilities has been a combination of Aqua Americas budgeted annual net income and the budgeted annual earnings before interest, taxes and depreciation (EBITD) of the executives particular operating unit or units. By tying the Company Factor for executives with operating unit responsibilities primarily to the financial performance of their operating unit or units, we believe that the operating executives will have a closer correlation between their actions and the financial components of their annual cash incentive compensation. EBITD was chosen as the appropriate measure for operating unit executives since these executives do not have direct responsibility for decisions affecting interest, taxes and depreciation charges. In the case of both the net income and EBITD measures, the impact of any unbudgeted extraordinary gains or losses as a result of changes in accounting principles may be excluded and results may be adjusted for other factors as deemed appropriate by the Compensation Committee. Over the past five years, the Company Factors for the named executive officers have ranged from 78% to 116%. For the annual cash incentive award for 2006, for Messrs. DeBenedictis, Smeltzer, Stahl and Riegler, whose Company Factor is based on Aqua Americas budgeted net income, the Company Factor was 78%, based on the level of net income achieved by Aqua America in 2006. For Mr. Kyriss, whose Company Factor is based 20% on Aqua Americas budgeted net income and 80% on EBITD for Aqua Americas Mid-Atlantic operations, the Company Factor was 87%, based on the level of net income achieved by Aqua America and the level of EBITD achieved by Aqua Americas Mid-Atlantic operations in 2006.
The Individual Factor ranges from 0% to 150% and is determined based on the individual executives performance against objectives established for the executive each year.
Each named executive officer has at least 10 objectives each year and each objective is assigned a point rating. The executive must achieve at least 70 points to be eligible to receive an annual cash incentive award. Achievement of objectives totaling 70 points would result in an Individual Factor of 70%. The total points that can be earned for the expected level of individual performance is 90 points, resulting in an Individual Factor of 90%, although up to 110 points can be earned for measurable achievement above target levels, resulting in an Individual Factor of 110%. Up to an additional 40 discretionary points can be awarded for exceptional performance or for achievements on matters not covered by the executives original objectives. For the Chief Executive Officer, the Individual Factor has been based on over 30 individual objectives with various points for each objective totaling 150 points for all objectives combined. The Chief Executive Officer must also achieve at least 70 points to receive the minimum Individual Factor rating of 70%, and the maximum Individual Factor rating he can achieve is 150% based on achieving all of his objectives for the year as determined by the Compensation Committee.
The annual objectives established for the executive officers, including the named executive officers, will vary depending on their primary areas of responsibility, but each of the objectives can be categorized into common areas of emphasis. These common areas of emphasis are customer growth and strategy, improving customer service, cost control, performance improvement, compliance and revenue improvement. The growth objectives for the Chief Executive Officer were based on both the number of acquisitions completed and total customer growth targets consistent with our publicly-announced long-term customer growth goals. For the annual cash incentive award for 2006, the Individual Factors were 150% for Mr. DeBenedictis, 126% for Mr. Smeltzer, 123% for Mr. Stahl, 115% for Mr. Kyriss and 110% for Mr. Riegler.
Regardless of Aqua Americas financial performance, the Compensation Committee retains the authority to determine the final Company Factor, and the actual payment and amount of any bonus is always subject to the discretion of the Compensation Committee. The Compensation Committee has never exercised this discretion to deny a cash incentive award that was otherwise earned under the Annual Cash Incentive Compensation Plan. In the event of a significant restatement of our financial results caused by executive fraud or willful misconduct, the Board will review the incentive compensation received by the executives with respect to the period to which the restatement relates, recalculate Aqua Americas results for the period to which the restatement relates and seek reimbursement of that portion of the incentive compensation that was based on the misstated financial results from the executive(s) whose fraud or willful misconduct was the cause of the restatement.
Under the terms of our 2004 Equity Compensation Plan, the Compensation 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 Aqua America and its subsidiaries who are in a position to contribute materially to the successful operation of our business. The purpose of the Equity Compensation Plan is to help align executive compensation with the enhancement of our financial stability and performance and with shareholder interests by providing the participants with a long-term equity interest in Aqua America. The Equity Compensation Plan also provides us the ability to attract and retain talented employees.
As part of its review of the total compensation package for our senior executives, the Compensation Committee annually reviews our equity incentive compensation program. The Compensation Committee uses a combination of stock options, dividend equivalents and restricted stock, with vesting subject to performance criteria established by the Compensation Committee, to best link executive long-term incentives to the enhancement of our financial stability and performance and shareholder interests. The Compensation Committee selects a target dollar amount of equity incentives for each executive based on the target equity incentive levels at the 50th percentile of a 50/50 mix of utility companies and general businesses in the Composite Market.
In determining the types of equity compensation to be awarded, stock options have been the predominant form of equity incentive used by the Compensation Committee, since the Compensation Committee believes that stock options have provided a cost-effective method of achieving the objectives of the equity incentives. Dividend equivalents are used to supplement the stock option awards and to motivate executive performance to achieve results
that will enable us to increase dividends for our shareholders. The Compensation Committee generally awards a number of dividend equivalents equal to the number of shares underlying stock options awarded to officers and senior executives each year.
Each dividend equivalent entitles the grantee to receive in the future an amount of cash compensation equal to the dividends paid by Aqua America on a share of Common Stock for a particular period of time referred to as the accumulation period. For the dividend equivalents awarded to date, the Compensation Committee has set this accumulation period as four years from the date of grant. As part of the dividend equivalent award, the Compensation Committee also sets a target payment date for the amounts accumulated for the dividend equivalents. For the dividend equivalents awarded to date, the Compensation Committee has set this payment date at four years from the date of grant. Under the terms of the Equity Compensation Plan, the actual payment date can be shortened to two years or lengthened to up to eight years depending on our achievement of annual performance criteria established by the Compensation Committee each year. If the payment date is shortened to less than four years, the executive will receive on the payment date any dividend equivalents accrued as of that date and the balance of the applicable dividends on Aqua Americas dividend payment dates through the end of the accumulation period. The performance criteria for determining the payment date consist of achieving our budgeted net income, increasing the dividend paid to shareholders, achieving a total return to shareholders over five years in excess of our peer group as shown in the total return to shareholders graph in the Annual Report to Shareholders and achieving a customer growth target. The performance criteria are the same for all executives that are granted dividend equivalents each year.
The Compensation Committee has used restricted stock on a selective basis to supplement the option and dividend equivalent awards to achieve target equity incentive levels for certain executives and as a retention tool for selected executives. The Compensation Committee has historically made annual awards of restricted stock to our Chief Executive Officer, primarily as a retention tool. In recent years, the Compensation Committee has also made limited restricted stock grants to other senior executives, also primarily as a retention tool. Restricted stock grants can vest in a given period of time or in increments over a period of years on the anniversaries of the grant date, subject to our achievement of certain performance criteria. These performance criteria require an increase in our annual operating income over previous periods.
Awards of stock options, dividend equivalents and restricted stock are generally all made on the same grant date. The Compensation Committee bases its equity incentive awards for the executives each year on the competitive levels for these awards as described above and does not consider any increase or decrease in the value of past equity incentive awards in making this decision.
In considering the number of stock options to be granted in total to all employees each year, the Compensation Committee considers the number of options outstanding and the number of options to be awarded as a percentage of Aqua Americas total shares outstanding. The number of options granted annually to all employees has been less than 1.0% of Aqua Americas total shares outstanding.
It is our long-standing practice to set the exercise price for stock options equal to the fair market value of Aqua Americas stock on the date of grant and to make the grant date of equity compensation grants (options, dividend equivalents and restricted stock) the date that the Compensation Committee approves the grants. The meeting dates for all Board and Compensation Committee meetings, including the dates for the Compensation Committee to approve the equity grants is set in the fall of the preceding year for the coming year, subject to last minute scheduling conflicts, and is independent of the timing of our disclosure of any material non-public information. The Compensation Committee has historically used the average of the high and low trading prices of our Common Stock on the New York Stock Exchange on the date of grant to determine the fair market value and, therefore, the exercise price of options. Beginning in 2007, the Compensation Committee will use the closing price of our Common Stock on the New York Stock Exchange on the date of grant to determine the exercise price of options granted.
Our qualified retirement plans are intended to provide competitive retirement benefits to help attract and retain employees. Our non-qualified retirement plans are intended to: (1) provide executives with a retirement benefit that is comparable on a percentage of salary basis to that of our other employees participating in our qualified pension plan by providing the benefits that are limited under current Internal Revenue Service regulations; and (2) provide our Chief Executive Officer with a total retirement benefit based on 25 years of service at normal retirement age.
Non-qualified Deferred Compensation Plans
We maintain a non-qualified Executive Deferred Compensation Plan and Director Deferred Compensation Plan that allow eligible members of management and the Board of Directors to defer a portion of their normal compensation. Management may defer their salary and annual cash incentives and the directors may defer any portion of their compensation. Deferred amounts accrue interest at the rate of one percent over the prime rate of interest and, for the participants in the Executive Deferred Compensation Plan, can also be used to purchase universal life insurance. In addition, in order to provide executives with the full company matching contribution available to other employees, executives who choose to defer up to six percent of their salary under one of Aqua Americas 401(k) plans, but do not receive the full Aqua America matching contribution under the plans due to the Internal Revenue Service regulations limiting the total dollar amount that can be deferred under a 401(k) plan, receive the portion of the Aqua America matching contribution that would otherwise be forfeited by the executive as an Aqua America contribution into the Executive Deferral Plan.
We maintain change-in-control agreements with certain senior executive officers, including the named executive officers. The change of control agreements entered into with executive officers are intended to minimize the distraction and uncertainty that could affect key management in the event we become involved in a transaction that could result in a change of control of Aqua America. Under the terms of these agreements, the covered executives are entitled to certain severance payments and continuation of benefits if they experience a termination of employment other than for cause, or in the event of a good reason termination, as defined in the agreements, within two years following a change-in-control of Aqua America. (See the description of Potential Payments Upon Termination or Change-in-Control on pages 26 to 32.) These agreements help to induce the covered executives to remain with Aqua America and to reinforce and encourage their continued attention and dedication to their duties and responsibilities in the event of a possible change-in-control. These change-in-control agreements are referred to as double trigger agreements since they only provide a benefit to executives whose employment is terminated or who have good reason to terminate their employment following a change of control. These change-in-control agreements do not provide any payments or benefits to the covered executives merely as a result of a change-in-control, although other benefits, such as the vesting of unvested stock options, restricted stock and accrued dividend equivalents, may be triggered under our other plans as a result of a change-in-control. Only the agreement with our Chief Executive Officer includes a provision allowing him to receive the benefits under the agreement if he terminates his employment within 12 months after a change of control if he determines that circumstances have changed with respect to Aqua America and he is no longer able to effectively perform his duties and responsibilities. Each of the change-in-control agreements, except the agreement with the Chief Executive Officer, limit the amount of the payments under the agreements to the Internal Revenue Services limitation on the deductibility of these payments under Section 280G of the Internal Revenue Code (the Code). The agreement with the Chief Executive Officer does not contain this limitation and requires Aqua America to reimburse him for certain tax impacts of exceeding this limit. See The Impact of Tax Consideration on Executive Compensation Decisions on page 16. Payment under the Chief Executive Officers Agreement is, however, contingent on his agreement to a 12 month non-compete agreement.
The Role of Management in the Executive Compensation Process
Our executive management team assists the Compensation Committee by preparing schedules showing the present compensation of executives and compiling the recommended salary grade midpoints, target annual cash incentives and target range of equity compensation awards from Towers Perrin, the Compensation Committees consultant. Executive management also gathers and presents the supporting information for the individual executives performance against their objectives for the Individual Factor under the Annual Cash Incentive Compensation Plan. Our Chief Financial Officer provides the Compensation Committee with certifications as to our financial performance for purposes of determining the Company Factor for the Annual Cash Incentive Compensation Plan, our performance against the criteria established by the Compensation Committee for the acceleration or deferral of the payment date for dividend equivalent awards and our performance against the criteria established by the Compensation Committee for the vesting of restricted stock grants. These financial measures are also certified by
our Director of Internal Audit. Our Chief Executive Officer makes recommendations to the Committee with respect to the compensation awards for the named executive officers other than himself, but the ultimate decisions regarding compensation for these officers are made by the Compensation Committee.
The Impact of Tax Considerations on Executive Compensation Decisions
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 achieve our objectives as described above. Section 162(m) of the Code generally precludes the deduction for federal income tax purposes of more than $1 million in compensation (including long-term incentives) paid individually to our Chief Executive Officer and the other named executive officers in any one year, subject to certain specified exceptions. We have determined that it may be appropriate for our Chief Executive Officers compensation to be at a level such that a portion is not deductible for federal income tax purposes.
As noted above, under the change-in-control agreement with our Chief Executive Officer, our payments to our Chief Executive Officer will not be subject to limitations under Section 280G of the Code, and therefore, a portion of the payments may not be deductible. In addition, our Chief Executive Officer shall be paid an additional amount such that the net amount retained by the Executive after deduction of any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment tax and excise tax imposed upon such additional amount shall be equal to the payment otherwise due under the agreement. We included these provisions in our Chief Executive Officers change-in-control agreement because we did not want the potential excise tax to serve as a disincentive to our Chief Executive Officers pursuit of a change-in-control transaction that might otherwise be in the best interests of our shareholders. We believe that, in light of our Chief Executive Officers record in enhancing value for our shareholders, this determination is appropriate.
Equity Ownership Requirements
In 2005, the Board of Directors established stock ownership guidelines for the named executive officers. These executive officers are expected to hold Aqua America shares equal in value to at least five times base salary for our Chief Executive Officer and three times base salary for the other named executive officers. Shareholdings will include shares held under our 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 named executive officers, except Mr. Kyriss, who was first designated as an executive officer in 2006, met these guidelines as of the end of 2006.
REPORT OF THE EXECUTIVE COMPENSATION AND EMPLOYEE BENEFITS COMMITTEE
William P. Hankowsky, Lon R. Greenberg and Ellen T. Ruff serve on the Executive Compensation and Employee Benefits Committee. Ms. Ruff joined the Committee in December 2006.
The Committee has reviewed and discussed the Compensation Discussion and Analysis on pages 10 through 16 with management and with the Committees consultant. Based on this review and discussion, the Committee recommended to the Companys Board of Directors and the Board of Directors approved the inclusion of the Compensation Discussion and Analysis in the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and the Companys proxy statement for the Annual Meeting of Shareholders.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table shows compensation paid or earned by the Companys Principal Executive Officer, Principal Financial Officer and the next three most highly compensated executive officers of the Company during the fiscal year ended December 31, 2006.
Dividends on shares of restricted stock pending the release of the stock from restrictions are paid to the grantee and these amounts are included in the All Other Compensation column set forth above. Amounts deferred by participants in the Companys Executive Deferral Plan earn interest at the rate of the prime rate plus 1% or may be used to purchase life insurance under a flexible premium universal life insurance policy, with any cash value under such policies being invested in a variety of investment funds offered by the insurance carrier under the policy. The above-market earnings on deferred compensation included in the Change in Pension Value and Non-Qualified Deferred Compensation Earning column are computed based on the basis of increases in the cash value of the insurance policies held under the Plan and the interest earned in any month during which the average interest rate at the prime interest rate plus 1% exceeded 120% of the average of the federal long-term rate for that month.
GRANTS OF PLAN-BASED AWARDS
The following table sets forth information regarding equity and non-equity awards granted to the named executive officers in 2006.
Grants Of Plan-Based Awards
Salary x Target Incentive Percentage x Company Factor x Individual Factor
The Individual Factor can range from 0 to 150 percent depending on the individuals performance against his or her annual objectives. The individual must achieve at least 70 points in order to receive an award for the year. The Company Factor can range from 0 to 125 percent depending on the performance of the Company or the executives business unit against established financial targets for the year. If the Company or the business unit achieves 90% of its financial target the Company Factor would be 50%. If the Company or business unit achieves 110% or more of its financial target, the Company Factor would be 125%. The Company or business unit must achieve at least 90%
of its financial target for the executive to receive an award for the year. Under the Estimated Future Payouts Under Non-Equity Incentive Plan Awards columns in the table above, the amounts were calculated based on the individuals target bonus percentage times their current annual salary, and using an Individual Factor of 70% and a Company Factor of 50% for the Threshold amount, an Individual Factor of 100% and a Company Factor of 100% for the Target amount, and an Individual Factor of 150% and Company Factor of 125% for the Maximum amount.
Stock Awards are in the form of restricted stock with various vesting periods. The grants for Messrs. DeBenedictis, Smeltzer and Stahl each vest in installments of one-third each year starting on the first anniversary of the grant date. In order for the grantee to receive the applicable portion of the restricted stock grant when it vests, the Company must also achieve the financial performance criteria established by the Committee at the time of grant. For the restricted stock grants made to Messrs. DeBenedictis, Stahl and Smeltzer, the performance criteria are an increase in the Companys operating income in the year ending immediately prior to the vesting date over the prior year. If the Company does not achieve the required financial performance, the shares that would otherwise vest are forfeited. Therefore, the full number of shares of restricted stock is included in the Target column under the Estimated Future Payouts Under Equity Incentive Plan Awards.
The Company has historically granted stock options at an exercise price equal to the average of the high and low sales price for the Companys Common Stock on the date of grant. Although the Company believes that this formula results in a fair exercise price for stock options, in accordance with general guidance from the SEC, the Company will begin using the closing price for the Companys Common Stock on the date of grant as the exercise price for stock options starting in 2007.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information on outstanding stock option and restricted stock awards held by the named executive officers at the end of 2006.
Outstanding Equity Awards at Fiscal Year-End
OPTION EXERCISES AND STOCK VESTED
The following table sets forth (1) the number of shares of Aqua Americas Common Stock acquired by the named executive officers in 2006 from the exercise of stock options, (2) the value realized by those officers upon the exercise of those stock options based on the difference between the market price for our Common Stock on the date of exercise and the exercise price for the options, (3) the number of shares of restricted stock previously granted to the named executive officers that vested in 2006, and (4) the value realized by those officers upon the vesting of such shares based on the closing market price for our shares of Common Stock on the vesting date.
Option Exercises and Stock Vested
RETIREMENT PLANS AND OTHER POST-EMPLOYMENT BENEFITS
The following table shows the number of years of credited service for the named executive officers under our various retirement plans and the actuarial present value of accumulated benefits under those plans as of December 31, 2006 and any payments made to the named executive officers in 2006 under those plans.
RETIREMENT INCOME PLAN FOR AQUA AMERICA, INC. AND SUBSIDIARIES (THE RETIREMENT PLAN)
Aqua America, Inc. sponsors a qualified defined benefit Retirement Plan to provide retirement income to Aqua Americas employees hired prior to certain dates in 2003. The plan pays benefits for eligible employees based upon a five-year final average plan compensation. For the portion of the Retirement Plan covering the named executive officers, plan compensation is defined as total compensation paid, but excludes contributions made by Aqua America to a plan of deferred compensation, distributions from a deferred compensation plan, amounts realized from the exercise of stock options or when restricted stock becomes freely transferable, fringe benefits, welfare benefits, reimbursements or other expense allowances, moving expenses and commissions. 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.
Benefits earned under the final pay formula are equal to 1.35% of average plan compensation plus 0.45% of average plan compensation above Covered Compensation for each year of credited service up to 25 years plus 0.5% of average plan compensation for each year of credited service above 25 years. The annual benefit is further subject to a minimum benefit schedule. Average plan compensation is defined as the average of plan compensation over the highest five consecutive years out of the last ten years. Covered Compensation is defined as the average of the Social Security Wage Bases in effect for each calendar year during the thirty-five year period ending with the last day of the calendar year of the benefit determination.
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. Participants may retire as early as age 55 with 10 years of service. Unreduced benefits are available when a participant attains the earlier of age 65 with 5 years of service or age 62 with 30 years of service. Otherwise, benefits are reduced 3% for each year by which retirement precedes the attainment of age 65. Pension benefits earned are payable in the form of a lifetime annuity. Married individuals receive a reduced benefit paid in the form of a qualified joint and survivor annuity.
Messrs. DeBenedictis, Kyriss, and Riegler are currently eligible to retire under the plan.
The provisions described above cover a significant portion of the companys non-union workforce hired prior to certain dates in 2003, including each of the named executive officers. Certain union employees and certain other non-union employees are covered under separate definitions of plan compensation, benefit formulas and benefit options within the Retirement Plan.
AQUA AMERICA, INC. SUPPLEMENTAL RETIREMENT PLANS
Effective December 1, 1989, the Board of Directors adopted an Excess Benefits Plan for Salaried Employees of the Company (the ERISA Excess Plan). The ERISA 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 the ERISA limitations described above. In addition, deferred compensation is excluded from the Retirement Plan Compensation, but is included in the calculation of benefits under the ERISA Excess Plan. The benefit under the ERISA 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 in the final average earnings calculation, and (ii) the amount of the benefit actually payable under the Retirement Plan.
A Supplemental Executive Retirement Plan, or SERP, has been established for Mr. DeBenedictis. This Plan, which is nonqualified and unfunded, was approved by the Board of Directors in 1992. 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 ERISA 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 ERISA Excess Plan.
Participants may retire as early age 55 with 10 years of service under the ERISA Excess Plan and the SERP. Unreduced benefits are available when a participant attains the earlier of age 65 with 5 years of service or age 62 with 30 years of service. Otherwise, benefits are reduced 3% for each year by which retirement precedes the attainment of age 65. Pension benefits earned are payable in the form of a lifetime annuity. Married individuals receive a reduced benefit paid in the form of a qualified joint and survivor annuity. Pension benefits under the ERISA Excess Plan and the SERP may be paid as a lump sum.
Messrs. DeBenedictis, Kyriss, Riegler, Smeltzer and Stahl are earning benefits under the ERISA Excess Plan, and are fully vested in those benefits. Mr. DeBenedictis is also earning benefits under the SERP, and is fully vested. Messrs. DeBenedictis, Kyriss, and Riegler are currently eligible to retire under the ERISA Excess plan and Mr. DeBenedictis is currently eligible to retire under the SERP.
ACTUARIAL ASSUMPTIONS USED TO DETERMINE VALUES IN THE PENSION BENEFITS TABLE
The amounts shown in the Pension Benefit Table above are actuarial present values of the benefits accumulated through the date shown. An actuarial present value is calculated by estimating expected future payments starting at an assumed retirement age, weighting the estimated payments by the estimated probability of surviving to each post-retirement age, and discounting the weighted payments at an assumed discount rate to reflect the time value of money. The actuarial present value represents an estimate of the amount which, if invested today at the discount rate, would be sufficient on an average basis to provide estimated future payments based on the current accumulated benefit. Assumptions used to determine the values are the same as those disclosed on Aqua Americas financial statements as of those dates with the exception of the assumed retirement age and the assumed probabilities of leaving employment prior to retirement. Retirement was assumed to occur at the earliest possible unreduced retirement age for each plan in which the executive participates. For purposes of determining the earliest unreduced retirement age, service was assumed to be granted until the actual date of retirement. Actual benefit present values will vary from these estimates depending on many factors, including an executives actual retirement age. The key assumptions included in the calculations are as follows:
NONQUALIFIED DEFERRED COMPENSATION
The following table sets forth information regarding contributions to, earnings on, withdrawals from and balances as of the end of 2006 for our nonqualified Executive Deferral Plan.
Nonqualified Deferred Compensation
Employees with total W-2 compensation in excess of $110,000 are eligible to participate in the Companys Executive Deferral Plan. Participants may defer up to 100% of their salary and 100% of their non-equity incentive compensation under the Companys Annual Cash Incentive Compensation Plan. The participants account balance is payable at the participants option either promptly after the participant termination of service with the Company or, if the participants account balance exceeds $25,000, in 12 annual installments. The executive officers, including the named executive officers, may not commence the receipt of their account balances for amounts deferred in 2005 or thereafter and the earnings on these deferrals sooner than the first day of the seventh month following the date of the executives separation from employment. For amounts contributed to the Plan in 2005 and thereafter, the participant must elect the timing for the payment of the account balance for the amounts deferred at the time the deferral election is made.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL
SEVERANCE AND EMPLOYMENT AGREEMENTS
All salaried employees, including the named executive officers, are covered by our severance policy. The policy provides eligible employees, subject to the terms of the policy, with a severance benefit of two weeks of the employees weekly base salary per credited year of service if the employees employment is terminated because the employees position is discontinued due to business conditions or a reorganization and no comparable employment is available and offered to the employee. The policy provides a minimum severance benefit of four weeks and a
maximum benefit of 26 weeks of the employees base weekly salary at the time of termination and a minimum of one month of continued medical benefits and a maximum of six months of continued medical benefits following termination to eligible employees. Employees must sign a general release in order to receive these severance benefits. These benefits are available to all eligible salaried employees.
Our Chief Executive Officer is the only named executive officer who has an employment agreement with the Company. Under the terms of the employment agreement, 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 salary paid in twelve equal monthly installments without offset.
The Company maintains change-in-control agreements with certain senior executive officers, including the named executive officers in the Summary Compensation Table. Payments under these agreements are triggered if the covered executives employment is terminated other than for cause or the executive terminates employment for good reason, as defined in the agreements, within two years after a change-in-control of the Company. In addition, the agreement covering Mr. DeBenedictis permits him to trigger the payments under his agreement if he terminates his employment within 12 months after a change-in-control if he determines that circumstances have so changed with respect to the Company that he is no longer able to effectively perform his duties and responsibilities. Mr. DeBenedictis payment is also subject to him agreeing to a twelve month non-compete covenant.
Payments under the change-in-control agreements consist of the payment of a multiple of 2 or 3 times the named executive officers Base Compensation, as defined in the agreements, the continuation of certain health and welfare benefits for a period of 2 or 3 years and other benefits which are summarized in the following table for the named executive officers. In addition, Mr. DeBenedictis is entitled under his change-in-control agreement to the transfer, without requiring a cash payment from him, of a life insurance policy.
The following table provides a summary of the benefits to which each named executive officer would be entitled under the change-in-control agreements.
For purposes of the change-in-control agreements, Base Compensation is defined as a three-year average of the executives (1) cash base salary, annual bonus or non-equity incentive award and dividend equivalents accrued for the executive in each year, (2) any amounts deferred by the executive under any non-qualified deferred compensation plan or salary reduction plan in each year, (3) the value of stock option grants in each year, valued on the same basis as the value of stock option grants set forth in the Grants of Plan-Based Awards Table on page 20, and (4) the value of grants of restricted stock vesting in each year, valued on the basis of the fair market value of restricted stock vesting in each year.
The payment of the multiple of Base Compensation would be made in a lump sum within 15 days after the executives termination as defined under the agreements. Each executive is required to execute a standard release of the Company as a condition to receiving the payment under the agreement.
Under our Equity Compensation Plan, certain unvested equity incentives become immediately vested upon a change-in-control regardless of whether the grantee is terminated or not. Thus, under our Equity Compensation Plan, upon a change-in-control, any unvested stock options become immediately vested, any accrued but unpaid dividend equivalents become immediately payable, and any unvested restricted stock becomes immediately vested. The vesting of these equity incentives is applicable to all grantees under the Plan. The value of vested stock options are not included in the tables below.
For purposes of the change-in-control agreements and the vesting of unvested equity incentives as described above, a change-in-control, subject to certain exceptions means:
Copies of these change-in-control agreements for Messrs. DeBenedictis, Smeltzer, Stahl and Riegler have been filed with the SEC as Exhibits to Aqua Americas Annual Report on Form 10-K for the year ended December 31, 2001. Mr. Kyriss agreement was entered into in March 2007 and will be filed as an Exhibit to Aqua Americas Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.
RETIREMENT AND OTHER BENEFITS
Under the terms of our qualified and non-qualified defined benefit retirement plans, eligible salaried employees, including the named executive officers are entitled to certain pension benefits upon their termination, retirement, death or disability. In general, the terms under which benefits are payable upon these triggering events are the same for all participants under the qualified and non-qualified plans. The present value of accumulated pension benefits, assumed payable at the earliest unreduced age, for the named executive officers is set forth in the Pension Benefits Table on page 23. The pension benefit values included in the tables below reflect the incremental value above the amounts shown in the Pension Benefits Table for benefits payable upon each triggering event from all pension plans in the aggregate.
Aqua America, Inc. sponsors a postretirement medical plan to provide company subsidies toward retiree medical benefits for employees hired prior to certain dates in 2003. Under the postretirement medical plan, employees are eligible to retire upon attainment of age 55 and completion of 15 years of service. Upon retirement, eligible participants are entitled to receive subsidized medical benefits prior to attainment of age 65 where the subsidy provided is based upon age and years of service upon retirement. Upon attainment of age 65, eligible participants are entitled to receive employer contributions into a premium reimbursement account which may be used by the retiree in paying medical and prescription drug benefit premiums. The postretirement medical benefits shown in the tables below show the total present value of the postretirement medical benefits payable from the Company under each of the triggering events. Assumptions used to determine the values are the same as those disclosed on Aqua Americas financial statements with the exception of the assumed immediate termination, retirement, death or disablement. Note that participants not eligible to receive benefits if leaving under a triggering event as of December 31, 2006 are shown with zero value.
Upon termination for any reason, the participants in our Executive Deferral Plan, including the named executive officers, would be entitled to a distribution of their account balances as set forth in the Nonqualified Deferred Compensation Table on page 26, subject to the restrictions under the Plan described on page 26. The value of these account balances are not included in the tables below. The named executive officers are also eligible for the same death and disability benefits of other eligible salaried employees. These common benefits are not included in the tables below.
Under the terms of our Equity Compensation Plan, upon termination of a grantees employment as a result of retirement, disability or death, the period during which the options may be exercised shall not exceed: (i) one year from the date of such termination of employment in the case of death; (ii) two years from the date of such termination in the case of permanent and total disability (within the meaning of Section 22(e)(3) of the Code) or retirement; and (iii) three months from the date of such termination of employment in the case of other disability; provided, however, that in no event shall the period extend beyond the expiration of the option term. To the extent that any option is not otherwise exercisable as of the date on which the grantee ceases to be employed by the Company or any subsidiary, the unexercisable portion of the option shall terminate as of such date. The Compensation Committee, in its sole discretion, may determine that any portion of an option that has not become exercisable as of the date of the grantees death, termination of employment on account of permanent and total disability (within the meaning of Section 22(e)(3) of the Code) or other termination of employment may also be exercised by a grantee, or in the case of death, a grantees legal representative or beneficiary. If a grantees regular full-time employment terminates prior to the vesting of a restricted stock grant, the restricted stock grant terminates as to all unvested shares. The Compensation Committee may, however, provide for complete or partial exceptions to this requirement as it deems equitable. Except as otherwise determined by the Compensation Committee, in the event of a grantees termination from regular full-time employment prior to the end of the applicable performance period for a dividend equivalent grant, no payment of the dividend equivalent amount shall be made until the end of the applicable performance period and no payments shall be made to any grantee whose regular full-time employment terminates prior to the end of the applicable performance period for any reason other than retirement, death or total disability.
The total estimated value of the payments that would be triggered by a termination following a change-in-control, a termination other than for cause without a change-in-control, retirement, death or disability for the named executive officers calculated assuming that the triggering event for the payments occurred on December 31, 2006 and assuming a value for our Common Stock as of December 31, 2006 for purposes of valuing the vesting of the equity incentives are as follows:
The amounts shown in the tables above reflect the excess of the value of pension benefits under each of the triggering events over the value included in the Pension Benefits Table on page 23. The total values calculated, prior to the offset for the amount shown in the Pension Benefits Table are calculated as set forth below.
Once vested, participants are eligible to receive qualified benefits under the Retirement Plan and nonqualified benefits from ERISA Excess Plan and SERP. Benefits vest upon attaining five years of service. Nonqualified plan benefits for Messrs. DeBenedictis, Kyriss, Riegler, Smeltzer and Stahl are vested and payable from the Retirement Plan as well as the ERISA Excess Plan. Additionally, Mr. DeBenedictis is eligible and vested in his benefit payable from the SERP.
The full value of the benefits payable due to termination is determined based on the assumed timing and form of the benefits payable as follows:
Benefits have been reduced for early commencement by 3% per year of commencement prior to age 65.
In the case of retirement, the present value of benefits is determined in the same manner as termination. Messrs. DeBenedictis, Kyriss, and Riegler are eligible for early retirement from the qualified Retirement Plan and ERISA Excess Plan. Mr. DeBenedictis may also receive a reduced benefit from the SERP should he retire from Aqua America, Inc. prior to the attainment of age 65. Messrs. Smeltzer and Stahl are not currently eligible to retire.
Vested benefits under the Retirement Plan, ERISA Excess Plan and SERP are payable to the participants surviving spouse as a single life annuity upon the death of the participant. The benefit will be paid to the spouse as early as the deceased participants earliest retirement age (age 55 with ten years of service or age 65). The benefit will be equal to 75% of the benefit calculated as if the participant had separated from service on the date of death (assumed to be 12/31/2006 in the table), survived to the earliest retirement age and retired with a qualified contingent annuity. For each of the participants, the total present value of pension benefits payable upon death is less than the amount shown in the Pension Benefits Table. For purposes of the benefit calculations shown, spouses are assumed to be three years younger than the participant.
If an individual is terminated as a result of a disability with less than ten years of service, the benefits are payable in the same amount and form as an individual who is terminated. Individuals who terminate employment as a result of a disability with at least ten years of service are entitled to future accruals until age 65 (or earlier date if elected by the participant) assuming level future earnings and continued service. The benefits are not payable until age 65, unless elected by the participant for an earlier age. Upon the attainment of age 65, the individual would be entitled to the same options as an individual who retired from the Retirement Plan.
Messrs. DeBenedictis, Kyriss, Riegler, Smeltzer and Stahl have each completed ten years of service. Therefore, for purposes of this present value calculation, participants are assumed to accrue additional service and earnings until age 65, at which time pension payments are assumed to commence.
Under a Change-in-Control, the benefits payable to each of the named executives will be the same as those described in the Termination section above.
COMPENSATION OF DIRECTORS
The following table sets forth the compensation paid to the Aqua America Board of Directors in 2006.
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 and discussed 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 four meetings during 2006.
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, 2006 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, 2007.
The foregoing reports of the Audit Committee and the Executive Compensation and Employee Benefits Committee 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.
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
The Audit Committee of the Companys Board of Directors has selected PricewaterhouseCoopers LLP (PwC) as the Companys independent registered public accounting firm for the year ending December 31, 2007. 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 2006.
SHAREHOLDER PROPOSALS FOR 2008 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 SEC. To be eligible for inclusion in the Companys Proxy Materials relating to the 2008 Annual Meeting of Shareholders, proposals must be submitted in writing and received by the Company at the address below by December 12, 2007.
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 2008 Annual Meeting of Shareholders (other than matters included in the Companys Proxy Materials pursuant to the preceding paragraph) no earlier than January 25, 2008 nor later than February 24, 2008. 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
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 10, 2007.
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 2008 Annual Meeting, no later than December 12, 2007.
CONSIDERATION OF DIRECTOR CANDIDATES
The Corporate Governance Committee identifies, evaluates and recommends director candidates to our Board of Directors for nomination. The process followed by our Corporate Governance Committee to identify and evaluate director candidates includes requests to current directors and others for recommendations, meetings from time to time to evaluate potential candidates and interviews of selected candidates.
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.
Shareholders may recommend individuals to our Corporate Governance Committee for consideration as potential director candidates by following the procedures set forth above under Procedures for Nominating or Recommending for Nomination Candidates for Director. The Corporate Governance Committee will evaluate shareholder-recommended candidates in the same manner as it evaluates candidates recommended by others.
COMMUNICATIONS WITH THE COMPANY OR INDEPENDENT DIRECTORS
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 or other interested parties 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 or other interested partys 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 2006, 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 2006, the Company believes that all filings required to be made by the reporting persons were made on a timely basis, except for one late Form 4 with respect to a February 15, 2006 stock option exercise and gift of shares by Mr. DeBenedictis.
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 10, 2007
762 W. LANCASTER AVENUE
BRYN MAWR, PA 19010
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 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 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.
This is your ADMISSION TICKET to the Aqua America, Inc. Annual Meeting of Shareholders to be held Thursday, May 24, 2007, at 10:00 a.m., Eastern Time, at the Springfield Country Club, 400 West Sproul Road, Springfield, Pennsylvania 19064. Please present this original ticket for admission at the registration table at the Annual Meeting.
For shareholders who hold shares through a brokerage firm, bank or other holder of record, your admission ticket is the copy of the latest account statement showing the Aqua America, Inc. stock balance. Please present the account statement for admission at the registration table at the Annual Meeting.
From Center City Philadelphia or Philadelphia International Airport:
From Pennsylvania Turnpike, Bucks County, Montgomery County:
From New York/North Jersey:
PROXY AQUA AMERICA, INC.
The undersigned hereby appoints Roy H. Stahl, David P. Smeltzer and Robert A. Rubin, or a majority of them or any one 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 Springfield Country Club, 400 West Sproul Road, Springfield, Pennsylvania 19064, at 10:00 a.m. on Thursday, May 24, 2007 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 ENCLOSED 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