Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC  20549
FORM 10-Q
(Mark One) 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the quarterly period ended June 30, 2015 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the transition period from_______________ to _______________
Commission File Number 1-6659 
AQUA AMERICA, INC. 
(Exact name of registrant as specified in its charter) 

 
 	 	
Pennsylvania	23-1702594	
(State or other jurisdiction of	(I.R.S. Employer	
incorporation or organization)	Identification No.)	
 	 	
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania	19010 -3489	
(Address of principal executive offices)	(Zip Code)	
 	 	
(610) 527-8000	
(Registrant’s telephone number, including area code)	
 
(Former Name, former address and former fiscal year, if changed since last report.)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒    No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12(b)-2 of the Exchange Act.:   
 	 	
Large accelerated filer ☒	Accelerated filer ☐	
Non-accelerated filer   ☐ (do not check if a smaller reporting company)	Smaller reporting company ☐	
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒ 
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of  
July 24, 2015:  176,805,350

 
Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS
 	 	
 	Page	
Part I – Financial Information 	
 	 	
Item 1.  Financial Statements: 	 	
 	 	
Consolidated Balance Sheets (unaudited) – June 30, 2015 and December 31, 2014 	2	
 	 	
Consolidated Statements of Net Income (unaudited) –
Three Months Ended June 30, 2015 and 2014 	3	
 	 	
Consolidated Statements of Net Income (unaudited) –
Six Months Ended June 30, 2015 and 2014 	4	
 	 	
Consolidated Statements of Comprehensive Income (unaudited) –
Three and Six Months Ended June 30, 2015 and 2014 	5	
 	 	
Consolidated Statements of Capitalization (unaudited) –
June 30, 2015 and December 31, 2014 	6	
 	 	
Consolidated Statement of Equity (unaudited) –
Six Months Ended June  30, 2015 	7	
 	 	
Consolidated Statements of Cash Flow (unaudited) –
Six Months Ended June 30, 2015 and 2014 	8	
 	 	
Notes to Consolidated Financial Statements (unaudited) 	9	
 	 	
Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations 	24	
 	 	
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 	30	
 	 	
Item 4.  Controls and Procedures 	30	
 	
Part II – Other Information 	
 	 	
Item 1.  Legal Proceedings 	30	
 	 	
Item 1A.  Risk Factors 	30	
 	 	
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 	31	
 	 	
Item 6.  Exhibits 	31	
 	 	
Signatures 	32	
 	 	
Exhibit Index 	33	

 
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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED BALANCE SHEETS 
(In thousands of dollars, except per share amounts) 
(UNAUDITED)

 	 	 	 	 	 	 	
 	 	June 30,	 	December 31,	
Assets	 	2015	 	2014	
Property, plant and equipment, at cost	 	$	5,879,250 	 	$	5,707,017 	
Less: accumulated depreciation	 	 	1,356,963 	 	 	1,305,027 	
Net property, plant and equipment	 	 	4,522,287 	 	 	4,401,990 	
Current assets:	 	 	 	 	 	 	
Cash and cash equivalents	 	 	4,615 	 	 	4,138 	
Accounts receivable and unbilled revenues, net	 	 	109,478 	 	 	96,999 	
Deferred income taxes	 	 	35,207 	 	 	26,849 	
Inventory, materials and supplies	 	 	13,589 	 	 	12,788 	
Prepayments and other current assets	 	 	12,471 	 	 	11,748 	
Total current assets	 	 	175,360 	 	 	152,522 	
 	 	 	 	 	 	 	
Regulatory assets	 	 	771,561 	 	 	725,591 	
Deferred charges and other assets, net	 	 	54,577 	 	 	52,084 	
Investment in joint venture	 	 	42,536 	 	 	43,334 	
Funds restricted for construction activity	 	 	15 	 	 	47 	
Goodwill	 	 	33,942 	 	 	31,184 	
Total assets	 	$	5,600,278 	 	$	5,406,752 	
Liabilities and Equity	 	 	 	 	 	 	
Aqua America stockholders' equity:	 	 	 	 	 	 	
Common stock at $.50 par value, authorized 300,000,000 shares, issued 179,102.369 and 178,591,254 as of June 30, 2015 and December 31, 2014	 	$	89,551 	 	$	89,296 	
Capital in excess of par value	 	 	766,067 	 	 	758,145 	
Retained earnings	 	 	897,261 	 	 	849,952 	
Treasury stock, at cost, 2,145,974 and 1,837,984 shares as of June 30, 2015 and December 31, 2014	 	 	(50,795)	 	 	(42,838)	
Accumulated other comprehensive income	 	 	843 	 	 	788 	
Total Aqua America stockholders' equity	 	 	1,702,927 	 	 	1,655,343 	
 	 	 	 	 	 	 	
Noncontrolling interest	 	 	 -	 	 	40 	
Total equity	 	 	1,702,927 	 	 	1,655,383 	
 	 	 	 	 	 	 	
Long-term debt, excluding current portion	 	 	1,660,526 	 	 	1,560,655 	
Commitments and contingencies (See Note 13)	 	 	 -	 	 	 -	
 	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	
Current portion of long-term debt	 	 	38,503 	 	 	58,615 	
Loans payable	 	 	36,306 	 	 	18,398 	
Accounts payable	 	 	47,510 	 	 	63,035 	
Accrued interest	 	 	13,077 	 	 	12,437 	
Accrued taxes	 	 	25,261 	 	 	31,462 	
Other accrued liabilities	 	 	42,738 	 	 	41,388 	
Total current liabilities	 	 	203,395 	 	 	225,335 	
 	 	 	 	 	 	 	
Deferred credits and other liabilities:	 	 	 	 	 	 	
Deferred income taxes and investment tax credits	 	 	1,079,678 	 	 	1,000,791 	
Customers' advances for construction	 	 	84,037 	 	 	78,301 	
Regulatory liabilities	 	 	269,200 	 	 	278,317 	
Other	 	 	94,933 	 	 	109,692 	
Total deferred credits and other liabilities	 	 	1,527,848 	 	 	1,467,101 	
 	 	 	 	 	 	 	
Contributions in aid of construction	 	 	505,582 	 	 	498,278 	
Total liabilities and equity	 	$	5,600,278 	 	$	5,406,752 	
 	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	

 

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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)

 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	June 30,	 	
 	 	2015	 	2014	 	
 	 	 	 	 	 	 	
Operating revenues	 	$	205,760 	 	$	195,307 	
 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	
Operations and maintenance	 	 	79,746 	 	 	70,375 	
Depreciation	 	 	31,049 	 	 	31,226 	
Amortization	 	 	924 	 	 	746 	
Taxes other than income taxes	 	 	13,795 	 	 	13,026 	
Total operating expenses	 	 	125,514 	 	 	115,373 	
 	 	 	 	 	 	 	
Operating income	 	 	80,246 	 	 	79,934 	
 	 	 	 	 	 	 	
Other expense (income):	 	 	 	 	 	 	
Interest expense, net	 	 	18,900 	 	 	19,093 	
Allowance for funds used during construction	 	 	(1,040)	 	 	(937)	
Loss (gain) on sale of other assets	 	 	1 	 	 	(140)	
Equity loss in joint venture	 	 	84 	 	 	1,251 	
Income from continuing operations before income taxes	 	 	62,301 	 	 	60,667 	
Provision for income taxes	 	 	4,919 	 	 	5,849 	
Income from continuing operations	 	 	57,382 	 	 	54,818 	
 	 	 	 	 	 	 	
Discontinued operations:	 	 	 	 	 	 	
Income from discontinued operations before income taxes	 	 	 -	 	 	1,253 	
Provision for income taxes	 	 	 -	 	 	502 	
Income from discontinued operations	 	 	 -	 	 	751 	
Net income attributable to common shareholders	 	$	57,382 	 	$	55,569 	
 	 	 	 	 	 	 	
Income from continuing operations per share:	 	 	 	 	 	 	
Basic	 	$	0.32 	 	$	0.31 	
Diluted	 	$	0.32 	 	$	0.31 	
 	 	 	 	 	 	 	
Income from discontinued operations per share:	 	 	 	 	 	 	
Basic	 	$	 -	 	$	0.00 	
Diluted	 	$	 -	 	$	0.00 	
 	 	 	 	 	 	 	
Net income per common share:	 	 	 	 	 	 	
Basic	 	$	0.32 	 	$	0.31 	
Diluted	 	$	0.32 	 	$	0.31 	
 	 	 	 	 	 	 	
Average common shares outstanding during the period:	 	 	 	 	 	 	
Basic	 	 	177,084 	 	 	177,058 	
Diluted	 	 	177,913 	 	 	178,012 	
 	 	 	 	 	 	 	
Cash dividends declared per common share	 	$	0.165 	 	$	0.152 	
 	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	 	

 

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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)

 

 	 	Six Months Ended	
 	 	June 30,	
 	 	2015	 	2014	
 	 	 	 	 	 	 	
Operating revenues	 	$	396,086 	 	$	377,979 	
 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	
Operations and maintenance	 	 	152,935 	 	 	142,061 	
Depreciation	 	 	61,549 	 	 	62,207 	
Amortization	 	 	1,773 	 	 	1,879 	
Taxes other than income taxes	 	 	28,416 	 	 	25,128 	
 	 	 	244,673 	 	 	231,275 	
 	 	 	 	 	 	 	
Operating income	 	 	151,413 	 	 	146,704 	
 	 	 	 	 	 	 	
Other expense (income):	 	 	 	 	 	 	
Interest expense, net	 	 	37,565 	 	 	38,403 	
Allowance for funds used during construction	 	 	(2,222)	 	 	(2,104)	
(Gain) loss on sale of other assets	 	 	(168)	 	 	208 	
Equity loss in joint venture	 	 	798 	 	 	1,937 	
Income from continuing operations before income taxes	 	 	115,440 	 	 	108,260 	
Provision for income taxes	 	 	9,513 	 	 	11,041 	
Income from continuing operations	 	 	105,927 	 	 	97,219 	
 	 	 	 	 	 	 	
Discontinued operations:	 	 	 	 	 	 	
Income from discontinued operations before income taxes	 	 	 -	 	 	2,025 	
Provision for income taxes	 	 	 -	 	 	816 	
Income from discontinued operations	 	 	 -	 	 	1,209 	
Net income attributable to common shareholders	 	$	105,927 	 	$	98,428 	
 	 	 	 	 	 	 	
Income from continuing operations per share:	 	 	 	 	 	 	
Basic	 	$	0.60 	 	$	0.55 	
Diluted	 	$	0.60 	 	$	0.55 	
 	 	 	 	 	 	 	
Income from discontinued operations per share:	 	 	 	 	 	 	
Basic	 	$	 -	 	$	0.01 	
Diluted	 	$	 -	 	$	0.01 	
 	 	 	 	 	 	 	
Net income per common share:	 	 	 	 	 	 	
Basic	 	$	0.60 	 	$	0.56 	
Diluted	 	$	0.60 	 	$	0.55 	
 	 	 	 	 	 	 	
Average common shares outstanding during the period:	 	 	 	 	 	 	
Basic	 	 	176,987 	 	 	176,949 	
Diluted	 	 	177,818 	 	 	177,868 	
 	 	 	 	 	 	 	
Cash dividends declared per common share	 	$	0.330 	 	$	0.304 	
 	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	 	 	 	 	 	 	

 
 
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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
(In thousands of dollars) 
(UNAUDITED)

 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2015	 	2014	 	2015	 	2014	

Net income attributable to common shareholders	 	$	57,382 	 	$	55,569 	 	$	105,927 	 	$	98,428 	
Other comprehensive income, net of tax:	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized holding (loss) gain on investments, net of tax (benefit) expense of $(11) and $68 for the three months and $29 and $106 for the six months ended June 30, 2015 and 2014, respectively	 	 	(21)	 	 	126 	 	 	55 	 	 	198 	
Reclassification adjustment for loss reported in net income, net of tax benefit of $134 for the six months ended June 30, 2014 (1)	 	 	 -	 	 	 -	 	 	 -	 	 	249 	
Comprehensive income	 	$	57,361 	 	$	55,695 	 	$	105,982 	 	$	98,875 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
(1) Amount of pre-tax loss of $383 reclassified from accumulated other comprehensive income to loss on sale of other assets on the consolidated statements of net income for the six months ended June 30, 2014.	
 	 	 	 	 	 	 	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	

 
 
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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF CAPITALIZATION 
(In thousands of dollars, except per share amounts) 
(UNAUDITED)

 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	
 	 	 	June 30,	 	December 31,	
 	 	 	2015	 	2014	
Aqua America stockholders' equity:	 	 	 	 	 	 	 	
    Common stock, $.50 par value	 	 	$	89,551 	 	$	89,296 	
    Capital in excess of par value	 	 	 	766,067 	 	 	758,145 	
    Retained earnings	 	 	 	897,261 	 	 	849,952 	
    Treasury stock, at cost	 	 	 	(50,795)	 	 	(42,838)	
    Accumulated other comprehensive income	 	 	843 	 	 	788 	
Total Aqua America stockholders' equity	 	 	 	1,702,927 	 	 	1,655,343 	
 	 	 	 	 	 	 	 	
Noncontrolling interest	 	 	 	 -	 	 	40 	
 	 	 	 	 	 	 	 	
Total equity	 	 	 	1,702,927 	 	 	1,655,383 	
 	 	 	 	 	 	 	 	
Long-term debt of subsidiaries (substantially secured by utility plant):	 	 	 	 	 	 	
Interest Rate Range	Maturity Date Range	 	 	 	 	 	 	
0.00% to  0.99%	2023 to 2033	 	 	5,288 	 	 	5,653 	
1.00% to  1.99%	2016 to 2035	 	 	23,926 	 	 	24,871 	
2.00% to  2.99%	2024 to 2031	 	 	16,623 	 	 	15,578 	
3.00% to  3.99%	2016 to 2047	 	 	189,674 	 	 	190,875 	
4.00% to  4.99%	2020 to 2054	 	 	483,971 	 	 	484,168 	
5.00% to  5.99%	2016 to 2043	 	 	221,881 	 	 	242,102 	
6.00% to  6.99%	2015 to 2036	 	 	64,954 	 	 	64,944 	
7.00% to  7.99%	2022 to 2027	 	 	34,097 	 	 	34,424 	
8.00% to  8.99%	2021 to 2025	 	 	18,709 	 	 	18,907 	
9.00% to  9.99%	2018 to 2026	 	 	27,800 	 	 	27,800 	
10.00% to 10.99%	2018	 	 	6,000 	 	 	6,000 	
 	 	 	 	1,092,923 	 	 	1,115,322 	
 	 	 	 	 	 	 	 	
Notes payable to bank under revolving credit agreement, variable rate, due 2017	 	 	72,158 	 	 	72,000 	
Unsecured notes payable:	 	 	 	 	 	 	 	
Bank notes at 1.921% and 1.975% due 2017 and 2018	 	 	 	100,000 	 	 	50,000 	
Notes at 3.57% and 3.59% due 2027 and 2030	 	 	 	120,000 	 	 	50,000 	
Notes ranging from 4.62% to 4.87%, due 2016 through 2024	 	 	144,400 	 	 	144,400 	
Notes ranging from 5.20% to 5.95%, due 2016 through 2037	 	 	169,548 	 	 	187,548 	
Total long-term debt	 	 	 	1,699,029 	 	 	1,619,270 	
 	 	 	 	 	 	 	 	
Current portion of long-term debt	 	 	 	38,503 	 	 	58,615 	
Long-term debt, excluding current portion	 	 	1,660,526 	 	 	1,560,655 	
Total capitalization	 	 	$	3,363,453 	 	$	3,216,038 	
 	 	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	

 

 

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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENT OF EQUITY 
(In thousands of dollars)
(UNAUDITED)

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated	 	 	 	 	 	 	
 	 	 	 	 	Capital in	 	 	 	 	 	 	 	Other	 	 	 	 	 	 	
 	 	Common	 	Excess of	 	Retained	 	Treasury	 	Comprehensive	 	Noncontrolling	 	 	 	
 	 	Stock	 	Par Value	 	Earnings	 	Stock	 	Income	 	Interest	 	Total	
Balance at December 31, 2014	 	$	89,296 	 	$	758,145 	 	$	849,952 	 	$	(42,838)	 	$	788 	 	$	40 	 	$	1,655,383 	
Net income	 	 	 -	 	 	 -	 	 	105,927 	 	 	 -	 	 	 -	 	 	 -	 	 	105,927 	
Other comprehensive income, net of income tax of $29	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	55 	 	 	 -	 	 	55 	
Dividends	 	 	 -	 	 	 -	 	 	(58,396)	 	 	 -	 	 	 -	 	 	 -	 	 	(58,396)	
Repurchase of stock (307,990 shares)         	 	 	 -	 	 	 -	 	 	 -	 	 	(7,957)	 	 	 -	 	 	 -	 	 	(7,957)	
Equity compensation plan (305,701 shares)	 	 	152 	 	 	(152)	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	 -	
Exercise of stock options (205,414 shares)	 	 	103 	 	 	3,349 	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	3,452 	
Stock-based compensation	 	 	 -	 	 	3,682 	 	 	(222)	 	 	 -	 	 	 -	 	 	 -	 	 	3,460 	
Employee stock plan tax benefits	 	 	 -	 	 	1,498 	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	1,498 	
Other  	 	 	 -	 	 	(455)	 	 	 -	 	 	 -	 	 	 -	 	 	(40)	 	 	(495)	
Balance at June 30, 2015	 	$	89,551 	 	$	766,067 	 	$	897,261 	 	$	(50,795)	 	$	843 	 	$	 -	 	$	1,702,927 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	

 

  

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AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF CASH FLOW 
(In thousands of dollars) 
(UNAUDITED)

 	 	 	 	 	 	 	
 	 	Six Months Ended	
 	 	June 30,	
 	 	2015	 	2014	
Cash flows from operating activities:	 	 	 	 	 	 	
Net income	 	$	105,927 	 	$	98,428 	
Income from discontinued operations	 	 	 -	 	 	1,209 	
Income from continuing operations	 	 	105,927 	 	 	97,219 	
Adjustments to reconcile income from continuing operations	 	 	 	 	 	 	
to net cash flows from operating activities:	 	 	 	 	 	 	
Depreciation and amortization	 	 	63,322 	 	 	64,086 	
Deferred income taxes	 	 	5,392 	 	 	7,845 	
Provision for doubtful accounts	 	 	2,233 	 	 	3,141 	
Stock-based compensation	 	 	3,682 	 	 	3,538 	
(Gain) loss on sale of other assets	 	 	(168)	 	 	208 	
Net change in receivables, inventory and prepayments	 	 	(17,430)	 	 	(11,087)	
Net change in payables, accrued interest, accrued taxes and other accrued liabilities	 	 	2,319 	 	 	4,740 	
Other	 	 	(8,259)	 	 	(15,050)	
Operating cash flows from continuing operations	 	 	157,018 	 	 	154,640 	
Operating cash flows used in discontinued operations, net	 	 	 -	 	 	(582)	
Net cash flows from operating activities	 	 	157,018 	 	 	154,058 	
Cash flows from investing activities:	 	 	 	 	 	 	
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $570 and $649	 	 	(150,284)	 	 	(131,966)	
Acquisitions of utility systems and other, net	 	 	(25,919)	 	 	(4,467)	
Release of funds previously restricted for construction activity	 	 	32 	 	 	 -	
Net proceeds from the sale of utility system and other assets	 	 	290 	 	 	308 	
Other	 	 	(1,296)	 	 	(30)	
Investing cash flows used in continuing operations	 	 	(177,177)	 	 	(136,155)	
Investing cash flows from discontinued operations, net	 	 	 -	 	 	2 	
Net cash flows used in investing activities	 	 	(177,177)	 	 	(136,153)	
Cash flows from financing activities:	 	 	 	 	 	 	
Customers' advances and contributions in aid of construction	 	 	2,872 	 	 	3,182 	
Repayments of customers' advances	 	 	(1,695)	 	 	(1,294)	
Net proceeds of short-term debt	 	 	17,908 	 	 	3,622 	
Proceeds from long-term debt	 	 	238,457 	 	 	116,074 	
Repayments of long-term debt	 	 	(158,824)	 	 	(70,910)	
Change in cash overdraft position	 	 	(16,047)	 	 	(19,128)	
Proceeds from exercised stock options	 	 	3,452 	 	 	4,692 	
Stock-based compensation windfall tax benefits	 	 	1,320 	 	 	1,217 	
Repurchase of common stock	 	 	(7,957)	 	 	(2,349)	
Dividends paid on common stock	 	 	(58,396)	 	 	(53,787)	
Other	 	 	(454)	 	 	(362)	
Financing cash flows from (used) in continuing operations	 	 	20,636 	 	 	(19,043)	
Financing cash flows used in discontinued operations, net	 	 	 -	 	 	(62)	
Net cash flows from (used) in financing activities	 	 	20,636 	 	 	(19,105)	
Net change in cash and cash equivalents	 	 	477 	 	 	(1,200)	
Cash and cash equivalents at beginning of period	 	 	4,138 	 	 	5,058 	
Cash and cash equivalents at end of period	 	$	4,615 	 	$	3,858 	
 	
Non-cash investing activity:	
Property, plant and equipment additions purchased at the period end, but not yet paid for	 	$	27,551 	 	$	20,356 	
 	
See notes to consolidated financial statements beginning on page 9 of this report.	

 
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
 
Note 1 – Basis of Presentation 
 
The accompanying consolidated balance sheets and statements of capitalization of Aqua America, Inc. and subsidiaries (the “Company”) at June 30, 2015, the consolidated statements of net income and comprehensive income for the three and six months ended June 30, 2015 and 2014, the consolidated statements of cash flow for the six months ended June 30, 2015 and 2014, and the consolidated statement of equity for the six months ended June 30, 2015 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in equity, the consolidated results of operations, and the consolidated cash flow for the periods presented.  Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  The results of operations for interim periods may not be indicative of the results that may be expected for the entire year.  The December 31, 2014 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2014 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.    
 
Note 2 – Goodwill 
 
The following table summarizes the changes in the Company’s goodwill, by business segment:

 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
 	 	Regulated	 	 	 	 	 	 	
 	 	Segment	 	Other	 	Consolidated	
 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2014	 	$	24,564 	 	$	6,620 	 	$	31,184 	
Goodwill acquired	 	 	 -	 	 	12 	 	 	12 	
Reclassifications (to) from utility plant acquisition adjustment, net	 	 	2,758 	 	 	 -	 	 	2,758 	
Other	 	 	 -	 	 	(12)	 	 	(12)	
Balance at June 30, 2015	 	$	27,322 	 	$	6,620 	 	$	33,942 	
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
The reclassification of goodwill to utility plant acquisition adjustment in the table above results from a mechanism approved by the applicable public utility commission.  The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with certain acquisitions upon achieving certain objectives. 

 
  
Note 3 – Acquisitions 
 
In May 2015, the Company acquired the water utility systems assets of Mt. Jewett Borough water system located in Hamlin Township, Pennsylvania serving approximately 440 customers.  The total purchase price consisted of $1,166 in cash. 
 
In April 2015, the Company acquired the water and wastewater utility system assets of North Maine Utilities located in the Village of Glenview, Illinois serving approximately 7,400 customers.  The total purchase price consisted of $23,079 in cash.  The purchase price allocation for this acquisition consists primarily of acquired property, plant and equipment.      

 
In December 2014, the Company acquired the water utility system assets of Lake Mohawk and Lake Tomahawk utilities located in Northeastern Ohio serving approximately 1,250 customers.  The total purchase price consisted of $1,770 in cash.    
 
In December 2014, the Company acquired a business that specializes in providing water distribution system services to prevent the contamination of potable water, including training to waterworks operators.  The total purchase price consisted of $1,800 in cash, of which $700 was paid in the first quarter of 2015.  This business is included in the Company’s market-based activities. 
 
In September 2014, the Company acquired the water and wastewater utility system assets of Texas H2O, Inc. located in Mansfield, Texas serving approximately 1,100 customers.  The total purchase price consisted of $2,796 in cash.
 
In September 2014, the Company acquired the water utility system assets of Lake Caroline Water Co. located in Caroline County, Virginia serving approximately 1,040 customers.  The total purchase price consisted of $1,377 in cash.
 
In August 2014, the Company acquired a business that specializes in the inspection, cleaning and repair of storm and sanitary sewer lines.  The total purchase price consisted of $3,010 in cash, of which a total of $810 is contingent upon satisfying certain annual performance targets over a three-year period.  This business is included in the Company’s market-based activities.   
 
In March 2014, the Company acquired the wastewater utility system assets of Penn Township located in Chester County, Pennsylvania serving approximately 800 customers.  The total purchase price consisted of $3,668 in cash.
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
Note 4 –  Discontinued Operations 
 
In December 2014, we completed the sale of our water utility system in southwest Allen County, Indiana to the City of Fort Wayne, Indiana.  The completion of this sale settled the dispute concerning the City of Fort Wayne’s valuation of the northern portion of our water and wastewater utility systems, which were acquired by the City of Fort Wayne in February 2008, by eminent domain.  In addition, as a result of this transaction, Aqua Indiana will expand its sewer customer base by accepting new wastewater flows from the City of Fort Wayne.
 
In March 2014, we completed the sale of our wastewater treatment facility in Georgia.
 
The operating results and cash flows of the Company’s operations named above, during the periods owned, have been presented in the Company’s consolidated statements of net income and consolidated statements of cash flow as discontinued operations.  These operations were included in the Company’s “Regulated” segment.     
 
A summary of discontinued operations presented in the consolidated statements of net income include the following:

 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30, 2014	 	June 30, 2014	
Operating revenues	 	$	1,720 	 	$	3,299 	
Total operating expenses	 	 	467 	 	 	1,140 	
Operating income	 	 	1,253 	 	 	2,159 	
Other expense:	 	 	 	 	 	 	
Loss on sale	 	 	 -	 	 	134 	
Income from discontinued operations before income taxes	 	 	1,253 	 	 	2,025 	
Provision for income taxes	 	 	502 	 	 	816 	
Income from discontinued operations	 	$	751 	 	$	1,209 	

 

As of June 30,  2015 and December 31, 2014, there were no assets or liabilities associated with the Company’s discontinued operations.

]
 
Note 5 – Capitalization 
 
In May 2015, the Company issued $70,000 of senior unsecured notes due in 2030 with an interest rate of 3.59%.  The proceeds were used to repay existing indebtedness and for general corporate purposes.   
 
In May 2015, Aqua Pennsylvania entered into a $50,000 three-year unsecured loan at an interest rate of 1.975%.  The proceeds from this loan were used for refinancing existing indebtedness and general working capital purposes. 
 
In February 2015, the Company renewed its universal shelf registration, which had expired in February 2015, through a filing with the Securities and Exchange Commission (“SEC”) to allow for the potential
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
future sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities and other securities specified therein at indeterminate prices.
 
In February 2015, the Company filed a registration statement with the SEC to update an existing filing which permits the offering, from time to time, of an aggregate of $500,000 in shares of common stock and shares of preferred stock in connection with acquisitions.  The form and terms of any securities issued under these shelf registration statements will be determined at the time of issuance.         
 
Note 6 – Fair Value of Financial Instruments 
 
The Company follows the Financial Accounting Standards Board’s (“FASB”) accounting guidance for fair value measurements and disclosures, which defines fair value and establishes a framework for using fair value to measure assets and liabilities.  That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are as follows:
 
 	·	 	Level 1:  unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access; 	
 
 	·	 	Level 2:  inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in non-active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or 	
 
 	·	 	Level 3:  inputs that are unobservable and significant to the fair value measurement. 	
 
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  There have been no changes in the valuation techniques used to measure fair value or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended June 30, 2015. 
 
Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented.  The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments. 
 
The fair value of funds restricted for construction activity and loans payable are determined based on their carrying amount and utilizing Level 1 methods and assumptions.  As of June 30, 2015 and December 31, 2014, the carrying amount of the Company’s funds restricted for construction activity was $15 and $47, respectively, which equates to their estimated fair value.  As of June 30, 2015 and December 31, 2014, the carrying amount of the Company’s loans payable was $36,306 and $18,398, respectively, which equates to their estimated fair value.  The fair value of cash and cash equivalents, which is comprised of a money
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
market fund, is determined based on the net asset value per unit utilizing Level 2 methods and assumptions.  As of June 30, 2015 and December 31, 2014, the carrying amounts of the Company's cash and cash equivalents was $4,615 and $4,138, respectively, which equates to their fair value.   
 
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:

 	 	June 30,	 	December 31,	
 	 	2015	 	2014	
Carrying Amount	 	$	1,699,029 	 	$	1,619,270 	
Estimated Fair Value	 	 	1,846,885 	 	 	1,694,424 	

The fair value of long-term debt has been determined by discounting the future cash flows using current market interest rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions.  The Company’s customers’ advances for construction have a carrying value of $84,037 as of June 30, 2015, and $78,301 as of December 31, 2014.  Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rate increases.  Portions of these non-interest bearing instruments are payable annually through 2025 and amounts not paid by the respective contract expiration dates become non-refundable.  The fair value of these amounts would, however, be less than their carrying value due to the non-interest bearing feature.
 
Note 7 – Net Income per Common Share 
 
Basic net income per common share is based on the weighted average number of common shares outstanding.  Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares.  The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share.  The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.  The treasury stock method assumes that the proceeds from the exercise of stock options are used to purchase the Company’s common stock at the average market price during the period.  The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share: 

 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2015	 	2014	 	2015	 	2014	
Average common shares outstanding during the period for basic computation	 	177,084 	 	177,058 	 	176,987 	 	176,949 	
Dilutive effect of employee stock-based compensation	 	829 	 	954 	 	831 	 	919 	
Average common shares outstanding during the period for diluted computation	 	177,913 	 	178,012 	 	177,818 	 	177,868 	

For the three and six months ended June 30, 2015 and 2014, all of the Company’s employee stock options were included in the calculations of diluted net income per share as the calculated cost to exercise
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
the stock options was less than the average market price of the Company’s common stock during these periods.  

 

 
Note 8 – Stock-based Compensation 
 
Under the Company’s 2009 Omnibus Equity Compensation Plan, as amended as of February 27, 2014, (the “2009 Plan”), as approved by the Company’s shareholders to replace the 2004 Equity Compensation Plan (the “2004 Plan”), stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors.  The 2009 Plan authorizes 6,250,000 shares for issuance under the plan.  A maximum of 3,125,000 shares under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the 2009 Plan.  During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the 2009 Plan.  Awards under the 2009 Plan are made by a committee of the Board of Directors of the Company, or in the case of awards to non-employee directors, by the Board of Directors of the Company.  At June 30, 2015,  4,234,045 shares underlying stock-based compensation awards were still available for grants under the 2009 Plan.    No further grants may be made under the 2004 Plan.     
 
Performance Share Units – A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the three-year performance period specified in the grant, subject to exceptions through the respective vesting period, generally three years.  Each grantee is granted a target award of PSUs, and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals.  The following table provides compensation costs for stock-based compensation related to PSUs: 

 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2015	 	2014	 	2015	 	2014	
Stock-based compensation within operations and maintenance expenses	 	$	1,562 	 	$	1,467 	 	$	2,639 	 	$	2,469 	
Income tax benefit	 	 	637 	 	 	601 	 	 	1,075 	 	 	1,011 	
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
The following table summarizes nonvested PSU transactions for the six months ended June 30, 2015:    

 	 	 	 	 	 	 	
 	 	 	Number	 	Weighted	
 	 	 	of	 	Average	
 	 	 	Share Units	 	Fair Value	
 	 	 	 	 	 	 	
Nonvested share units at December 31, 2014	 	 	582,644 	 	$	22.98 	
Granted	 	 	123,820 	 	 	26.54 	
Performance criteria adjustment	 	 	15,363 	 	 	25.59 	
Forfeited	 	 	(7,457)	 	 	25.86 	
Share units vested	 	 	(83,300)	 	 	26.25 	
Share units issued	 	 	(217,014)	 	 	18.49 	
Nonvested share units at June 30, 2015	 	 	414,056 	 	$	25.78 	

 
 
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions associated with the PSUs using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions.  The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied.  The per unit weighted-average fair value at the date of grant for PSUs granted during the six months ended June 30, 2015 and 2014 was $26.54 and $25.31, respectively.  The fair value of each PSU grant is amortized monthly into compensation expense on a straight-line basis over their respective vesting periods, generally 36 months.  The accrual of compensation costs is based on our estimate of the final expected value of the award, and is adjusted as required for the portion based on the performance-based condition.  The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.  As the payout of the PSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the PSUs.  The recording of compensation expense for PSUs has no impact on net cash flows.   
 
On July 1, 2015, in association with the appointment of the Company’s Executive Vice President and President and Chief Operating Officer, Regulated Operations, to Chief Executive Officer (“CEO”), the Company granted 9,892 PSUs to the CEO.  The fair market value of the PSUs granted is $25.80 per unit.    
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock.  RSUs are eligible to be earned at the end of a specified restricted period, generally three years, beginning on the date of grant.  In some cases the right to receive the shares is subject to certain performance goals established at the time the grant is made.  The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.  As the payout of the RSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the RSUs.  The following table provides compensation costs for stock-based compensation related to RSUs:

 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2015	 	2014	 	2015	 	2014	
Stock-based compensation within operations and maintenance expenses	 	$	415 	 	$	295 	 	$	678 	 	$	532 	
Income tax benefit	 	 	172 	 	 	122 	 	 	281 	 	 	220 	

The following table summarizes nonvested RSU transactions for the six months ended June 30, 2015: 

 	 	 	 	 	 	 	
 	 	 	Number	 	Weighted	
 	 	 	of	 	Average	
 	 	 	Stock Units	 	Fair Value	
 	 	 	 	 	 	 	
Nonvested stock units at December 31, 2014	 	 	122,565 	 	$	22.29 	
Granted	 	 	37,650 	 	 	26.26 	
Stock units vested in prior period and issued in current period	 	 	11,500 	 	 	17.99 	
Stock units vested but not issued	 	 	(12,900)	 	 	24.75 	
Stock units vested and issued	 	 	(74,887)	 	 	20.26 	
Forfeited	 	 	(1,563)	 	 	24.72 	
Nonvested stock units at June 30, 2015	 	 	82,365 	 	$	24.92 	

The per unit weighted-average fair value at the date of grant for RSUs granted during the six months ended June 30, 2015 and 2014 was $26.26 and $24.80, respectively.    
 
On July 1, 2015, in association with the appointment of the Company’s Executive Vice President and President and Chief Operating Officer, Regulated Operations, to CEO, the Company granted 4,935 RSUs to the CEO.  The fair market value of the RSUs granted is $24.80 per unit.    
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
Stock Options – The following table provides the income tax benefit for stock-based compensation related to stock options granted in prior periods:

 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	 	June 30,	
 	 	2015	 	2014	 	2015	 	2014	
Income tax benefit	 	$	11 	 	$	23 	 	$	115 	 	$	96 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
For the six months ended June 30, 2015 and 2014, there were no compensation costs for stock-based compensation related to stock options, as stock options were fully amortized in 2013.  Additionally, there were no stock options granted during the six months ended June 30, 2015 or 2014. 
 
The following table summarizes stock option transactions for the six months ended June 30, 2015:

 	 	 	 	Weighted	 	Weighted	 	 	 	
 	 	 	 	Average	 	Average	 	Aggregate	
 	 	 	 	Exercise	 	Remaining	 	Intrinsic	
 	 	Shares	 	Price	 	Life (years)	 	Value	
Outstanding at December 31, 2014	 	1,084,992 	 	$	17.06 	 	 	 	 	 	
Forfeited	 	 -	 	 	 -	 	 	 	 	 	
Expired	 	 -	 	 	 -	 	 	 	 	 	
Exercised	 	(205,414)	 	 	16.81 	 	 	 	 	 	
Outstanding and exercisable at June 30, 2015	 	879,578 	 	$	17.12 	 	2.8 	 	$	6,481 	

Restricted Stock – The following table provides compensation costs for stock-based compensation related to restricted stock:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2015	 	2014	 	2015	 	2014	
Stock-based compensation within operations and maintenance expenses	 	$	 -	 	$	445 	 	$	 -	 	$	537 	
Income tax benefit	 	 	 -	 	 	185 	 	 	 -	 	 	223 	

 
For the six months ended June 30, 2015, there were no compensation costs for stock-based compensation related to restricted stock, as restricted stock was fully amortized in 2014.  Additionally, there was no restricted stock granted during the six months ended June 30, 2015 or 2014.
 
Stock Awards – On June 3, 2015, the Company granted an aggregate of 13,800 shares of common stock to the non-employee members of the Board of Directors continuing in office.  The fair market value of the shares is $26.44 per share.  The shares granted are not subject to any restrictions.  In the second quarter of 2015, the Company recognized $365 of compensation expense and an income tax benefit of $151 associated with this grant. 

  
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 
Note 9 – Pension Plans and Other Postretirement Benefits   
 
The Company maintains a qualified defined benefit pension plan (the “Pension Plan”), a nonqualified pension plan and other postretirement benefit plans for certain of its employees.  The net periodic benefit cost is based on estimated values and an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover, and medical costs.  The following tables provide the components of net periodic benefit cost:

 	 	Pension Benefits	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2015	 	2014	 	2015	 	2014	
Service cost	 	$	925 	 	$	1,143 	 	$	1,850 	 	$	2,286 	
Interest cost	 	 	3,222 	 	 	3,512 	 	 	6,444 	 	 	7,024 	
Expected return on plan assets	 	 	(4,674)	 	 	(4,305)	 	 	(9,348)	 	 	(8,610)	
Amortization of prior service cost	 	 	43 	 	 	69 	 	 	86 	 	 	138 	
Amortization of actuarial loss	 	 	1,532 	 	 	500 	 	 	3,064 	 	 	1,000 	
Net periodic benefit cost	 	$	1,048 	 	$	919 	 	$	2,096 	 	$	1,838 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Other	
 	 	Postretirement Benefits	
 	 	 	Three Months Ended	 	 	Six Months Ended	
 	 	 	June 30,	 	 	June 30,	
 	 	2015	 	2014	 	2015	 	2014	
Service cost	 	$	273 	 	$	283 	 	$	679 	 	$	595 	
Interest cost	 	 	681 	 	 	722 	 	 	1,439 	 	 	1,459 	
Expected return on plan assets	 	 	(731)	 	 	(686)	 	 	(1,461)	 	 	(1,369)	
Amortization of prior service cost	 	 	(211)	 	 	(68)	 	 	(265)	 	 	(142)	
Amortization of actuarial loss	 	 	309 	 	 	59 	 	 	663 	 	 	141 	
Net periodic benefit cost	 	$	321 	 	$	310 	 	$	1,055 	 	$	684 	
 
The Company made cash contributions of $13,756 to its Pension Plan during the first six months of 2015,  which completes the Company’s 2015 cash contributions. 
 
Note 10 – Water and Wastewater Rates 
 
During the first six months of 2015, the Company’s operating divisions in Illinois, Ohio, and Texas were granted base rate increases designed to increase total operating revenues on an annual basis by $3,347.  Further, during the first six months of 2015, the Company’s operating divisions in New Jersey, Illinois, Pennsylvania (wastewater), and North Carolina received approval to bill infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $1,626.
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
Note 11 – Taxes Other than Income Taxes 
 
The following table provides the components of taxes other than income taxes:

 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2015	 	2014	 	2015	 	2014	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Property	 	$	7,007 	 	$	6,254 	 	$	13,831 	 	$	11,078 	
Capital stock	 	 	541 	 	 	521 	 	 	1,080 	 	 	1,023 	
Gross receipts, excise and franchise	 	 	2,554 	 	 	2,970 	 	 	4,996 	 	 	5,749 	
Payroll	 	 	2,075 	 	 	1,610 	 	 	5,353 	 	 	4,263 	
Regulatory assessments	 	 	687 	 	 	590 	 	 	1,340 	 	 	1,183 	
Other	 	 	931 	 	 	1,081 	 	 	1,816 	 	 	1,832 	
Total taxes other than income	 	$	13,795 	 	$	13,026 	 	$	28,416 	 	$	25,128 	

 
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
Note 12 – Segment Information 
 
The Company has identified ten operating segments and has one reportable segment named the “Regulated” segment.  The reportable segment is comprised of eight operating segments for the Company’s water and wastewater regulated utility companies which are organized by the states where we provide these services.  In addition, two segments are not quantitatively significant to be reportable and are comprised of the Company’s market-based activities:  Aqua Resources, Inc. and Aqua Infrastructure, LLC.  Aqua Resources provides liquid waste hauling and disposal; water and wastewater service through operating and maintenance contracts with municipal authorities and other parties in close proximity to our utility companies’ service territories; offers, through a third party, water and wastewater line repair service and protection solutions to households; inspects, cleans and repairs storm and sanitary wastewater lines; installs and tests devices that prevent the contamination of potable water; designs and builds water and wastewater systems; and provides other market-based water and wastewater services.  Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry.  These two segments are included as a component of “Other” in the tables below.  Also included in “Other” are corporate costs that have not been allocated to the Regulated segment and intersegment eliminations.  Corporate costs include general and administrative expense, and interest expense. 
 
The following table presents information about the Company’s reportable segment:

 	 	Three Months Ended	 	Three Months Ended	
 	 	June 30, 2015	 	June 30, 2014	
 	 	Regulated	 	Other	 	Consolidated	 	Regulated	 	Other	 	Consolidated	
Operating revenues	 	$	196,932 	 	$	8,828 	 	$	205,760 	 	$	189,678 	 	$	5,629 	 	$	195,307 	
Operations and maintenance expense	 	 	71,248 	 	 	8,498 	 	 	79,746 	 	 	67,516 	 	 	2,859 	 	 	70,375 	
Depreciation	 	 	30,948 	 	 	101 	 	 	31,049 	 	 	31,224 	 	 	2 	 	 	31,226 	
Operating income (loss)	 	 	80,649 	 	 	(403)	 	 	80,246 	 	 	77,436 	 	 	2,498 	 	 	79,934 	
Interest expense, net of allowance for funds used during construction	 	 	16,904 	 	 	956 	 	 	17,860 	 	 	17,045 	 	 	1,111 	 	 	18,156 	
Income tax expense (benefit)	 	 	5,429 	 	 	(510)	 	 	4,919 	 	 	5,783 	 	 	66 	 	 	5,849 	
Income (loss) from continuing operations	 	 	58,311 	 	 	(929)	 	 	57,382 	 	 	54,745 	 	 	73 	 	 	54,818 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	 	Six Months Ended	
 	 	June 30, 2015	 	June 30, 2014	
 	 	Regulated	 	Other	 	Consolidated	 	Regulated	 	Other	 	Consolidated	
Operating revenues	 	$	377,496 	 	$	18,590 	 	$	396,086 	 	$	367,877 	 	$	10,102 	 	$	377,979 	
Operations and maintenance expense	 	 	138,266 	 	 	14,669 	 	 	152,935 	 	 	135,972 	 	 	6,089 	 	 	142,061 	
Depreciation	 	 	61,386 	 	 	163 	 	 	61,549 	 	 	62,105 	 	 	102 	 	 	62,207 	
Operating income	 	 	149,273 	 	 	2,140 	 	 	151,413 	 	 	143,855 	 	 	2,849 	 	 	146,704 	
Interest expense, net of allowance for funds used during construction	 	 	33,624 	 	 	1,719 	 	 	35,343 	 	 	33,849 	 	 	2,450 	 	 	36,299 	
Income tax expense (benefit)	 	 	9,796 	 	 	(283)	 	 	9,513 	 	 	11,869 	 	 	(828)	 	 	11,041 	
Income (loss) from continuing operations	 	 	106,016 	 	 	(89)	 	 	105,927 	 	 	98,366 	 	 	(1,147)	 	 	97,219 	
Capital expenditures	 	 	150,063 	 	 	221 	 	 	150,284 	 	 	131,092 	 	 	874 	 	 	131,966 	

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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 	 	 	 	 	 	 	
 	 	June 30,	 	December 31,	
 	 	2015	 	2014	
Total assets:	 	 	 	 	 	 	
  Regulated	 	$	5,380,811 	 	$	5,195,191 	
  Other	 	 	219,467 	 	 	211,561 	
  Consolidated	 	$	5,600,278 	 	$	5,406,752 	

 
Note 13 – Commitments and Contingencies 
 
The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business.  The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved.  As of June 30, 2015, the aggregate amount of $11,963 is accrued for loss contingencies and is reported in the Company’s consolidated balance sheet as other accrued liabilities and other liabilities.  These accruals represent management’s best estimate of probable loss (as defined in the accounting guidance) for loss contingencies or the low end of a range of losses if no single probable loss can be estimated.  For some loss contingencies, the Company is unable to estimate the amount of the probable loss or range of probable losses.  While the final outcome of these loss contingencies cannot be predicted with certainty, and unfavorable outcomes could negatively impact the Company, at this time in the opinion of management, the final resolution of these matters are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.  Further, the Company has insurance coverage for certain of these loss contingencies, and as of June 30, 2015, estimates that approximately $1,253 of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported in the Company’s consolidated balance sheet as deferred charges and other assets, net.
 
In addition to the aforementioned loss contingencies, the Company self-insures its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims.  The Company’s reserve for these claims totaled $1,468 at June 30, 2015 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.  
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
Note 14 – Income Taxes 
 
During the six months ended June 30, 2015, the Company utilized $25,820 of its Federal net operating loss carryforward (“NOL”).  In addition, during the six months ended June 30, 2015, the Company utilized $2,156 of its state NOL carryforward.  As of June 30, 2015, the balance of the Company’s Federal NOL was $183,753.  The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires no valuation allowance.  As of June 30, 2015, the balance of the Company’s gross state NOL was $552,333, a portion of which is offset by a valuation allowance because the Company does not believe the NOLs are more likely than not to be realized.  The Company’s Federal and state NOL carryforwards begin to expire in 2032 and 2023, respectively.   The Company has unrecognized tax positions that result in the associated tax benefit being unrecognized.  The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of $57,503 and $83,543, respectively.  The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were $241,255 and $635,876, respectively.  The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability. 
 
In accordance with a 2012 settlement agreement with the Pennsylvania Public Utility Commission, Aqua Pennsylvania expenses, for tax purposes, qualifying utility asset improvement costs, which results in a substantial reduction in income tax expense and greater net income and cash flows.  The Company’s effective income tax rate for the second quarter of 2015 and 2014, for its continuing operations, was 7.9% and 9.6%, respectively, and for the first six months of 2015 and 2014, for its continuing operations, was 8.2% and 10.2% respectively. 
 
As of June 30, 2015, the total gross unrecognized tax benefit was $25,200, of which $14,425, if recognized, would affect the Company’s effective tax rate as a result of the regulatory treatment afforded for qualifying infrastructure improvements in Pennsylvania.  At December 31, 2014, the Company had unrecognized tax benefits of $25,292. 
 
Accounting rules for uncertain tax positions specify that tax positions for which the timing of resolution is uncertain should be classified as long-term liabilities.  Judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes.  Management believes that an adequate provision has been made for any adjustments that may result from tax examinations.  Although the timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, the Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.
 
Note 15 – Recent Accounting Pronouncements   
 
In April 2015, the FASB issued updated accounting guidance on simplifying the presentation of debt issuance costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability.  Previously, debt issuance costs were presented in the balance sheet as a deferred charge.  The accounting standard is effective for reporting periods beginning after December 15, 2015, and will be applied retrospectively.    The Company does not expect the provisions of this accounting standard to have a material impact on its results of operations or financial position.
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

In August 2014, the FASB issued an accounting standard that will require management to assess an entity’s ability to continue as a going concern for each annual and interim reporting period and to provide related footnote disclosures in circumstances in which substantial doubt exists.  The accounting standard is effective in the first annual reporting period ending after December 15, 2016.  The Company does not expect the provisions of this accounting standard to have an impact on its results of operations or financial position.
 
In May 2014, the FASB issued updated accounting guidance on recognizing revenue from contracts with customers, which outlines a single comprehensive model that an entity will apply to determine the measurement of revenue and timing of when it is recognized.  The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.  The updated guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract.  In July 2015, the FASB approved a one year deferral to the original effective date of this guidance.  The updated guidance is effective for reporting periods beginning after December 15, 2017, and will be applied retrospectively.  The Company is currently evaluating the requirements of the updated guidance to determine the impact of adoption.   
 
In April 2014, the FASB issued updated accounting guidance which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements.  The updated guidance is effective prospectively for reporting periods beginning after December 15, 2014, with early adoption available.  The Company adopted the provisions of the updated accounting guidance for its quarterly reporting period beginning January 1, 2015, and the adoption of the revised guidance did not have an impact on the Company’s consolidated results of operations or consolidated financial position. 

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AQUA AMERICA, INC. AND SUBSIDIARIES 
 
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
 
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 
 
Forward-looking Statements 
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements address, among other things: the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “plans,”  “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue” or the negative of such terms or similar expressions.  Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements.  These risks and uncertainties include, among others: the effects of regulation, abnormal weather, changes in capital requirements and funding, acquisitions, changes to the capital markets, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such report.  As a result, readers are cautioned not to place undue reliance on any forward-looking statements.  We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.      
 
General Information 
 
Aqua America, Inc. (“we”,  “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water or wastewater services to what we estimate to be almost three million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, and Virginia.  Our largest operating subsidiary, Aqua Pennsylvania, Inc., provides water or wastewater services to approximately one-half of the total number of people we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 27 other counties in Pennsylvania.  Our other regulated utility subsidiaries provide similar services in seven other states.  In addition, the Company’s market-based activities are conducted through Aqua Resources, Inc. and Aqua Infrastructure, LLC.  Aqua Resources provides liquid waste hauling and disposal; water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to our utility companies’ service territories; offers, through a third party, water and wastewater line repair service and protection solutions to households; inspects, cleans and repairs storm and sanitary wastewater lines; installs and tests devices that prevent the contamination of potable water; designs and builds water and wastewater systems; and provides other market-based water and wastewater services.  Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry. 
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
 
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
 
Aqua America, Inc., which prior to its name change in 2004 was known as Philadelphia Suburban Corporation, was formed in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania, formerly known as Philadelphia Suburban Water Company.  Since the early 1990s, we have embarked on a growth-through-acquisition strategy focused on water and wastewater operations.  Our most significant transactions to date have been the merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition of American Water Works Company, Inc.’s regulated operations in Ohio in 2012.  Since the early 1990s, our business strategy has been primarily directed toward the regulated water and wastewater utility industry, where we have more than quadrupled the number of regulated customers we serve, and has extended our regulated operations from southeastern Pennsylvania to include operations in seven other states.  
 
Beginning in 2010, and substantially completed in 2013, we pursued a portfolio rationalization strategy to focus our operations in areas where we have critical mass and economic growth potential and to divest operations where limited customer growth opportunities exist, or where we are unable to achieve favorable operating results or a return on equity that we consider acceptable.  In 2014, we sold our operation in Georgia; in 2013, we sold our operations in Florida; in 2012, we sold our operations in Maine and New York; in 2011, we sold our operations in Missouri; and in 2010, we sold our operations in South Carolina.  In connection with the sale of our New York and Missouri operations, we acquired additional utility systems (and customers) in Ohio and Texas, two of the larger states in our portfolio.         
 
In December 2014, we completed the sale of our water utility system in southwest Allen County, Indiana to the City of Fort Wayne, Indiana.  The completion of this sale settled the dispute concerning the City of Fort Wayne’s valuation of the northern portion of our water and wastewater utility systems, which were acquired by the City of Fort Wayne in February 2008, by eminent domain.    In addition, as a result of this transaction, Aqua Indiana will expand its sewer customer base by accepting new wastewater flows from the City of Fort Wayne.
 
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes.
 
Financial Condition
 
During the first six months of 2015, we had $150,284 of capital expenditures, expended $25,919 primarily for the acquisition of water and wastewater utility systems, issued $238,457 of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of $158,824. The capital expenditures were related to new and rehabilitated water mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, and other enhancements and improvements.  The issuance of long-term debt was comprised principally of the funds borrowed under our revolving credit facility of $103,000, the proceeds from the issuance of $70,000 of senior unsecured notes due in 2030, and the funds borrowed under a three-year unsecured loan of $50,000.         
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
 
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
 
At June 30, 2015, we had $4,615 of cash and cash equivalents compared to $4,138 at December 31, 2014.  During the first six months of 2015, we used the proceeds from the issuance of long-term debt and internally generated funds to fund the cash requirements discussed above and to pay dividends.   
 
At June 30, 2015, our $200,000 unsecured revolving credit facility, which expires in March 2017, had $106,581 available for borrowing.  At June 30, 2015, we had short-term lines of credit of $160,500, of which $124,194 was available for borrowing.  One of our short-term lines of credit is an Aqua Pennsylvania $100,000 364-day unsecured revolving credit facility with four banks, which is used to provide working capital, and as of June 30, 2015, $68,434 was available for borrowing. 
 
Our short-term lines of credit of $160,500 are subject to renewal on an annual basis.  Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be.     
 
The Company’s consolidated balance sheet historically has had a negative working capital position whereby routinely our current liabilities exceed our current assets.  Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months. 
 
On June 7, 2012, Aqua Pennsylvania reached a settlement agreement in its rate filing with the Pennsylvania Public Utility Commission, which in addition to a water rate increase, provided for a reduction in current income tax expense as a result of the recognition of qualifying income tax benefits upon Aqua Pennsylvania changing its tax accounting method to permit the expensing of qualifying utility asset improvement costs that have historically been capitalized and depreciated for book and tax purposes.  In December 2012, Aqua Pennsylvania implemented this change, which resulted in a substantial reduction in income tax expense and greater net income and cash flow, and as a result allowed Aqua Pennsylvania to suspend its water Distribution System Improvement Charges in 2013 and lengthen the amount of time until the next Aqua Pennsylvania rate case is filed.  During 2013 and 2014, our non-Pennsylvania regulated operating divisions implemented this change.  These divisions currently do not employ a method of accounting that provides for a reduction in current income taxes as a result of the recognition of income tax benefits, and as such the change in the Company’s tax method of accounting in these other operating divisions has no impact on our effective income tax rate.
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AQUA AMERICA, INC. AND SUBSIDIARIES 
 
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
 
Results of Operations 
 
Analysis of Second Quarter of 2015 Compared to Second Quarter of 2014 
 
Unless specifically noted, the following discussion of the Company’s results of operations for the second quarter of 2015 refers to the Company’s results of operations from continuing operations. 
 
Revenues increased by $10,453 or 5.4%, primarily due to an increase in market-based activities revenues of $3,232 principally associated with acquisitions, an increase in customer water consumption, an increase in water and wastewater rates of $2,345, and additional water and wastewater revenues of 2,241 associated with a larger customer base due to acquisitions, offset by a decrease in infrastructure rehabilitation surcharges of $1,135. 
  
Operations and maintenance expenses increased by $9,371 or 13.3%, primarily due to additional operating costs associated with acquired utility systems and market-based activities of $4,774, the recording of a reserve of $1,862 for water rights held for future use, leadership transition expenses of $1,848, the effect of the favorable recognition of a regulatory asset in the second quarter of 2014 of $1,575, an increase in legal expense of $667, and an increase in water production costs of $630, offset by a decrease in postretirement benefits expense of $1,083 and a decrease in the Company’s self-insured employee medical benefit program expense of $535.   
 
Depreciation expense decreased by $177 or 0.6%, primarily due to the implementation of new depreciation rates, in January 2015, for our Pennsylvania operating subsidiary. 
 
Amortization expense increased by $178, primarily due to the amortization of costs associated with, and other costs being recovered in, various rate filings. 
 
Taxes other than income taxes increased by $769 or 5.9%, primarily due to an increase in property taxes of $753 primarily for our Ohio operating subsidiary resulting from an increase in taxable property and an increase in the property tax rate.    
 
Interest expense decreased by $193 or 1.0%, primarily due to a decrease in the effective interest rate on average borrowings as compared to the second quarter of 2014, offset by an increase in average borrowings. 
 
Allowance for funds used during construction (“AFUDC”) increased by $103, primarily due to an increase in the AFUDC rate. 
 
Our effective income tax rate was 7.9% in the second quarter of 2015 and 9.6% in the second quarter of 2014.  The effective income tax rate decreased due to the effect of additional tax deductions recognized in the second quarter of 2015 for certain qualifying infrastructure improvements for Aqua Pennsylvania.     
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
 
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
 
Income from continuing operations increased by $2,564 or 4.7%, primarily as a result of the factors described above.  On a diluted per share basis, income from continuing operations increased by $0.01, reflecting the change in income from continuing operations.    
 
Income from discontinued operations decreased by $751, primarily as a result of the sale of our water utility system in southwest Allen County, Indiana completed in the fourth quarter of 2014.   
 
Net income attributable to common shareholders increased by $1,813 or 3.3%, primarily as a result of the factors described above.  On a diluted per share basis, earnings increased by $0.01 reflecting the change in net income attributable to common shareholders.
 
Analysis of First Six Months of 2015 Compared to First Six Months of 2014 
 
Unless specifically noted, the following discussion of the Company’s results of operations for the first six months of 2015 refers to the Company’s results of operations from continuing operations. 
 
Revenues increased by $18,107 or 4.8%, primarily due to an increase in market-based activities revenues of $8,549 principally associated with acquisitions, an increase in water and wastewater rates of $5,222, additional water and wastewater revenues of $3,159 associated with a larger customer base due to acquisitions, and an increase in customer water consumption, offset by a decrease in infrastructure rehabilitation surcharges of $1,996. 
 
Operations and maintenance expenses increased by $10,874 or 7.7%, primarily due to additional operating costs associated with acquired utility systems and market-based activities of $9,135, the recording of a reserve of $1,862 for water rights held for future use, leadership transition expenses of $1,848, the effect of the favorable recognition of a regulatory asset in the second quarter of 2014 of $1,575, an increase in water production costs of $1,461,  and an increase in legal expense of $1,023, offset by a decrease in postretirement benefits expense of $1,841, a decrease in the Company’s self-insured employee medical benefit program expense of $1,464, a decrease in bad debt expense of $1,008, and reduced operating costs of $662 associated with severe winter weather conditions experienced in many of our service territories in the first quarter of 2014.  The increase in water production costs of $1,461 is primarily due to an increase in energy costs resulting from the extreme cold temperatures experienced in many of our service territories in the first quarter of 2015. 
 
Depreciation expense decreased by $658 or 1.1%, primarily due to the implementation of new depreciation rates, in January 2015, for our Pennsylvania operating subsidiary. 
 
Amortization expense decreased by $106, primarily due to the completion of the recovery of our costs associated with various completed rate filings. 
 
Taxes other than income taxes increased by $3,288 or 13.1%, primarily due to an increase in property taxes of $2,753 largely due to the effect of a non-recurring credit realized in the first quarter of 2014 that resulted in a reduction in property taxes for our Ohio operating subsidiary.
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AQUA AMERICA, INC. AND SUBSIDIARIES 
 
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Interest expense decreased by $838 or 2.2%, primarily due to a decrease in the effective interest rate on average borrowings as compared to the first six months of 2014, offset by an increase in average borrowings. 
 
Allowance for funds used during construction increased by $118, primarily due to an increase in the AFUDC rate.
 
Our effective income tax rate was 8.2% in the first six months of 2015 and 10.2% in the first six months of 2014.  The effective income tax rate decreased due to the effect of additional tax deductions recognized in the first six months of 2015 for certain qualifying infrastructure improvements for Aqua Pennsylvania.     
 
Income from continuing operations increased by $8,708 or 9.0%, primarily as a result of the factors described above.  On a diluted per share basis, income from continuing operations increased by $0.05, reflecting the change in income from continuing operations.    
 
Income from discontinued operations decreased by $1,209, primarily as a result of the sale of our water utility system in southwest Allen County, Indiana completed in the fourth quarter of 2014.   
 
Net income attributable to common shareholders increased by $7,499 or 7.6%, primarily as a result of the factors described above.  On a diluted per share basis, earnings increased by $0.05 reflecting the change in net income attributable to common shareholders.
 
Impact of Recent Accounting Pronouncements 
 
We describe the impact of recent accounting pronouncements in Note 15,  Recent Accounting Pronouncements , of the consolidated financial statements in this report.  

 
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Item 3  – Quantitative and Qualitative Disclosures About Market Risk 
 
We are subject to market risks in the normal course of business, including changes in interest rates and equity prices.  There have been no significant changes in our exposure to market risks since December 31, 2014.  Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for additional information.
 
Item 4  – Controls and Procedures 
 
 	(a)	 	Evaluation of Disclosure Controls and Procedures 	
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.   
 
 	(b)	 	Changes in Internal Control over Financial Reporting 	
 
No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Part II.  Other Information
 
Item 1 – Legal Proceedings 
 
We are party to various legal proceedings.  Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our properties is the subject that we believe are material or are expected to have a material adverse effect on our financial position, results of operations or cash flows.     
 
Item 1A – Risk Factors 
 
There have been no material changes to the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014  under “Part 1, Item 1A – Risk Factors.”
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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table summarizes the Company’s purchases of its common stock for the quarter ended June 30, 2015:

 	 	Issuer Purchases of Equity Securities	 	 	
 	 	 	 	 	 	 	Total	 	Maximum	
 	 	 	 	 	 	 	Number of	 	Number of	
 	 	 	 	 	 	 	Shares	 	Shares	
 	 	 	 	 	 	 	Purchased	 	that May	
 	 	 	 	 	 	 	as Part of	 	Yet be	
 	 	Total	 	 	 	 	Publicly	 	Purchased	
 	 	Number	 	Average	 	Announced	 	Under the	
 	 	of Shares	 	Price Paid	 	Plans or	 	Plan or	
Period	 	Purchased (1)	 	per Share	 	Programs	 	Programs (2)	
April 1-30, 2015	 	820 	 	$	26.94 	 	 -	 	1,125,348 	
May 1-31, 2015	 	 -	 	$	 -	 	 -	 	1,125,348 	
June 1-30, 2015	 	166,186 	 	$	25.16 	 	161,000 	 	964,348 	
Total	 	167,006 	 	$	25.16 	 	161,000 	 	964,348 	

 	(1)	 	These amounts include the following:  (a) 5,186 shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of PSUs, RSUs, or restricted stock; and (b) 820 shares we acquired from employees who elected to pay the exercise price of their stock options (and then hold shares of the stock), upon exercise, by delivering to us shares of our common stock in accordance with the terms of our equity compensation plan that were previously approved by our shareholders and disclosed in our proxy statements.  These features of our equity compensation plan are available to all employees who receive stock-based compensation under the plan.  We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day of vesting of the PSU, RSU, or restricted stock awards or on the day prior to the option exercise.     	
 
 	(2)	 	On October 4, 2013, our Board of Directors approved a resolution authorizing the repurchase of up to 685,348 of our outstanding shares.  This authorization renewed the number of shares that had remained, when affected for stock splits, from an existing buy-back authorization from 1997.  As of June 30, 2015, there are no shares left for purchase under this program.  In December 2014, our Board of Directors authorized a share buyback program of up to 1,000,000 shares to minimize share dilution through timely and orderly share repurchases.  This program expires on the earliest of December 31, 2015 or when all authorized repurchases have been made.     	
 
Item 6 – Exhibits  
 
The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference.
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SIGNATURES 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be executed on its behalf by the undersigned thereunto duly authorized. 
 
August 6, 2015

 	 	 	 	
 	 	Aqua America, Inc.                  	
 	 	Registrant	

 	 	 	 	
 	 	/s/ Christopher H. Franklin	
 	 	Christopher H. Franklin	
 	 	President and	
 	 	Chief Executive Officer	

 	 	 	 	
 	 	/s/ David P. Smeltzer	
 	 	David P. Smeltzer	
 	 	Executive Vice President and	
 	 	Chief Financial Officer 	

 
 
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EXHIBIT INDEX 

 
Exhibit No.
 	 
Description	
10.1	Employment Agreement, dated June 3, 2015, between Aqua America, Inc. and Christopher Franklin* (Incorporated by reference from Exhibit 10.1 to Form 8-K filed on June 3, 2015)	
10.2	Amendment to Employment Agreement, dated July 7, 2015, between Aqua America, Inc. and Nicholas DeBenedictis* (Incorporated by reference from Exhibit 10.1 to Form 8-K filed on July 7, 2015)	
31.1 	Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934.	
31.2 	Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934.	
32.1 	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.	
32.2 	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.	
101.INS	XBRL Instance Document	
101.SCH	XBRL Taxonomy Extension Schema Document	
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	
101.PRES	XBRL Taxonomy Extension Presentation Linkbase Document	

 
*Indicates management contract
33

Exhibit 31.1 
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER, PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES AND EXCHANGE ACT OF 1934 
 
I, Christopher H. Franklin, certify that: 
 
 	1.	 	I have reviewed this quarterly report on Form 10-Q of Aqua America, Inc.; 	

 	2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 	

 	3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 	

 	4.	 	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 	

 	a.	 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 	

 	b.	 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 	

 	c.	 	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 	

 	d.	 	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and 	

 	5.	 	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 	

 	a.	 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 	

 	b.	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 	

 
 
/s/ Christopher H. Franklin 	
Christopher H. Franklin 	
President and Chief Executive Officer 	
August 6, 2015 	

Exhibit 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER, PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES AND EXCHANGE ACT OF 1934  
 
I, David P. Smeltzer, certify that: 
 
 	1.	 	I have reviewed this quarterly report on Form 10-Q of Aqua America, Inc.; 	

 	2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 	

 	3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 	

 	4.	 	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 	

 	a.	 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;  	

 	b.	 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 	

 	c.	 	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 	

 	d.	 	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and 	

 	5.	 	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 	

 	a.	 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 	

 	b.	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 	

 
 
/s/David P. Smeltzer	
David P. Smeltzer 	
Executive Vice President and Chief Financial Officer 	
August 6, 2015	

Exhibit 32.1 

 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 
18 U.S.C. SECTION 1350 

 
 
In connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2015 of Aqua America, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher H. Franklin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 

 	(1)	 	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m(a) or Section 78o(d)); and 	
 
 	(2)	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 	

 
 
/s/ Christopher H. Franklin	 	
Christopher H. Franklin 	 	
President and Chief Executive Officer 	 	
August 6, 2015 	 	

Exhibit 32.2 

 
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 
18 U.S.C. SECTION 1350 

 
 
In connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2015 of Aqua America, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David P. Smeltzer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 

 	(1)	 	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m(a) or Section 78o(d)); and 	
 
 	(2)	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 	

 

/s/David P. Smeltzer	 	
David P. Smeltzer 	 	
Executive Vice President and Chief Financial Officer 	 	
August 6, 2015