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, 2014 
☐ 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 25,  2014:  177,180,169

 
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, 2014 and December 31, 2013 	2 	
 	 	
Consolidated Statements of Net Income (unaudited) -
Three Months Ended June 30, 2014 and 2013 	3 	
 	 	
Consolidated Statements of Net Income (unaudited)
Six Months Ended June 30, 2104 and 2013 	4 	
 	 	
Consolidated Statements of Comprehensive Income (unaudited) –
Three and Six Months Ended June 30, 2014 and 2013 	5 	
 	 	
Consolidated Statements of Capitalization (unaudited) –
June 30, 2014 and December 31, 2013 	6 	
 	 	
Consolidated Statement of Equity (unaudited) –
Six Months Ended June 30, 2014 	7 	
 	 	
Consolidated Statements of Cash Flow (unaudited) –
Six Months Ended June 30, 2014 and 2013 	8 	
 	 	
Notes to Consolidated Financial Statements (unaudited) 	9 	
 	 	
Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations 	26 	
 	 	
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 	34 	
 	 	
Item 4.  Controls and Procedures 	34 	
 	
Part II – Other Information 	
 	 	
Item 1.  Legal Proceedings 	34 	
 	 	
Item 1A.  Risk Factors 	35 	
 	 	
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 	36 	
 	 	
Item 6.  Exhibits 	36 	
 	 	
Signatures 	37 	
 	 	
Exhibit Index 	38 	
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED BALANCE SHEETS 
(In thousands of dollars, except per share amounts) 
(UNAUDITED)

 	 	June 30,	 	December 31,	
Assets	 	2014	 	2013	
Property, plant and equipment, at cost	 	$	5,500,281 	 	$	5,350,868 	
Less: accumulated depreciation	 	 	1,266,441 	 	 	1,212,300 	
Net property, plant and equipment	 	 	4,233,840 	 	 	4,138,568 	
Current assets:	 	 	 	 	 	 	
Cash and cash equivalents	 	 	3,858 	 	 	5,058 	
Accounts receivable and unbilled revenues, net	 	 	100,474 	 	 	94,704 	
Deferred income taxes	 	 	41,867 	 	 	40,038 	
Inventory, materials and supplies	 	 	12,294 	 	 	11,353 	
Prepayments and other current assets	 	 	12,995 	 	 	18,954 	
Assets of discontinued operations held for sale	 	 	30,330 	 	 	30,747 	
Total current assets	 	 	201,818 	 	 	200,854 	
 	 	 	 	 	 	 	
Regulatory assets	 	 	630,305 	 	 	585,140 	
Deferred charges and other assets, net	 	 	51,346 	 	 	50,290 	
Investment in joint venture	 	 	46,170 	 	 	48,695 	
Funds restricted for construction activity	 	 	47 	 	 	47 	
Goodwill	 	 	27,999 	 	 	28,223 	
Total assets	 	$	5,191,525 	 	$	5,051,817 	
Liabilities and Equity	 	 	 	 	 	 	
Aqua America stockholders' equity:	 	 	 	 	 	 	
Common stock at $.50 par value, authorized 300,000,000 shares, issued 178,451,832 and 177,928,922 as of June 30, 2014 and December 31, 2013	 	$	89,226 	 	$	88,964 	
Capital in excess of par value	 	 	751,853 	 	 	743,335 	
Retained earnings	 	 	773,717 	 	 	729,272 	
Treasury stock, at cost, 1,273,171 and 1,178,323 shares as of June 30, 2014 and December 31, 2013	 	 	(29,431)	 	 	(27,082)	
Accumulated other comprehensive income	 	 	793 	 	 	346 	
Total Aqua America stockholders' equity	 	 	1,586,158 	 	 	1,534,835 	
 	 	 	 	 	 	 	
Noncontrolling interest	 	 	223 	 	 	208 	
Total equity	 	 	1,586,381 	 	 	1,535,043 	
 	 	 	 	 	 	 	
Long-term debt, excluding current portion	 	 	1,481,449 	 	 	1,468,583 	
Commitments and contingencies (See Note 13)	 	 	 -	 	 	 -	
 	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	
Current portion of long-term debt	 	 	118,116 	 	 	86,288 	
Loans payable	 	 	40,362 	 	 	36,740 	
Accounts payable	 	 	38,112 	 	 	65,815 	
Accrued interest	 	 	13,097 	 	 	13,615 	
Accrued taxes	 	 	8,911 	 	 	14,176 	
Other accrued liabilities	 	 	31,390 	 	 	33,596 	
Liabilities of discontinued operations held for sale	 	 	27,985 	 	 	29,649 	
Total current liabilities	 	 	277,973 	 	 	279,879 	
 	 	 	 	 	 	 	
Deferred credits and other liabilities:	 	 	 	 	 	 	
Deferred income taxes and investment tax credits	 	 	926,447 	 	 	866,211 	
Customers' advances for construction	 	 	78,394 	 	 	73,892 	
Regulatory liabilities	 	 	283,707 	 	 	281,014 	
Other	 	 	68,121 	 	 	81,552 	
Total deferred credits and other liabilities	 	 	1,356,669 	 	 	1,302,669 	
 	 	 	 	 	 	 	
Contributions in aid of construction	 	 	489,053 	 	 	465,643 	
Total liabilities and equity	 	$	5,191,525 	 	$	5,051,817 	
 	 	 	 	 	 	 	
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 NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)
 	 	 	 	 	 	 	
 	 	Three Months Ended	
 	 	June 30,	
 	 	2014	 	2013	
 	 	 	 	 	 	 	
Operating revenues	 	$	195,307 	 	$	193,943 	
 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	
Operations and maintenance	 	 	70,375 	 	 	70,412 	
Depreciation	 	 	31,226 	 	 	29,311 	
Amortization	 	 	746 	 	 	1,368 	
Taxes other than income taxes	 	 	13,026 	 	 	13,102 	
Total operating expenses	 	 	115,373 	 	 	114,193 	
 	 	 	 	 	 	 	
Operating income	 	 	79,934 	 	 	79,750 	
 	 	 	 	 	 	 	
Other expense (income):	 	 	 	 	 	 	
Interest expense, net	 	 	19,093 	 	 	19,208 	
Allowance for funds used during construction	 	 	(937)	 	 	(490)	
(Gain) loss on sale of other assets	 	 	(140)	 	 	109 	
Equity loss in joint venture	 	 	1,251 	 	 	1,154 	
Income from continuing operations before income taxes	 	 	60,667 	 	 	59,769 	
Provision for income taxes	 	 	5,849 	 	 	6,765 	
Income from continuing operations	 	 	54,818 	 	 	53,004 	
 	 	 	 	 	 	 	
Discontinued operations:	 	 	 	 	 	 	
Income from discontinued operations before income taxes	 	 	1,253 	 	 	943 	
Provision for income taxes	 	 	502 	 	 	361 	
Income from discontinued operations	 	 	751 	 	 	582 	
Net income attributable to common shareholders	 	$	55,569 	 	$	53,586 	
 	 	 	 	 	 	 	
Income from continuing operations per share:	 	 	 	 	 	 	
Basic	 	$	0.31 	 	$	0.30 	
Diluted	 	$	0.31 	 	$	0.30 	
 	 	 	 	 	 	 	
Income from discontinued operations per share:	 	 	 	 	 	 	
Basic	 	$	0.00 	 	$	0.00 	
Diluted	 	$	0.00 	 	$	0.00 	
 	 	 	 	 	 	 	
Net income per common share:	 	 	 	 	 	 	
Basic	 	$	0.31 	 	$	0.30 	
Diluted	 	$	0.31 	 	$	0.30 	
 	 	 	 	 	 	 	
Average common shares outstanding during the period:	 	 	 	 	 	 	
Basic	 	 	177,058 	 	 	175,983 	
Diluted	 	 	178,012 	 	 	177,078 	
 	 	 	 	 	 	 	
Cash dividends declared per common share	 	$	0.152 	 	$	0.292 	
 	 	 	 	 	 	 	
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 NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)

 	 	 	 	 	 	 	
 	 	Six Months Ended	
 	 	June 30,	
 	 	2014	 	2013	
 	 	 	 	 	 	 	
Operating revenues	 	$	377,979 	 	$	372,495 	
 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	
Operations and maintenance	 	 	142,061 	 	 	138,206 	
Depreciation	 	 	62,207 	 	 	58,356 	
Amortization	 	 	1,879 	 	 	2,745 	
Taxes other than income taxes	 	 	25,128 	 	 	26,500 	
 	 	 	231,275 	 	 	225,807 	
 	 	 	 	 	 	 	
Operating income	 	 	146,704 	 	 	146,688 	
 	 	 	 	 	 	 	
Other expense (income):	 	 	 	 	 	 	
Interest expense, net	 	 	38,403 	 	 	38,483 	
Allowance for funds used during construction	 	 	(2,104)	 	 	(1,042)	
Loss on sale of other assets	 	 	208 	 	 	17 	
Equity loss in joint venture	 	 	1,937 	 	 	1,810 	
Income from continuing operations before income taxes	 	 	108,260 	 	 	107,420 	
Provision for income taxes	 	 	11,041 	 	 	13,552 	
Income from continuing operations	 	 	97,219 	 	 	93,868 	
 	 	 	 	 	 	 	
Discontinued operations:	 	 	 	 	 	 	
Income from discontinued operations before income taxes	 	 	2,025 	 	 	9,868 	
Provision for income taxes	 	 	816 	 	 	3,585 	
Income from discontinued operations	 	 	1,209 	 	 	6,283 	
Net income attributable to common shareholders	 	$	98,428 	 	$	100,151 	
 	 	 	 	 	 	 	
Income from continuing operations per share:	 	 	 	 	 	 	
Basic	 	$	0.55 	 	$	0.53 	
Diluted	 	$	0.55 	 	$	0.53 	
 	 	 	 	 	 	 	
Income from discontinued operations per share:	 	 	 	 	 	 	
Basic	 	$	0.01 	 	$	0.04 	
Diluted	 	$	0.01 	 	$	0.04 	
 	 	 	 	 	 	 	
Net income per common share:	 	 	 	 	 	 	
Basic	 	$	0.56 	 	$	0.57 	
Diluted	 	$	0.55 	 	$	0.57 	
 	 	 	 	 	 	 	
Average common shares outstanding during the period:	 	 	 	 	 	 	
Basic	 	 	176,949 	 	 	175,701 	
Diluted	 	 	177,868 	 	 	176,598 	
 	 	 	 	 	 	 	
Cash dividends declared per common share	 	$	0.304 	 	$	0.432 	
 	 	 	 	 	 	 	
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 COMPREHENSIVE INCOME 
(In thousands of dollars) 
(UNAUDITED)

 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2014	 	2013	 	2014	 	2013	

Net income attributable to common shareholders	 	$	55,569 	 	$	53,586 	 	$	98,428 	 	$	100,151 	
Other comprehensive income, net of tax:	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized holding gain (loss) on investments, net of tax expense (benefit) of $68 and $(18) for the three months and $106 and $(23) for the six months ended, June 30, respectively	 	 	126 	 	 	(33)	 	 	198 	 	 	(42)	
Reclassification adjustment for loss reported in net income, net of tax benefit of $49 for the three months and $134 and $49 for the six months ended, June 30, respectively (1)  (2)	 	 	 -	 	 	90 	 	 	249 	 	 	90 	
Comprehensive income	 	$	55,695 	 	$	53,643 	 	$	98,875 	 	$	100,199 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
(1) Amount of pre-tax loss of $139 reclassified from accumulated other comprehensive income to loss on sale of other assets on the consolidated statements of net income for the three months ended June 30, 2013.	
(2) Amount of pre-tax loss of $383 and $139 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 and 2013, respectively.	
 	 	 	 	 	 	 	 	 	 	 	 	 	
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 CAPITALIZATION 
(In thousands of dollars, except per share amounts) 
(UNAUDITED)

 	 	 	June 30,	 	December 31,	
 	 	 	2014	 	2013	
Aqua America stockholders' equity:	 	 	 	 	 	 	 	
    Common stock, $.50 par value	 	 	$	89,226 	 	$	88,964 	
    Capital in excess of par value	 	 	 	751,853 	 	 	743,335 	
    Retained earnings	 	 	 	773,717 	 	 	729,272 	
    Treasury stock, at cost	 	 	 	(29,431)	 	 	(27,082)	
    Accumulated other comprehensive income	 	 	793 	 	 	346 	
Total Aqua America stockholders' equity	 	 	 	1,586,158 	 	 	1,534,835 	
 	 	 	 	 	 	 	 	
Noncontrolling interest	 	 	 	223 	 	 	208 	
 	 	 	 	 	 	 	 	
Total equity	 	 	 	1,586,381 	 	 	1,535,043 	
 	 	 	 	 	 	 	 	
Long-term debt:	 	 	 	 	 	 	 	
Long-term debt of subsidiaries (substantially secured by utility plant):	 	 	 	 	 	 	
Interest Rate Range	Maturity Date Range	 	 	 	 	 	 	
0.00% to  0.99%	2023 to 2033	 	 	5,794 	 	 	5,035 	
1.00% to  1.99%	2014 to 2035	 	 	26,148 	 	 	28,615 	
2.00% to  2.99%	2024 to 2031	 	 	16,709 	 	 	14,903 	
3.00% to  3.99%	2016 to 2047	 	 	166,232 	 	 	167,365 	
4.00% to  4.99%	2020 to 2048	 	 	444,460 	 	 	447,296 	
5.00% to  5.99%	2015 to 2043	 	 	256,414 	 	 	284,362 	
6.00% to  6.99%	2015 to 2036	 	 	64,934 	 	 	64,924 	
7.00% to  7.99%	2022 to 2027	 	 	34,743 	 	 	35,056 	
8.00% to  8.99%	2021 to 2025	 	 	19,099 	 	 	19,283 	
9.00% to  9.99%	2018 to 2026	 	 	28,500 	 	 	28,500 	
10.40%	2018	 	 	6,000 	 	 	6,000 	
 	 	 	 	1,069,033 	 	 	1,101,339 	
 	 	 	 	 	 	 	 	
Notes payable to bank under revolving credit agreement, variable rate, due March 2017	 	 	77,000 	 	 	 -	
Unsecured notes payable:	 	 	 	 	 	 	 	
Notes at 3.57% due 2027	 	 	 	50,000 	 	 	50,000 	
Notes ranging from 4.62% to 4.87%, due 2014 through 2024	 	 	171,400 	 	 	171,400 	
Notes ranging from 5.01% to 5.95%, due 2015 through 2037	 	 	232,132 	 	 	232,132 	
 	 	 	 	1,599,565 	 	 	1,554,871 	
Current portion of long-term debt	 	 	 	118,116 	 	 	86,288 	
Long-term debt, excluding current portion	 	 	1,481,449 	 	 	1,468,583 	
Total capitalization	 	 	$	3,067,830 	 	$	3,003,626 	
 	 	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	

 

 
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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, 2013	 	$	88,964 	 	$	743,335 	 	$	729,272 	 	$	(27,082)	 	$	346 	 	$	208 	 	$	1,535,043 	
Net income	 	 	 -	 	 	 -	 	 	98,428 	 	 	 -	 	 	 -	 	 	15 	 	 	98,443 	
Other comprehensive income, net of income tax of $240	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	447 	 	 	 -	 	 	447 	
Dividends	 	 	 -	 	 	 -	 	 	(53,787)	 	 	 -	 	 	 -	 	 	 -	 	 	(53,787)	
Repurchase of stock (94,853 shares)         	 	 	 -	 	 	 -	 	 	 -	 	 	(2,349)	 	 	 -	 	 	 -	 	 	(2,349)	
Equity compensation plan (212,920 shares)	 	 	107 	 	 	(107)	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	 -	
Exercise of stock options (309,990 shares)	 	 	155 	 	 	4,537 	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	4,692 	
Stock-based compensation	 	 	 -	 	 	3,149 	 	 	(196)	 	 	 -	 	 	 -	 	 	 -	 	 	2,953 	
Employee stock plan tax benefits	 	 	 -	 	 	1,301 	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	1,301 	
Other  	 	 	 -	 	 	(362)	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	(362)	
Balance At June 30, 2014	 	$	89,226 	 	$	751,853 	 	$	773,717 	 	$	(29,431)	 	$	793 	 	$	223 	 	$	1,586,381 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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,	
 	 	2014	 	2013	
Cash flows from operating activities:	 	 	 	 	 	 	
Net income	 	$	98,428 	 	$	100,151 	
Income from discontinued operations	 	 	1,209 	 	 	6,283 	
Income from continuing operations	 	 	97,219 	 	 	93,868 	
Adjustments to reconcile income from continuing operations	 	 	 	 	 	 	
to net cash flows from operating activities:	 	 	 	 	 	 	
Depreciation and amortization	 	 	64,086 	 	 	61,101 	
Deferred income taxes	 	 	7,845 	 	 	17,681 	
Provision for doubtful accounts	 	 	3,141 	 	 	2,016 	
Stock-based compensation	 	 	3,538 	 	 	2,694 	
Gain on sale of utility system	 	 	 -	 	 	(1,025)	
Loss on sale of other assets	 	 	208 	 	 	17 	
Net increase in receivables, inventory and prepayments	 	 	(11,087)	 	 	(4,561)	
Net increase (decrease) in payables, accrued interest, accrued taxes and other accrued liabilities	 	 	4,740 	 	 	(10,841)	
Other	 	 	(15,050)	 	 	(2,795)	
Operating cash flows from continuing operations	 	 	154,640 	 	 	158,155 	
Operating cash flows (used in) from discontinued operations, net	 	 	(582)	 	 	1,252 	
Net cash flows from operating activities	 	 	154,058 	 	 	159,407 	
Cash flows from investing activities:	 	 	 	 	 	 	
Property, plant and equipment additions, including the non-equity component of allowance for funds used during construction of $649 and $944	 	 	(131,966)	 	 	(134,722)	
Acquisitions of utility systems and other, net	 	 	(4,467)	 	 	(10,721)	
Additions to funds restricted for construction activity	 	 	 -	 	 	(5)	
Release of funds previously restricted for construction activity	 	 	 -	 	 	394 	
Net proceeds from the sale of utility system and other assets	 	 	308 	 	 	113 	
Investment in joint venture	 	 	 -	 	 	(9,800)	
Other	 	 	(30)	 	 	(343)	
Investing cash flows used in continuing operations	 	 	(136,155)	 	 	(155,084)	
Investing cash flows from discontinued operations, net	 	 	2 	 	 	51,124 	
Net cash flows used in investing activities	 	 	(136,153)	 	 	(103,960)	
Cash flows from financing activities:	 	 	 	 	 	 	
Customers' advances and contributions in aid of construction	 	 	3,182 	 	 	2,159 	
Repayments of customers' advances	 	 	(1,294)	 	 	(928)	
Net proceeds of short-term debt	 	 	3,622 	 	 	31,704 	
Proceeds from long-term debt	 	 	116,074 	 	 	172,069 	
Repayments of long-term debt	 	 	(70,910)	 	 	(226,914)	
Change in cash overdraft position	 	 	(19,128)	 	 	(1,330)	
Proceeds from issuing common stock	 	 	 -	 	 	6,816 	
Proceeds from exercised stock options	 	 	4,692 	 	 	20,662 	
Stock-based compensation windfall tax benefits	 	 	1,217 	 	 	 -	
Repurchase of common stock	 	 	(2,349)	 	 	(11,710)	
Dividends paid on common stock	 	 	(53,787)	 	 	(49,192)	
Other	 	 	(362)	 	 	 -	
Financing cash flows used in continuing operations	 	 	(19,043)	 	 	(56,664)	
Financing cash flows used in discontinued operations, net	 	 	(62)	 	 	(32)	
Net cash flows used in financing activities	 	 	(19,105)	 	 	(56,696)	
Net decrease in cash and cash equivalents	 	 	(1,200)	 	 	(1,249)	
Cash and cash equivalents at beginning of period	 	 	5,058 	 	 	5,521 	
Cash and cash equivalents at end of period	 	$	3,858 	 	$	4,272 	
 	 	 	 	 	 	 	
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, 2014, the consolidated statements of net income and comprehensive income for the three and six months ended June 30, 2014 and 2013 the consolidated statements of cash flow for the six months ended June 30, 2014 and 2013, and the consolidated statement of equity for the six months ended June 30, 2014 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, 2013.  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, 2013 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2013 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.  All common share, per common share, stock unit, and per stock unit data, for all periods presented, has been adjusted to give effect to the September 1, 2013 five-for-four stock split effected in the form of a 25% stock distribution (see Note 5).  Certain prior period amounts have been reclassified to conform to the reporting of discontinued operations (see Note 4).

 
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, 2013	 	$	24,102 	 	$	4,121 	 	$	28,223 	
Reclassifications to utility plant acquisition adjustment	 	 	(202)	 	 	 -	 	 	(202)	
Other	 	 	(22)	 	 	 -	 	 	(22)	
Balance At June 30, 2014	 	$	23,878 	 	$	4,121 	 	$	27,999 	
 
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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 
 
Subsequent to the quarter ended June 30, 2014, in August, the Company acquired Tri-State Grouting, which is a non-regulated business that specializes in the cleaning, televising, and trenchless repair of storm and sanitary sewer  pipes and appurtenances.  The total purchase price consisted of $3,010, of which a total of $810 is contingent upon satisfying certain annual performance targets over a three-year period.      
 
In May 2014, the Company entered into an asset purchase agreement for the acquisition of the water and wastewater utility system assets of North Maine Utilities owned by the Village of Glenview, Illinois serving approximately 7,200 customers, for cash at closing of up to $22,000, subject to final adjustment pursuant to the purchase agreement.  Closing of this acquisition is anticipated to occur in mid-2015.          
 
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.
 
In March 2013, the Company acquired the water and wastewater utility system assets of Total Environmental Solutions, Inc. located in Clearfield County, Pennsylvania serving approximately 4,200 customers.  The total purchase price consisted of $10,350 in cash.      

Note 4 –  Discontinued Operations 
 
Discontinued Operations – In September 2012, the Company began to market for sale its water and wastewater operations in Florida, which served approximately 38,000 customers, and the Company’s wastewater treatment facility in Georgia.  In March, April, and December 2013, through five separate sales transactions, the Company completed the sale of its water and wastewater utility systems in Florida, which concluded its regulated operations in Florida.  The Company received total net proceeds from these sales of $88,934 and recognized a gain on sale of $21,178 ($13,766 after-tax).  One of the Company’s sales in Florida, which was completed in March 2013, and represented approximately 8% of its customers served in Florida, remained subject to customary regulatory review, for which the Company received the regulator’s decision approving the sale in June 2014.  On March 12, 2014, the Company completed the sale of its wastewater treatment facility in Georgia.     
 
The City of Fort Wayne, Indiana (the “City”) authorized the acquisition by eminent domain of the northern portion of the utility system of one of the Company’s operating subsidiaries in Indiana (the “Northern Assets”).  In January 2008, the Company reached a settlement with the City to transition the
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
Northern Assets in February 2008 upon receipt of the City’s initial valuation payment of $16,911.  The settlement agreement specifically stated that the final valuation of the Northern Assets will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation.  On February 12, 2008, the Company turned over the Northern Assets to the City upon receipt of the initial valuation payment.  The proceeds received by the Company are in excess of the book value of the assets relinquished.  No gain has been recognized due to the contingency over the final valuation of the assets.  The net book value of the Northern Assets has been removed from the consolidated balance sheet and the difference between the net book value and the initial payment received has been deferred and is recorded in other accrued liabilities on the Company’s consolidated balance sheet.  Once the contingency is resolved and the asset valuation is finalized, through the finalization of the litigation between the Company and the City, the amounts deferred will be recognized in the Company’s consolidated statement of net income.  On March 16, 2009, oral argument was held on certain procedural aspects with respect to the valuation evidence that may be presented and whether the Company is entitled to a jury trial.  On October 12, 2010, the Wells County Indiana Circuit Court ruled that the Company is not entitled to a jury trial, and that the Wells County judge should review the City of Fort Wayne Board of Public Works’ assessment based upon a “capricious, arbitrary or an abuse of discretion” standard.  The Company appealed the Wells County Indiana Circuit Court’s decision to the Indiana Court of Appeals.  On January 13, 2012, the Indiana Court of Appeals reached a decision upholding the Wells County Indiana Circuit Court decision.  On February 10, 2012, the Company filed a petition for transfer requesting that the Indiana Supreme Court review the matter.  On April 11, 2013, the Indiana Supreme Court ruled that the statute at issue gives the Company the right to a full evidentiary hearing before a jury regarding the value of the assets and remanded the case to the trial court for a proceeding consistent with that ruling.  The Northern Assets relinquished represent approximately 0.4% of the Company’s total assets. 
 
In addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public convenience and necessity” to acquire certain of the Company's water utility system assets located in the southwest section of the City and in Allen County (the “Southern Assets”), and if negotiations with Fort Wayne officials were to fail, to condemn the Southern Assets.  The first public hearing on the ordinance was held on January 22, 2013 and a subsequent hearing scheduled for February 5, 2013 was not held due to ongoing settlement discussions between the parties. As part of such settlement discussions, the parties negotiated an acquisition agreement that was approved by the City on May 13, 2014.  The acquisition agreement will settle both the acquisition of the Southern Assets and the dispute concerning the Northern Assets.  The acquisition agreement establishes an aggregate purchase price of $67,011 for the Southern and Northern Assets.  The City has already paid Aqua Indiana $16,911 for the Northern Assets.  The completion of the transaction is conditioned upon approval by various regulatory bodies.  If this transaction is consummated, the Company will expand its sewer customer base by accepting new wastewater from the City.  The transaction is not expected to close until the fourth quarter of 2014.  The Company continues to evaluate its legal and operational options on an ongoing basis.    The planned sale of these operations is accounted for as a  discontinued operation held for sale beginning in the first quarter of 2014. 
 
The operating results, cash flows, and financial position of the Company’s operations named above, during the periods owned, have been presented in the Company’s consolidated statements of net income,
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
consolidated statements of cash flow, and consolidated balance sheets 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,	 	June 30,	
 	 	2014	 	2013	 	2014	 	2013	
Operating revenues	 	$	1,720 	 	$	4,120 	 	$	3,299 	 	$	11,613 	
Total operating expenses	 	 	467 	 	 	2,193 	 	 	1,140 	 	 	7,213 	
Operating income	 	 	1,253 	 	 	1,927 	 	 	2,159 	 	 	4,400 	
Other (income) expense:	 	 	 	 	 	 	 	 	 	 	 	 	
Loss (gain) on sale	 	 	 -	 	 	982 	 	 	134 	 	 	(5,469)	
Other, net	 	 	 -	 	 	2 	 	 	 -	 	 	1 	
Income from discontinued operations before income taxes	 	 	1,253 	 	 	943 	 	 	2,025 	 	 	9,868 	
Provision for income taxes	 	 	502 	 	 	361 	 	 	816 	 	 	3,585 	
Income from discontinued operations	 	$	751 	 	$	582 	 	$	1,209 	 	$	6,283 	

 
 
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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 assets and liabilities of discontinued operations presented in the consolidated balance sheets include the following:

 	 	June 30,	 	December 31,	
 	 	2014	 	2013	
 	 	 	 	 	 	 	
Property, plant and equipment, at cost	 	$	37,114 	 	$	37,303 	
Less: accumulated depreciation	 	 	8,232 	 	 	8,378 	
Net property, plant and equipment	 	 	28,882 	 	 	28,925 	
Current assets	 	 	1,015 	 	 	1,362 	
Regulatory assets	 	 	433 	 	 	460 	
Assets of discontinued operations held for sale	 	 	30,330 	 	 	30,747 	
 	 	 	 	 	 	 	
Current liabilities	 	 	14,100 	 	 	16,212 	
Deferred income taxes and investment tax credits	 	 	1,803 	 	 	1,308 	
Contributions in aid of construction	 	 	10,935 	 	 	10,935 	
Other liabilities	 	 	1,147 	 	 	1,194 	
Liabilities of discontinued operations held for sale	 	 	27,985 	 	 	29,649 	
 	 	 	 	 	 	 	
Net assets	 	$	2,345 	 	$	1,098 	

]
 
Note 5 – Capitalization 
 
In May 2013, the Board of Directors of the Company approved a five-for-four stock split to be effected in the form of a 25% stock distribution to shareholders of record on August 16, 2013.  Common shares outstanding do not include shares held by the Company in treasury.  The new shares were distributed on September 1, 2013.  Aqua America’s par value of $0.50 per share did not change as a result of the common stock distribution, and $17,655 was transferred from capital in excess of par value to common stock to record the stock split.  All common share, per common share, stock unit, and per stock unit data, for all periods presented, has been adjusted to give effect to the stock split.   
 
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
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
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, 2014. 
 
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, 2014 and December 31, 2013, the carrying amount of the Company’s funds restricted for construction activity was $47 and $47, respectively, which equates to their estimated fair value.  As of June 30, 2014 and December 31, 2013, the carrying amount of the Company’s loans payable was $40,362 and $36,740, respectively, which equates to their estimated fair value.  The fair value of cash and cash equivalents, which is comprised of a money market fund, is determined based on the net asset value per unit utilizing Level 2 methods and assumptions.  As of June 30, 2014 and December 31, 2013, the carrying amounts of the Company's cash and cash equivalents was $3,858 and $5,058, 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,	
 	 	2014	 	2013	
Carrying Amount	 	$	1,599,565 	 	$	1,554,871 	
Estimated Fair Value	 	 	1,680,333 	 	 	1,540,296 	

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 $78,394 as
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
of June 30, 2014, and $73,892 as of December 31, 2013.  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 2029 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 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,	
 	 	2014	 	2013	 	2014	 	2013	
Average common shares outstanding during the period for basic computation	 	177,058 	 	175,983 	 	176,949 	 	175,701 	
Dilutive effect of employee stock-based compensation	 	954 	 	1,095 	 	919 	 	897 	
Average common shares outstanding during the period for diluted computation	 	178,012 	 	177,078 	 	177,868 	 	176,598 	

For the three and six months ended June 30, 2014 and 2013, 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 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 (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 50% of the shares available for issuance under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards and the maximum number of shares that may be subject to grants under the 2009 Plan to any one individual in any one year is 250,000.  Awards under the 2009 Plan are made by a committee of the Board of Directors.  At June 30, 2014, 4,471,866 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.   
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

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 certain 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 performance share units: 

 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2014	 	2013	 	2014	 	2013	
Stock-based compensation for performance share units within operations and maintenance expenses	 	$	1,467 	 	$	965 	 	$	2,469 	 	$	1,681 	
Income tax benefit	 	 	601 	 	 	393 	 	 	1,011 	 	 	684 	
 
The following table summarizes nonvested PSU transactions for the six months ended June 30, 2014:    

 	 	 	 	 	 	 	
 	 	 	Number	 	Weighted	
 	 	 	of	 	Average	
 	 	 	Share Units	 	Fair Value	
 	 	 	 	 	 	 	
Nonvested share units at beginning of period	 	 	528,092 	 	$	21.25 	
Granted	 	 	143,630 	 	 	25.31 	
Performance criteria adjustment	 	 	16,555 	 	 	19.45 	
Forfeited	 	 	(6,422)	 	 	23.00 	
Share units vested in prior period and issued in current period	 	 	18,000 	 	 	19.51 	
Share units issued	 	 	(174,148)	 	 	18.93 	
Nonvested share units at end of period	 	 	525,707 	 	$	22.99 	

 
 
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.  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, 2014 and 2013 was $25.31 and $26.88, 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 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.   
 
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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.  The following table provides compensation costs for stock-based compensation related to restricted stock units:

 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2014	 	2013	 	2014	 	2013	
Stock-based compensation for restricted stock units within operations and maintenance expenses	 	$	295 	 	$	221 	 	$	532 	 	$	396 	
Income tax benefit	 	 	122 	 	 	90 	 	 	220 	 	 	163 	

The following table summarizes nonvested RSU transactions for the six months ended June 30, 2014: 

 	 	 	 	 	 	 	
 	 	 	Number	 	Weighted	
 	 	 	of	 	Average	
 	 	 	Stock Units	 	Fair Value	
 	 	 	 	 	 	 	
Nonvested stock units at beginning of period	 	 	112,666 	 	$	20.16 	
  Granted	 	 	41,150 	 	 	24.80 	
Stock units vested but not paid	 	 	(5,750)	 	 	17.99 	
Stock units vested and paid	 	 	(24,772)	 	 	17.77 	
  Forfeited	 	 	 -	 	 	 -	
Nonvested stock units at end of period	 	 	123,294 	 	$	22.29 	

The per unit weighted-average fair value at the date of grant for RSUs granted during the six months ended June 30, 2014 and 2013 was $24.80 and $23.28, respectively.    
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
Stock Options – The fair value of stock options is estimated at the grant date using the Black-Scholes option-pricing model.  The following table provides compensation costs for stock-based compensation related to stock options granted in prior periods:

 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	 	June 30,	
 	 	2014	 	2013	 	2014	 	2013	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation for stock options within operations and maintenance expenses	 	$	 -	 	$	 -	 	$	 -	 	$	30 	
Income tax benefit	 	 	23 	 	 	85 	 	 	96 	 	 	323 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
There were no stock options granted during the six months ended June 30, 2014 or 2013. 
 
The following table summarizes stock option transactions for the six months ended June 30, 2014:

 	 	 	 	Weighted	 	Weighted	 	 	 	
 	 	 	 	Average	 	Average	 	Aggregate	
 	 	 	 	Exercise	 	Remaining	 	Intrinsic	
 	 	Shares	 	Price	 	Life (years)	 	Value	
Outstanding at beginning of period	 	1,538,110 	 	$	16.82 	 	 	 	 	 	
Forfeited	 	 -	 	 	 -	 	 	 	 	 	
Expired	 	(3,706)	 	 	17.87 	 	 	 	 	 	
Exercised	 	(309,990)	 	 	15.14 	 	 	 	 	 	
Outstanding and exercisable at end of period	 	1,224,414 	 	$	17.25 	 	3.4 	 	$	10,988 	

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,	
 	 	2014	 	2013	 	2014	 	2013	
Stock-based compensation for restricted stock within operations and maintenance expenses	 	$	445 	 	$	494 	 	$	537 	 	$	586 	
Income tax benefit	 	 	185 	 	 	205 	 	 	223 	 	 	243 	

 
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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 restricted stock transactions for the six months ended June 30, 2014:

 	 	 	Number	 	Weighted	
 	 	 	of	 	Average	
 	 	 	Shares	 	Fair Value	
 	 	 	 	 	 	 	
Nonvested shares at beginning of period	 	 	62,500 	 	$	17.70 	
  Granted	 	 	14,000 	 	 	25.19 	
  Vested	 	 	(45,250)	 	 	20.02 	
  Forfeited	 	 	 -	 	 	 -	
Nonvested shares at end of period	 	 	31,250 	 	$	17.70 	
 	 	 	 	 	 	 	
The per unit weighted-average fair value at the date of grant for restricted stock granted during the six months ended June 30, 2104 and 2013 was $25.19 and $25.09, respectively.

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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,	
 	 	2014	 	2013	 	2014	 	2013	
Service cost	 	$	1,143 	 	$	1,446 	 	$	2,286 	 	$	2,892 	
Interest cost	 	 	3,512 	 	 	3,165 	 	 	7,024 	 	 	6,330 	
Expected return on plan assets	 	 	(4,305)	 	 	(3,693)	 	 	(8,610)	 	 	(7,386)	
Amortization of prior service cost	 	 	69 	 	 	57 	 	 	138 	 	 	114 	
Amortization of actuarial loss	 	 	500 	 	 	2,016 	 	 	1,000 	 	 	4,032 	
Net periodic benefit cost	 	$	919 	 	$	2,991 	 	$	1,838 	 	$	5,982 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Other	
 	 	Postretirement Benefits	
 	 	 	Three Months Ended	 	 	Six Months Ended	
 	 	 	June 30,	 	 	June 30,	
 	 	2014	 	2013	 	2014	 	2013	
Service cost	 	$	283 	 	$	425 	 	$	595 	 	$	850 	
Interest cost	 	 	722 	 	 	667 	 	 	1,459 	 	 	1,334 	
Expected return on plan assets	 	 	(686)	 	 	(560)	 	 	(1,369)	 	 	(1,120)	
Amortization of prior service cost	 	 	(68)	 	 	(74)	 	 	(142)	 	 	(148)	
Amortization of actuarial loss	 	 	59 	 	 	345 	 	 	141 	 	 	690 	
Net periodic benefit cost	 	$	310 	 	$	803 	 	$	684 	 	$	1,606 	
 
The Company made cash contributions of $17,875 to its Pension Plan during the first six months of 2014, which completes the Company’s 2014 cash contributions.  In addition, the Company expects to make cash contributions of $2,009, to the extent allowable for a tax deduction, for the funding of its other postretirement benefit plans during the remainder of 2014.
 
In the first quarter of 2014 the Company offered a one-time voluntary lump sum window to certain eligible terminated vested participants in an effort to reduce its long-term obligations and plan volatility for its Pension Plan.  In May 2014, the Pension Plan paid $11,417 to participants who elected to receive a lump sum distribution, which was funded from the existing Pension Plan assets.  
 
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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 10 – Water and Wastewater Rates 
 
During the first six months of 2014, the Company’s operating divisions in North Carolina, Ohio, New Jersey, Virginia, and Indiana were granted base rate increases designed to increase total operating revenues on an annual basis by $4,502.  Further, during the first six months of 2014, the Company’s operating divisions in Illinois and New Jersey received approval to bill infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $1,558.
 
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,	
 	 	2014	 	2013	 	2014	 	2013	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Property	 	$	6,254 	 	$	6,350 	 	$	11,078 	 	$	12,794 	
Capital stock	 	 	521 	 	 	578 	 	 	1,023 	 	 	1,112 	
Gross receipts, excise and franchise	 	 	2,970 	 	 	2,940 	 	 	5,749 	 	 	5,621 	
Payroll	 	 	1,610 	 	 	1,655 	 	 	4,263 	 	 	4,074 	
Other	 	 	1,671 	 	 	1,579 	 	 	3,015 	 	 	2,899 	
Total taxes other than income	 	$	13,026 	 	$	13,102 	 	$	25,128 	 	$	26,500 	

 
   
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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 non-regulated subsidiaries:  Aqua Resources, Inc. and Aqua Infrastructure LLC.  Aqua Resources, Inc. provides water and wastewater services through operating and maintenance contracts with municipal authorities and other parties in close proximity to our utility companies’ service territories as well as offers, through a third party, water and sewer line repair service and protection solutions to households, liquid waste hauling and disposal, backflow prevention, construction, and other non-regulated water and wastewater services.  Aqua Infrastructure LLC provides non-utility raw water supply services for firms, with which the Company enters into  a water supply contract, with our customers 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, 2014	 	June 30, 2013	
 	 	Regulated	 	Other	 	Consolidated	 	Regulated	 	Other	 	Consolidated	
Operating revenues	 	$	189,678 	 	$	5,629 	 	$	195,307 	 	$	189,773 	 	$	4,170 	 	$	193,943 	
Operations and maintenance expense	 	 	67,516 	 	 	2,859 	 	 	70,375 	 	 	67,494 	 	 	2,918 	 	 	70,412 	
Depreciation	 	 	31,224 	 	 	2 	 	 	31,226 	 	 	29,182 	 	 	129 	 	 	29,311 	
Operating income	 	 	77,436 	 	 	2,498 	 	 	79,934 	 	 	79,250 	 	 	500 	 	 	79,750 	
Interest expense, net of AFUDC	 	 	17,045 	 	 	1,111 	 	 	18,156 	 	 	17,069 	 	 	1,649 	 	 	18,718 	
Income tax expense (benefit)	 	 	5,783 	 	 	66 	 	 	5,849 	 	 	7,696 	 	 	(931)	 	 	6,765 	
Income (loss) from continuing operations	 	 	54,745 	 	 	73 	 	 	54,818 	 	 	54,515 	 	 	(1,511)	 	 	53,004 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	 	Six Months Ended	
 	 	June 30, 2014	 	June 30, 2013	
 	 	Regulated	 	Other	 	Consolidated	 	Regulated	 	Other	 	Consolidated	
Operating revenues	 	$	367,877 	 	$	10,102 	 	$	377,979 	 	$	364,178 	 	$	8,317 	 	$	372,495 	
Operations and maintenance expense	 	 	135,972 	 	 	6,089 	 	 	142,061 	 	 	132,904 	 	 	5,302 	 	 	138,206 	
Depreciation	 	 	62,105 	 	 	102 	 	 	62,207 	 	 	58,692 	 	 	(336)	 	 	58,356 	
Operating income	 	 	143,855 	 	 	2,849 	 	 	146,704 	 	 	144,800 	 	 	1,888 	 	 	146,688 	
Interest expense, net of AFUDC	 	 	33,849 	 	 	2,450 	 	 	36,299 	 	 	34,020 	 	 	3,421 	 	 	37,441 	
Income tax expense (benefit)	 	 	11,869 	 	 	(828)	 	 	11,041 	 	 	15,048 	 	 	(1,496)	 	 	13,552 	
Income (loss) from continuing operations	 	 	98,366 	 	 	(1,147)	 	 	97,219 	 	 	95,814 	 	 	(1,946)	 	 	93,868 	
Capital expenditures	 	 	131,092 	 	 	874 	 	 	131,966 	 	 	134,313 	 	 	409 	 	 	134,722 	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)

 	 	 	 	 	 	 	
 	 	June 30,	 	December 31,	
 	 	2014	 	2013	
Total assets:	 	 	 	 	 	 	
  Regulated	 	$	5,038,104 	 	$	4,893,573 	
  Other and eliminations	 	 	153,421 	 	 	158,244 	
  Consolidated	 	$	5,191,525 	 	$	5,051,817 	

 
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, 2014, the aggregate amount of $12,207 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, 2014, estimates that approximately $1,330 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 $1,965 at June 30, 2014 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, 2014, the Company utilized $33,983 of its Federal net operating loss carryforward (“NOL”).  In addition, during the six months ended June 30, 2014, the Company utilized $876 of its state NOL carryforward.  As of June 30, 2014, the balance of the Company’s Federal NOL was $224,111.  The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires no valuation allowance.  As of June 30, 2014, the balance of the Company’s gross state NOL was $546,623, a portion of which was offset by a net valuation allowance of $5,214 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 2031 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 $62,924 and $86,207, respectively, which results from the Company’s adoption in the third quarter of 2013 of the FASB’s accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were $287,035 and $632,829, respectively.  The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability. 
 
In December 2012, the Company changed its tax method of accounting for qualifying utility system repairs in Aqua Pennsylvania, Inc. (“Aqua Pennsylvania”) effective with the tax year ended December 31, 2012 and for prior tax years.  The tax accounting method was changed to permit the expensing of qualifying utility asset improvement costs that were previously being capitalized and depreciated for book and tax purposes (the “Repair Change”).  As a result of the adoption of the Repair Change prior to the receipt of Aqua Pennsylvania’s next rate order, the Repair Change 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 2014 and 2013, for its continuing operations, was 9.6% and 11.3%, respectively, and for the first six months of 2014 and 2013, for its continuing operations, was 10.2% and 12.6%, respectively. 
 
In September 2013, the Department of Treasury and the Internal Revenue Service issued “Guidance Regarding and Capitalization of Expenditures Related to Tangible Property” which contains standards for determining whether and when a taxpayer must capitalize costs incurred in acquiring, maintaining or improving tangible property.  These regulations are effective for the Company’s 2014 fiscal year.  The Company has reviewed the regulations and concluded that the regulations will not have a material impact on the Company’s consolidated results of operations or consolidated financial position.
 
As of June 30, 2014, the total gross unrecognized tax benefit was $28,910, of which $11,282, if recognized, would affect the Company’s effective tax rate as a result of the regulatory treatment afforded the Repair Change in Pennsylvania.  At December 31, 2013, the Company had unrecognized tax benefits of $28,690.  There was no unrecognized tax benefit at June 30, 2013 or December 31, 2012.
 
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
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
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 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.  The updated guidance is effective retrospectively for reporting periods beginning after December 15, 2016.  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 will adopt the provisions of the updated accounting guidance for its quarterly reporting period beginning January 1, 2015, and the Company does not expect the adoption of the revised guidance to 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, 2013 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 
 
Nature of Operations - 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, 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 26 other counties in Pennsylvania.  Our other regulated utility subsidiaries provide similar services in seven other states.  In addition, the Company’s non-regulated subsidiary, Aqua Resources, Inc., 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 and offers, through a third party, water and sewer line repair service and protection solutions to households, backflow prevention,
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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)
 
construction, and other non-regulated water and wastewater services.  The Company’s non-regulated subsidiary, Aqua Infrastructure, LLC, provides non-utility raw water supply services for firms, with which we enter into a  water supply contract, with our customers in the natural gas drilling industry.      
 
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, Inc., 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 completed in 2014, 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.  One of our operations sold in Florida, which was completed in March 2013, and represented approximately 8% of our customers served in Florida, remained subject to customary regulatory review, for which we received the regulator’s decision approving the sale in June 2014, which concluded our regulated operations in Florida.      
 
In January 2008, we reached a settlement agreement with the City of Fort Wayne, Indiana, (the “City”) to transition the northern portion of the utility system of one of the Company’s operating subsidiaries in Indiana (the “Northern Assets”), upon receipt of the City’s initial valuation payment of $16,911.  The settlement agreement specifically stated that the final valuation of the Northern Assets will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation.  In February 2008, we turned over the Northern Assets to the City upon receipt of the initial valuation payment.  The proceeds we received are in excess of the book value of the assets relinquished.  No gain has been recognized due to the contingency over the final valuation of the assets.  In December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public convenience and necessity” to acquire certain of our water utility system assets located in the southwest section of the City and in Allen County (the “Southern Assets”), and if negotiations with Fort Wayne officials were to fail, to condemn the Southern Assets.  On May 13, 2014, an acquisition agreement was approved by the City, which will settle both the acquisition of the Southern Assets and the dispute concerning the Northern Assets.  The acquisition agreement establishes an aggregate purchase price of $67,011 for the Southern and Northern
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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)
 
Assets.    The completion of the transaction is conditioned upon approval by various regulatory bodies.  If this transaction is consummated, we will expand our sewer customer base by accepting new wastewater from the City.  The transaction is not expected to close until the fourth quarter of 2014.  We continue to evaluate our legal and operational options on an ongoing basis. 
 
We have accounted for sales of our operations in Georgia and Florida, and planned disposition of our Southern Assets in Indiana as discontinued operations. 

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 2014, we had $131,966 of capital expenditures, issued $116,074 of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of $70,910. The capital expenditures were related to improvements to treatment plants, new and rehabilitated water mains, tanks, hydrants, and service lines, well and booster improvements, and other enhancements and improvements.  The issuance of $116,074 of long-term debt was comprised principally of the funds borrowed under our revolving credit facility of $114,000.         
 
At June 30, 2014 we had $3,858 of cash and cash equivalents compared to $5,058 at December 31, 2013.  During the first six months of 2014, we used internally generated funds, the proceeds from the issuance of long-term debt, the sale or issuance of common stock through our equity compensation plan, and the sale of other assets, to fund the cash requirements discussed above and to pay dividends.   
 
At June 30, 2014, our $150,000 unsecured revolving credit facility, which expires in March 2017, had $48,434 available for borrowing.  At June 30, 2014, we had short-term lines of credit of $160,500, of which $120,139 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, 2014, $64,379 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. 
 
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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)
 
On June 7, 2012, the Company’s Pennsylvania operating subsidiary, 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 the flow-through accounting treatment of certain income tax benefits upon Aqua Pennsylvania changing its tax accounting method to permit the expensing of certain utility asset improvement costs that have historically been capitalized and depreciated for book and tax purposes (the “Repair Change”).  In December 2012, Aqua Pennsylvania implemented the Repair Change.  During the third quarter of 2013, we recorded additional tax deductions for certain qualifying infrastructure improvements in connection with the preparation of our annual tax return filings, which resulted in both additional recognized and unrecognized tax benefits.  As a result of the adoption of the Repair Change prior to the receipt of Aqua Pennsylvania’s next rate order, the Repair Change results in a substantial reduction in income tax expense and greater net income and cash flow, and as a result allowed the Company to suspend its Distribution System Improvement Charges (“DSIC”) in 2013 and lengthen the amount of time until the next Aqua Pennsylvania rate case is filed.  A portion of the additional tax deductions recognized in the third quarter of 2013 relate to a change in our tax method of accounting for certain qualifying utility system repairs in certain other operating divisions.  These divisions currently do not employ a flow-through method of accounting and as such the change in the Company’s tax method of accounting in these other operating divisions had 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 2014 Compared to Second Quarter of 2013 
 
Unless specifically noted, the following discussion of the Company’s results of operations for the second quarter of 2014 refers to the Company’s results of operations from continuing operations. 
 
Revenues increased by $1,364  or  0.7%, primarily due to an increase in water and wastewater rates of $1,313, an increase in non-regulated revenues of $1,203 associated with water and sewer line repairs and construction services, an increase in infrastructure rehabilitation surcharges of $892, and additional water and wastewater revenues of $585 associated with a larger customer base due to acquisitions, offset by a decrease in customer water consumption and the effect of a  reversal in the second quarter of 2013 of a reserve of $2,061 for rates that were subject to refund in Texas. 
    
Operations and maintenance expenses decreased by $37 or 0.1%, primarily due to the recognition of a regulatory asset of $1,575, a reduction in post-retirement benefits expense of $733, a reduction in legal expense of $685,  and a decrease in water production costs of $498, offset by additional operating costs of $1,149, primarily associated with non-regulated water and sewer line repairs and construction services,  the effect of the June 2013 gain on sale of a utility system of $1,025, an increase in maintenance expense of $517, primarily associated with the restoration of roads, an increase in bad debt expense of $489,  and an increase in insurance expense of $399.  The gain on sale of a  utility system is reported in the consolidated statement of net income as a component of operations and maintenance expense.       
 
Depreciation expense increased by $1,915 or 6.5%, due to the utility plant placed in service since June 30, 2013. 
 
Amortization expense decreased by $622, primarily due to an increase in the amortization period for expenses associated with providing non-utility raw water supply services for firms, with which we enter into a water supply contract,  with our customers in the natural gas drilling industry, and the completion of the recovery of our costs associated with various rate filings. 
 
Taxes other than income taxes decreased by $76 or 0.6%, primarily due to a decrease in property taxes of $96, a decrease in capital stock taxes of $57 assessed for Aqua Pennsylvania, and a decrease in payroll taxes of $45, offset by an increase in other taxes of $92, primarily due to an increase in taxes assessed resulting from the pumping of ground water in Texas.    
 
Interest expense decreased by $115 or 0.6%, primarily due to a decrease in average borrowings as compared to the second quarter of 2013. 
 
Allowance for funds used during construction (“AFUDC”) increased by $447, primarily due to the usage of equity funds in the capitalization rate, which are a component of the AFUDC 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)
 
Gain (loss) on sale of other assets totaled $140 during the second quarter of 2014 and $(109) during the second quarter of 2013.  The increase of $249 is principally due to gains recognized on the sale of property, plant and equipment.      
 
Equity loss in joint venture totaled $1,251 during the second quarter of 2014, and reflects a decline in water sales, due to sluggish well drilling activity, in connection with serving the raw water needs of firms, with which we enter into a water supply contract, with our customers in the natural gas drilling industry. 
 
Our effective income tax rate was 9.6% in the second quarter of 2014 and 11.3% in the second quarter of 2013.   The effective income tax rate decreased due to an increase in repair expenditures for Aqua Pennsylvania, which are estimated to be tax deductible in the second quarter of 2014 as compared to the second quarter of 2013.     
 
Income from continuing operations increased by $1,814 or 3.4%, 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 and a 0.5% increase in the average number of common shares outstanding.  The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through our equity compensation plan.    
 
Income from discontinued operations increased by $169, primarily as a result of the effect of the recognition in the second quarter of 2013 of the loss on sale of one of our Florida operations net of income taxes of $638.   
 
Net income attributable to common shareholders increased by $1,983 or 3.7%, 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 and a 0.5% increase in the average number of common shares outstanding.  The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through our equity compensation plan.    
 
Analysis of First Six Months of 2014 Compared to First Six Months of 2013 
 
Unless specifically noted, the following discussion of the Company’s results of operations for the first six months of 2014 refers to the Company’s results of operations from continuing operations.  
 
Revenues increased $5,484 or 1.5%, primarily due to an increase in water and wastewater rates of $1,853, an increase in infrastructure rehabilitation surcharges of $1,763, an increase in non-regulated revenues of $1,441 associated with water and sewer line repairs and construction services,  and additional water and wastewater revenues of $1,230 associated with a larger customer base due to acquisitions, offset by the effect of a reversal in the second quarter of 2013 of a reserve of $2,061 for rates that were subject to refund in Texas.    
   
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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)
 
Operations and maintenance expenses increased by $3,855 or 2.8%, primarily due to additional operating costs of $1,861 associated with severe winter weather conditions experienced in many of our service territories, additional operating costs of $1,149, primarily associated with non-regulated water and sewer line repairs and construction services,  the effect of the June 2013 gain on sale of a utility system of $1,025, an increase in maintenance expense of $914, primarily associated with the restoration of roads, the effect of the favorable recognition in the first quarter of 2013 of a legal settlement received of $871, and additional operating costs associated with acquired utility systems and other growth ventures of $521, offset by the recognition of a regulatory asset in the second quarter of 2014 of $1,575, a reduction in post-retirement benefits expense of $1,421, and a decrease in water production costs of $527.    The gain on sale of a  utility system is reported in the consolidated statement of net income as a component of operations and maintenance expense.
 
Depreciation expense increased $3,851 or 6.6%, due to the utility plant placed in service since June 30, 2013.
 
Amortization expense decreased $866, primarily due to an increase in the amortization period for expenses associated with providing non-utility raw water supply services for firms, with which we enter into a water supply contract, with our customers in the natural gas drilling industry, and the completion of the recovery of our costs associated with various rate filings.   
 
Taxes other than income taxes decreased by $1,372 or 5.2%, primarily due to a decrease in property taxes of $1,716 associated with a reduction in the property tax rate assessed for our Ohio subsidiary recognized in the first quarter of 2014.  
 
AFUDC increased by $1,062, primarily due to the usage of equity funds in the capitalization rate, which are a component of the AFUDC rate. 
 
Loss on sale of other assets totaled $208 during the first six months of 2014 and $17 during the first six months of 2013.  The increase of $191 is principally due to the write-off in the first quarter of 2014 of a marketable security of $443, offset by gains recognized on the sale of property, plant and equipment of $235.    
 
Equity loss in joint venture totaled $1,937 during the first six months of 2014, and reflects a decline in water sales, due to sluggish well drilling activity, in connection with serving the raw water needs of certain firms, with which we enter into a water supply contract, with our customers in the natural gas drilling industry. 
 
Our effective income tax rate was 10.2% during the first six months of 2014 and 12.6% during the first six months of 2013.  The effective income tax rate decreased due to an increase in repair expenditures for Aqua Pennsylvania, which are estimated to be deductible in the first six months of 2014 as compared to the first six months of 2013.      
 
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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 $3,351 or 3.6%, in comparison to the same period in 2013, primarily as a result of the factors described above.   On a diluted per share basis, income from continuing operations increased $0.02 reflecting the change in income from continuing operations and a 0.7% increase in the average number of common shares outstanding.    
 
Income from discontinued operations decreased by $5,074 or $0.03 per diluted share, in comparison to the same period in 2013, primarily as a result of the effect of the prior year recognition of the gain on sale of our Florida operations in 2013, net of income taxes of $3,555. 
 
Net income attributable to common shareholders decreased by $1,723 or 1.7%, in comparison to the same period in 2013, primarily as a result of the factors described above.  On a diluted per share basis, earnings decreased  $0.02 reflecting the change in net income attributable to common shareholders and a 0.7% increase in the average number of common shares outstanding.  The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through our equity compensation plan and dividend reinvestment plan.

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, 2013.  Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 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, other than as described below, 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.  Dollar amounts disclosed is this section, Item 1. Legal Proceedings are presented in whole dollars, not thousands of dollars. 
 
The City of Fort Wayne, Indiana (the “City”) authorized the acquisition by eminent domain of the northern portion of the utility system of one of our operating subsidiaries in Indiana (the “Northern Assets”).  In January 2008, we reached a settlement with the City to transition the Northern Assets in February 2008 upon receipt of the City’s initial valuation payment of $16,910,500.  The settlement agreement specifically stated that the final valuation of the Northern Assets will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation.  On February 12, 2008, we turned over the Northern Assets to the City upon receipt of the initial valuation payment.  The proceeds received by the Company are in excess of the
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book value of the assets relinquished.  No gain has been recognized due to the contingency over the final valuation of the assets.  The net book value of the Northern Assets has been removed from the consolidated balance sheet and the difference between the net book value and the initial payment received has been deferred and is recorded in other accrued liabilities on the Company’s consolidated balance sheet.  Once the contingency is resolved and the asset valuation is finalized, through the finalization of the litigation between the Company and the City the amounts deferred will be recognized in the Company’s consolidated income statement.  On March 16, 2009, oral argument was held before the Allen County Circuit Court on certain procedural aspects with respect to the valuation evidence that may be presented and whether we are entitled to a jury trial.  On October 12, 2010, the Wells County Indiana Circuit Court ruled that we were not entitled to a jury trial, and that the Wells County judge should review the City of Fort Wayne Board of Public Works’ assessment based upon a “capricious, arbitrary or an abuse of discretion” standard.  We appealed the Wells County Indiana Circuit Court’s decision to the Indiana Court of Appeals.  On January 13, 2012, the Indiana Court of Appeals reached a decision upholding the Wells County Indiana Circuit Court decision.  On February 10, 2012, we filed a petition for transfer requesting that the Indiana Supreme Court review the matter.  On April 11, 2013, the Indiana Supreme Court ruled that the statute at issue gives us the right to a full evidentiary hearing before a jury regarding the value of the assets and remanded the case to the trial court for a proceeding consistent with that ruling.     
 
In addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public convenience and necessity” to acquire certain of our water utility system assets located in the southwest section of the City and in Allen County (the “Southern Assets”) and, if negotiations with Fort Wayne officials were to fail, to condemn the Southern Assets.  The first public hearing on the ordinance was held on January 22, 2013 and a subsequent hearing scheduled for February 5, 2013 was not held due to ongoing settlement discussions between the parties.  As part of such settlement discussions, the parties negotiated an acquisition agreement that was approved by the City on May 13, 2014.  The acquisition agreement will settle both the acquisition of the Southern Assets and the dispute concerning the Northern Assets.  The acquisition agreement establishes an aggregate purchase price of $67,011,000 for the Southern and Northern Assets.  The City has already paid Aqua Indiana $16,910,500 for the Northern Assets.  The completion of the transaction is conditioned upon approval by various regulatory bodies.  If this transaction is consummated, we will expand our sewer customer base by accepting new wastewater from the City.  The transaction is not expected to close until the fourth quarter of 2014.  We continue to evaluate our legal and operational options on an ongoing basis. 
 
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, 2013  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, 2014:

 	 	 	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, 2014	 	 -	 	$	 -	 	 -	 	685,348 	
 	May 1-31, 2014	 	4,008 	 	$	25.19 	 	 -	 	685,348 	
 	June 1-30, 2014	 	10,884 	 	$	25.08 	 	 -	 	685,348 	
 	Total	 	14,892 	 	$	25.11 	 	 -	 	685,348 	

 
 	(1)	 	These amounts consist of the following:  (a) shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of performance share and restricted stock units; and (b) 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 plans that were previously approved by our shareholders and disclosed in our proxy statements.  These features of our equity compensation plans are available to all employees who receive stock-based compensation under the plans.  We acquired 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 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 purchase of up to 685,348 shares.  This authorization renewed the number of shares that had remained, when affected for stock splits, from an existing buy-back authorization from 1997.  The program has no fixed expiration date. 	
 
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, 2014 

 	 	 	 	
 	 	        Aqua America, Inc.                  	
 	 	 	Registrant	

 	 	 	 	
 	 	        /s/Nicholas DeBenedictis            	
 	 	 	Nicholas DeBenedictis	
 	 	 	Chairman, 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	
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	

 
 
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Exhibit 31.1 
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER, PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES AND EXCHANGE ACT OF 1934 
 
I, Nicholas DeBenedictis, 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. 	
 
Date: August 6, 2014 
 	 	
 	/s/Nicholas DeBenedictis                                     	
 	Nicholas DeBenedictis	
 	Chairman, President and Chief Executive Officer	

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. 	
 
Date: August 6, 2014
 	 	
 	/s/David P. Smeltzer                                     	
 	David P. Smeltzer	
 	Executive Vice President and Chief Financial Officer	

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, 2014 of Aqua America, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nicholas DeBenedictis, 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/Nicholas DeBenedictis	 	
Nicholas DeBenedictis 	 	
Chairman, President and Chief Executive Officer 	 	
August 6, 2014 	 	

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, 2014 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, 2014