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, 2016 
☐ 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 20, 2016:  177,329,959

 
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, 2016 and December 31, 2015	2	
 	 	
﻿Consolidated Statements of Net Income (unaudited) –
Three Months Ended June 30, 2016 and 2015	3	
﻿	 	
﻿Consolidated Statements of Net Income (unaudited) –
Six Months Ended June 30, 2016 and 2015	4	
﻿	 	
﻿Consolidated Statements of Comprehensive Income (unaudited) –
Three and Six Months Ended June 30, 2016 and 2015	5	
﻿	 	
﻿Consolidated Statements of Capitalization (unaudited) –
June 30, 2016 and December 31, 2015	6	
﻿	 	
﻿Consolidated Statement of Equity (unaudited) –
Six Months Ended June 30, 2016	7	
﻿	 	
﻿Consolidated Statements of Cash Flow (unaudited) –
Six Months Ended June 30, 2016 and 2015	8	
﻿	 	
﻿Notes to Consolidated Financial Statements (unaudited)	9	
﻿	 	
﻿Item 2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations	23	
﻿	 	
﻿Item 3.  Quantitative and Qualitative Disclosures About Market Risk	28	
﻿	 	
﻿Item 4.  Controls and Procedures	28	
﻿	
﻿Part II – Other Information	
﻿	 	
﻿Item 1.  Legal Proceedings	28	
﻿	 	
﻿Item 1A.  Risk Factors	28	
﻿	 	
﻿Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	29	
﻿	 	
﻿Item 6.  Exhibits	29	
﻿	 	
﻿Signatures	30	
﻿	 	
﻿Exhibit Index	31	
﻿
﻿
 
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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED BALANCE SHEETS 
(In thousands of dollars, except per share amounts) 
(UNAUDITED)
﻿
﻿	 	 	 	 	 	 	
﻿	 	 	 	 	 	
﻿	 	June 30,	 	December 31,	
Assets	 	2016	 	2015	
Property, plant and equipment, at cost	 	$	6,282,410 	 	$	6,088,011 	
Less:  accumulated depreciation	 	 	1,458,923 	 	 	1,399,086 	
Net property, plant and equipment	 	 	4,823,487 	 	 	4,688,925 	
Current assets:	 	 	 	 	 	 	
Cash and cash equivalents	 	 	4,923 	 	 	3,229 	
Accounts receivable and unbilled revenues, net	 	 	99,718 	 	 	99,146 	
Inventory, materials and supplies	 	 	11,714 	 	 	12,414 	
Prepayments and other current assets	 	 	14,436 	 	 	11,802 	
Assets held for sale	 	 	1,641 	 	 	1,779 	
Total current assets	 	 	132,432 	 	 	128,370 	
﻿	 	 	 	 	 	 	
Regulatory assets	 	 	887,135 	 	 	830,118 	
Deferred charges and other assets, net	 	 	30,313 	 	 	28,878 	
Investment in joint venture	 	 	7,238 	 	 	7,716 	
Goodwill	 	 	42,234 	 	 	33,866 	
Total assets	 	$	5,922,839 	 	$	5,717,873 	
Liabilities and Equity	 	 	 	 	 	 	
Stockholders' equity:	 	 	 	 	 	 	
Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,235,772 and 179,363,660 as of June 30, 2016 and December 31, 2015	 	$	90,118 	 	$	89,682 	
Capital in excess of par value	 	 	793,229 	 	 	773,585 	
Retained earnings	 	 	978,124 	 	 	930,061 	
Treasury stock, at cost, 2,911,624 and 2,819,569 shares as of June 30, 2016 and December 31, 2015	 	 	(70,944)	 	 	(68,085)	
Accumulated other comprehensive income	 	 	636 	 	 	687 	
Total stockholders' equity	 	 	1,791,163 	 	 	1,725,930 	
﻿	 	 	 	 	 	 	
Long-term debt, excluding current portion	 	 	1,798,067 	 	 	1,743,612 	
Less:  debt issuance costs	 	 	22,193 	 	 	23,165 	
Long-term debt, excluding current portion, net of debt issuance costs	 	 	1,775,874 	 	 	1,720,447 	
Commitments and contingencies (See Note 13)	 	 	 -	 	 	 -	
﻿	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	
Current portion of long-term debt	 	 	38,212 	 	 	35,593 	
Loans payable	 	 	26,239 	 	 	16,721 	
Accounts payable	 	 	40,651 	 	 	56,452 	
Accrued interest	 	 	17,977 	 	 	12,651 	
Accrued taxes	 	 	19,096 	 	 	21,887 	
Other accrued liabilities	 	 	37,045 	 	 	49,895 	
Total current liabilities	 	 	179,220 	 	 	193,199 	
﻿	 	 	 	 	 	 	
Deferred credits and other liabilities:	 	 	 	 	 	 	
Deferred income taxes and investment tax credits	 	 	1,190,204 	 	 	1,118,923 	
Customers' advances for construction	 	 	87,694 	 	 	86,934 	
Regulatory liabilities	 	 	254,438 	 	 	259,507 	
Other	 	 	109,450 	 	 	100,498 	
Total deferred credits and other liabilities	 	 	1,641,786 	 	 	1,565,862 	
﻿	 	 	 	 	 	 	
Contributions in aid of construction	 	 	534,796 	 	 	512,435 	
Total liabilities and equity	 	$	5,922,839 	 	$	5,717,873 	
﻿	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	
﻿
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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)
﻿
﻿
﻿	 	 	 	 	 	 	
﻿	 	Three Months Ended	
﻿	 	June 30,	
﻿	 	2016	 	2015	
Operating revenues	 	$	203,876 	 	$	205,760 	
﻿	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	
Operations and maintenance	 	 	73,994 	 	 	79,746 	
Depreciation	 	 	31,619 	 	 	31,049 	
Amortization	 	 	528 	 	 	924 	
Taxes other than income taxes	 	 	14,242 	 	 	13,795 	
Total operating expenses	 	 	120,383 	 	 	125,514 	
﻿	 	 	 	 	 	 	
Operating income	 	 	83,493 	 	 	80,246 	
﻿	 	 	 	 	 	 	
Other expense (income):	 	 	 	 	 	 	
Interest expense, net	 	 	20,115 	 	 	18,900 	
Allowance for funds used during construction	 	 	(1,871)	 	 	(1,040)	
Gain on sale of other assets	 	 	(121)	 	 	1 	
Equity loss in joint venture	 	 	229 	 	 	84 	
Income before income taxes	 	 	65,141 	 	 	62,301 	
Provision for income taxes	 	 	5,515 	 	 	4,919 	
Net income	 	$	59,626 	 	$	57,382 	
﻿	 	 	 	 	 	 	
Net income per common share:	 	 	 	 	 	 	
Basic	 	$	0.34 	 	$	0.32 	
Diluted	 	$	0.33 	 	$	0.32 	
﻿	 	 	 	 	 	 	
Average common shares outstanding during the period:	 	 	 	 	 	 	
Basic	 	 	177,288 	 	 	177,084 	
Diluted	 	 	178,084 	 	 	177,913 	
﻿	 	 	 	 	 	 	
Cash dividends declared per common share	 	$	0.178 	 	$	0.165 	
﻿	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	
﻿	 	 	 	 	 	 	
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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands, except per share amounts)
(UNAUDITED)
﻿
﻿

 

﻿	 	 	 	 	 	 	
﻿	 	Six Months Ended	
﻿	 	June 30,	
﻿	 	2016	 	2015	
Operating revenues	 	$	396,483 	 	$	396,086 	
﻿	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	
Operations and maintenance	 	 	147,535 	 	 	152,935 	
Depreciation	 	 	63,764 	 	 	61,549 	
Amortization	 	 	978 	 	 	1,773 	
Taxes other than income taxes	 	 	28,382 	 	 	28,416 	
Total operating expenses	 	 	240,659 	 	 	244,673 	
﻿	 	 	 	 	 	 	
Operating income	 	 	155,824 	 	 	151,413 	
﻿	 	 	 	 	 	 	
Other expense (income):	 	 	 	 	 	 	
Interest expense, net	 	 	39,968 	 	 	37,565 	
Allowance for funds used during construction	 	 	(4,179)	 	 	(2,222)	
Gain on sale of other assets	 	 	(328)	 	 	(168)	
Equity loss in joint venture	 	 	478 	 	 	798 	
Income before income taxes	 	 	119,885 	 	 	115,440 	
Provision for income taxes	 	 	8,522 	 	 	9,513 	
Net income	 	$	111,363 	 	$	105,927 	
﻿	 	 	 	 	 	 	
Net income per common share:	 	 	 	 	 	 	
Basic	 	$	0.63 	 	$	0.60 	
Diluted	 	$	0.63 	 	$	0.60 	
﻿	 	 	 	 	 	 	
Average common shares outstanding during the period:	 	 	 	 	 	 	
Basic	 	 	177,196 	 	 	176,987 	
Diluted	 	 	177,920 	 	 	177,818 	
﻿	 	 	 	 	 	 	
Cash dividends declared per common share	 	$	0.356 	 	$	0.330 	
﻿	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	
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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
(In thousands of dollars) 
(UNAUDITED)
  
﻿
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	Three Months Ended	 	Six Months Ended	
﻿	 	June 30,	 	June 30,	
﻿	 	2016	 	2015	 	2016	 	2015	
Net income	 	$	59,626 	 	$	57,382 	 	$	111,363 	 	$	105,927 	
Other comprehensive income, net of tax:	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized holding gain (loss) on investments, net of tax expense (benefit) of $7 and $(11) for the three months and $3 and $29 for the six months ended June 30, 2016 and 2015, respectively	 	 	12 	 	 	(21)	 	 	6 	 	 	55 	
Reclassification of gain on sale of investment to net income, net of tax of $30 for the six months ended June 30, 2016 (1)	 	 	 -	 	 	 -	 	 	(57)	 	 	 -	
Comprehensive income	 	$	59,638 	 	$	57,361 	 	$	111,312 	 	$	105,982 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
(1) Amount of pre-tax gain of $87 reclassified from accumulated other comprehensive income to gain on sale of other assets on the consolidated statements of net income for the six months ended June 30, 2016.	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	

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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF CAPITALIZATION 
(In thousands of dollars, except per share amounts) 
(UNAUDITED)
﻿
﻿
﻿	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	
﻿	 	 	June 30,	 	December 31,	
﻿	 	 	2016	 	2015	
Stockholders' equity:	 	 	 	 	 	 	 	
    Common stock, $.50 par value	 	 	$	90,118 	 	$	89,682 	
    Capital in excess of par value	 	 	 	793,229 	 	 	773,585 	
    Retained earnings	 	 	 	978,124 	 	 	930,061 	
    Treasury stock, at cost	 	 	 	(70,944)	 	 	(68,085)	
    Accumulated other comprehensive income	 	 	636 	 	 	687 	
Total stockholders' equity	 	 	 	1,791,163 	 	 	1,725,930 	
﻿	 	 	 	 	 	 	 	
Long-term debt of subsidiaries (substantially secured by utility plant):	 	 	 	 	 	 	
Interest Rate Range	Maturity Date Range	 	 	 	 	 	 	
0.00% to  0.99%	2023 to 2033	 	 	4,802 	 	 	5,148 	
1.00% to  1.99%	2016 to 2035	 	 	16,347 	 	 	20,811 	
2.00% to  2.99%	2024 to 2031	 	 	22,063 	 	 	19,167 	
3.00% to  3.99%	2016 to 2047	 	 	296,045 	 	 	297,275 	
4.00% to  4.99%	2020 to 2054	 	 	486,909 	 	 	487,093 	
5.00% to  5.99%	2017 to 2043	 	 	214,634 	 	 	221,435 	
6.00% to  6.99%	2017 to 2036	 	 	52,975 	 	 	52,964 	
7.00% to  7.99%	2022 to 2027	 	 	33,418 	 	 	33,762 	
8.00% to  8.99%	2021 to 2025	 	 	14,288 	 	 	14,502 	
9.00% to  9.99%	2018 to 2026	 	 	27,100 	 	 	27,100 	
10.00% to 10.99%	2018	 	 	6,000 	 	 	6,000 	
﻿	 	 	 	1,174,581 	 	 	1,185,257 	
﻿	 	 	 	 	 	 	 	
Notes payable to bank under revolving credit agreement, variable rate, due 2021	 	 	133,000 	 	 	60,000 	
Unsecured notes payable:	 	 	 	 	 	 	 	
Bank notes at 1.921% and 1.975% due 2017 and 2018	 	 	 	100,000 	 	 	100,000 	
Notes at 3.57% and 3.59% due 2027 and 2030	 	 	 	120,000 	 	 	120,000 	
Notes ranging from 4.62% to 4.87%, due 2016 through 2024	 	 	144,400 	 	 	144,400 	
Notes ranging from 5.20% to 5.95%, due 2016 through 2037	 	 	164,298 	 	 	169,548 	
Total long-term debt	 	 	 	1,836,279 	 	 	1,779,205 	
﻿	 	 	 	 	 	 	 	
Current portion of long-term debt	 	 	 	38,212 	 	 	35,593 	
Long-term debt, excluding current portion	 	 	1,798,067 	 	 	1,743,612 	
Less:  debt issuance costs	 	 	 	22,193 	 	 	23,165 	
Long-term debt, excluding current portion, net of debt issuance costs	 	 	1,775,874 	 	 	1,720,447 	
﻿	 	 	 	 	 	 	 	
Total capitalization	 	 	$	3,567,037 	 	$	3,446,377 	
﻿	 	 	 	 	 	 	 	
See notes to consolidated financial statements beginning on page 9 of this report.	
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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENT OF EQUITY 
(In thousands of dollars)
(UNAUDITED)
﻿
﻿	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated	 	 	 	
﻿	 	 	 	 	Capital in	 	 	 	 	 	 	 	Other	 	 	 	
﻿	 	Common	 	Excess of	 	Retained	 	Treasury	 	Comprehensive	 	 	 	
﻿	 	Stock	 	Par Value	 	Earnings	 	Stock	 	Income	 	Total	
Balance at December 31, 2015	 	$	89,682 	 	$	773,585 	 	$	930,061 	 	$	(68,085)	 	$	687 	 	$	1,725,930 	
Net income	 	 	 -	 	 	 -	 	 	111,363 	 	 	 -	 	 	 -	 	 	111,363 	
Other comprehensive loss, net of income tax benefit of $27	 	 	 -	 	 	 -	 	 	 -	 	 	 -	 	 	(51)	 	 	(51)	
Dividends	 	 	 -	 	 	 -	 	 	(63,071)	 	 	 -	 	 	 -	 	 	(63,071)	
Stock issued for acquisition (439,943 shares)	 	 	220 	 	 	12,625 	 	 	 -	 	 	 -	 	 	 -	 	 	12,845 	
Sale of stock (22,281 shares)	 	 	11 	 	 	659 	 	 	 -	 	 	 -	 	 	 -	 	 	670 	
Repurchase of stock (92,055 shares)         	 	 	 -	 	 	 -	 	 	 -	 	 	(2,859)	 	 	 -	 	 	(2,859)	
Equity compensation plan (221,449 shares)	 	 	111 	 	 	(111)	 	 	 -	 	 	 -	 	 	 -	 	 	 -	
Exercise of stock options (188,439 shares)	 	 	94 	 	 	3,475 	 	 	 -	 	 	 -	 	 	 -	 	 	3,569 	
Stock-based compensation	 	 	 -	 	 	2,200 	 	 	(229)	 	 	 -	 	 	 -	 	 	1,971 	
Employee stock plan tax benefits	 	 	 -	 	 	1,198 	 	 	 -	 	 	 -	 	 	 -	 	 	1,198 	
Other  	 	 	 -	 	 	(402)	 	 	 -	 	 	 -	 	 	 -	 	 	(402)	
Balance at June 30, 2016	 	$	90,118 	 	$	793,229 	 	$	978,124 	 	$	(70,944)	 	$	636 	 	$	1,791,163 	
﻿	
See notes to consolidated financial statements beginning on page 9 of this report.	
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Table of Contents
AQUA AMERICA, INC. AND SUBSIDIARIES 
 
CONSOLIDATED STATEMENTS OF CASH FLOW 
(In thousands of dollars) 
(UNAUDITED)
﻿
  
﻿	 	 	 	 	 	 	
﻿	 	Six Months Ended	
﻿	 	June 30,	
﻿	 	2016	 	2015	
Cash flows from operating activities:	 	 	 	 	 	 	
Net income	 	$	111,363 	 	$	105,927 	
Adjustments to reconcile net income to net cash flows from operating activities:	 	 	 	 	 	 	
Depreciation and amortization	 	 	64,742 	 	 	63,322 	
Deferred income taxes	 	 	5,051 	 	 	5,392 	
Provision for doubtful accounts	 	 	2,101 	 	 	2,233 	
Stock-based compensation	 	 	2,200 	 	 	3,682 	
Gain on sale of utility system and market-based business unit	 	 	(1,782)	 	 	 -	
Gain on sale of other assets	 	 	(328)	 	 	(168)	
Net change in receivables, inventory and prepayments	 	 	(4,130)	 	 	(17,430)	
Net change in payables, accrued interest, accrued taxes and other accrued liabilities	 	 	(2,695)	 	 	2,319 	
Other	 	 	1,136 	 	 	(8,259)	
Net cash flows from operating activities	 	 	177,658 	 	 	157,018 	
Cash flows from investing activities:	 	 	 	 	 	 	
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $1,097 and $570	 	 	(168,587)	 	 	(150,284)	
Acquisitions of utility systems and other, net	 	 	(5,626)	 	 	(25,919)	
Release of funds previously restricted for construction activity	 	 	 -	 	 	32 	
Net proceeds from the sale of utility system and other assets	 	 	6,439 	 	 	290 	
Other	 	 	(45)	 	 	(1,296)	
Net cash flows used in investing activities	 	 	(167,819)	 	 	(177,177)	
Cash flows from financing activities:	 	 	 	 	 	 	
Customers' advances and contributions in aid of construction	 	 	3,205 	 	 	2,872 	
Repayments of customers' advances	 	 	(1,282)	 	 	(1,695)	
Net proceeds of short-term debt	 	 	9,518 	 	 	17,908 	
Proceeds from long-term debt	 	 	169,297 	 	 	238,457 	
Repayments of long-term debt	 	 	(112,650)	 	 	(158,824)	
Change in cash overdraft position	 	 	(15,338)	 	 	(16,047)	
Proceeds from issuing common stock	 	 	670 	 	 	 -	
Proceeds from exercised stock options	 	 	3,569 	 	 	3,452 	
Stock-based compensation windfall tax benefits	 	 	1,198 	 	 	1,320 	
Repurchase of common stock	 	 	(2,859)	 	 	(7,957)	
Dividends paid on common stock	 	 	(63,071)	 	 	(58,396)	
Other	 	 	(402)	 	 	(454)	
Net cash flows (used in) from financing activities	 	 	(8,145)	 	 	20,636 	
Net change in cash and cash equivalents	 	 	1,694 	 	 	477 	
Cash and cash equivalents at beginning of period	 	 	3,229 	 	 	4,138 	
Cash and cash equivalents at end of period	 	$	4,923 	 	$	4,615 	
﻿	
Non-cash investing activity:	
Property, plant and equipment additions purchased at the period end, but not yet paid for	 	$	20,863 	 	$	27,551 	
﻿	
See notes to consolidated financial statements beginning on page 9 of this report.	
See note 3 - Acquisitions for a description of non-cash activities.	
﻿
﻿
﻿
﻿
﻿
﻿
﻿
﻿
﻿
 
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Table of Contents
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, 2016, the consolidated statements of net income and comprehensive income for the three and six months ended June 30, 2016 and 2015 the consolidated statements of cash flow for the six months ended June 30, 2016 and 2015, and the consolidated statement of equity for the six months ended June 30, 2016 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, 2015.  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, 2015 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2015 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.    Certain prior period amounts have been reclassified, including debt issuance costs (see Note 15 -  Recent Accounting Pronouncements ), to conform to the current period presentation.          
﻿
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, 2015	 	$	27,246 	 	$	6,620 	 	$	33,866 	
Goodwill acquired	 	 	10,095 	 	 	 -	 	 	10,095 	
Reclassification to utility plant acquisition adjustment	 	 	(25)	 	 	 -	 	 	(25)	
Disposition	 	 	 -	 	 	(996)	 	 	(996)	
Classified as assets held for sale	 	 	 -	 	 	(547)	 	 	(547)	
Other	 	 	(159)	 	 	 -	 	 	(159)	
Balance at June 30, 2016	 	$	37,157 	 	$	5,077 	 	$	42,234 	
﻿
The reclassification of goodwill to utility plant acquisition adjustment results from a mechanism approved by the applicable utility commission.  The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with some acquisitions upon achieving specific objectives. 
﻿
 
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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 3 – Acquisitions 
﻿
Pursuant to our strategy to grow through acquisitions, in January 2016, the Company acquired Superior Water Company, Inc., which provides public water service to approximately 3,900 customers in portions of Berks, Chester, and Montgomery counties in Pennsylvania.  The total purchase price for the utility system was $16,750, which consisted of the issuance of 439,943 shares of the Company’s common stock and $3,905 in cash. The purchase price allocation for this acquisition consists primarily of acquired property, plant and equipment of $25,167, contributions in aid of construction of $16,565, and goodwill of $8,622.  Additionally, during 2016 to date, the Company has completed nine acquisitions of water and wastewater utility systems in various states.  The total purchase price of these utility systems consisted of $1,721 in cash.  The Company recorded goodwill on acquisitions completed during the first half of 2016 of $1,473.  The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.     
﻿
In April 2015, the Company acquired the water and wastewater utility system assets of North Maine Utilities located in the Village of Glenview, Illinois serving approximately 7,400 customers.  The total purchase price consisted of $23,079 in cash.  The purchase price allocation for this acquisition consists primarily of acquired property, plant and equipment.  Additionally, in 2015, the Company completed 14 acquisitions of water and wastewater utility systems in various states.  The total purchase price of these utility systems consisted of $5,210 in cash.      
﻿
Note 4 –  Assets Held for Sale
﻿
In December 2015, the Company decided to sell a business unit within the Company’s market-based subsidiary, Aqua Resources, which provides liquid waste hauling and disposal services, and which was reported as assets held for sale in the Company’s consolidated balance sheets included in this report.    During the second quarter of 2016, this business unit was sold for $3,400 in cash and resulted in a gain on sale of $537.  The gain on sale is reported as a reduction to operations and maintenance expense in the consolidated statements of net income.  This business unit was included in “Other” in the Company’s segment information.    
﻿
In the second quarter of 2016, the Company decided to market for sale business units within the Company’s market-based subsidiary, Aqua Resources, which install and test devices that prevent the contamination of potable water and repair water and wastewater systems.  These business units are reported as assets held for sale in the Company’s consolidated balance sheets included in this report.  These business units are included in “Other” in the Company’s segment information.          
﻿
﻿
﻿
]
Note 5 – Capitalization 
﻿
In February 2016, the Company amended its unsecured revolving credit facility to extend the expiration from March 2017 to February 2021, to increase the facility from $200,000 to $250,000, and to add a fourth bank to the lending group.  Funds borrowed under this facility are classified as long-term debt and are used to provide working capital as well as support for letters of credit for insurance policies and other financing arrangements.  Interest under this facility is based at the Company’s option, on the prime rate,
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
an adjusted Euro-Rate, an adjusted federal funds rate or at rates offered by the banks.  A facility fee is charged on the total commitment amount of the agreement. 
﻿
Note 6 – Fair Value of Financial Instruments 
 
The Company follows the Financial Accounting Standards Board’s (“FASB”) accounting guidance for fair value measurements and disclosures, which defines fair value and establishes a framework for using fair value to measure assets and liabilities.  That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are as follows:
﻿
 	·	 	Level 1:  unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access; 	
 
 	·	 	Level 2:  inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in non-active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or 	
 
 	·	 	Level 3:  inputs that are unobservable and significant to the fair value measurement. 	
 
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  There have been no changes in the valuation techniques used to measure fair value or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended June 30, 2016. 
 
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 loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions.    As of June 30, 2016 and December 31, 2015, the carrying amount of the Company’s loans payable was $26,239 and $16,721, 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, 2016 and December 31, 2015, the carrying amounts of the Company's cash and cash equivalents was $4,923 and $3,229, respectively, which equates to their fair value.   
 
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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 carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
﻿	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	
﻿	 	June 30,	 	December 31,	
﻿	 	2016	 	2015	
Carrying Amount	 	$	1,836,279 	 	$	1,779,205 	
Estimated Fair Value	 	 	2,144,322 	 	 	1,905,393 	
 
﻿
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 $87,694 as of June 30, 2016, and $86,934 as of December 31, 2015.  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 2026 and amounts not paid by the respective contract expiration dates become non-refundable.  The fair value of these amounts would, however, be less than their carrying value due to the non-interest bearing feature.
﻿
Note 7 – Net Income per Common Share 
 
Basic net income per common share is based on the weighted average number of common shares outstanding.  Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares.  The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share.  The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.  The treasury stock method assumes that the proceeds from the exercise of stock options are used to purchase the Company’s common stock at the average market price during the period.  The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share: 
﻿
﻿	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	
﻿	 	Three Months Ended	 	Six Months Ended	
﻿	 	June 30,	 	June 30,	
﻿	 	2016	 	2015	 	2016	 	2015	
Average common shares outstanding during the period for basic computation	 	177,288 	 	177,084 	 	177,196 	 	176,987 	
Dilutive effect of employee stock-based compensation	 	796 	 	829 	 	724 	 	831 	
Average common shares outstanding during the period for diluted computation	 	178,084 	 	177,913 	 	177,920 	 	177,818 	
﻿	 	 	 	 	 	 	 	 	
﻿
For the three and six months ended June 30,  2016 and 2015, 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.  
 
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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 8 – Stock-based Compensation 
 
Under the Company’s 2009 Omnibus Equity Compensation Plan, as amended as of February 27, 2014 (the “2009 Plan”), as approved by the Company’s shareholders to replace the 2004 Equity Compensation Plan (the “2004 Plan”), stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors.  The 2009 Plan authorizes 6,250,000 shares for issuance under the plan.  A maximum of 3,125,000 shares under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the 2009 Plan.  During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the 2009 Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the 2009 Plan.  Awards to employees and consultants under the 2009 Plan are made by a committee of the Board of Directors of the Company, except that with respect to awards to the Chief Executive Officer, the committee recommends those awards for approval by the non-employee directors of the Board of Directors.  In the case of awards to non-employee directors, the Board of Directors makes such awards.  At June 30, 2016,  3,891,288 shares were still available for issuance under the 2009 Plan.    No further grants may be made under the 2004 Plan.     
 
Performance Share Units – A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the three-year performance period specified in the grant, subject to exceptions through the respective vesting period, generally three years.  Each grantee is granted a target award of PSUs, and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals.  The following table provides compensation costs for stock-based compensation related to PSUs: 
﻿
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	Three Months Ended	 	Six Months Ended	
﻿	 	June 30,	 	June 30,	
﻿	 	2016	 	2015	 	2016	 	2015	
Stock-based compensation within operations and maintenance expenses	 	$	967 	 	$	1,562 	 	$	1,492 	 	$	2,639 	
Income tax benefit	 	 	392 	 	 	637 	 	 	601 	 	 	1,075 	
 
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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 the PSU transactions for the six months ended June 30, 2016:   
﻿
﻿	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	
﻿	 	 	Number	 	Weighted	
﻿	 	 	of	 	Average	
﻿	 	 	Share Units	 	Fair Value	
Nonvested share units at December 31, 2015	 	 	424,858 	 	$	25.78 	
Granted	 	 	152,533 	 	 	28.89 	
Performance criteria adjustment	 	 	38,657 	 	 	25.96 	
Forfeited	 	 	(12,127)	 	 	26.45 	
Share units vested in prior period and issued in current period	 	 	44,625 	 	 	26.88 	
Share units issued	 	 	(189,885)	 	 	23.25 	
Nonvested share units at June 30, 2016	 	 	458,661 	 	$	27.97 	
﻿	 	 	 	 	 	 	

 
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions.  The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied.  The per unit weighted-average fair value at the date of grant for PSUs granted during the six months ended June 30, 2016 and 2015 was $28.89 and $26.54, respectively.  The fair value of each PSU grant is amortized monthly into compensation expense on a straight-line basis over their respective vesting periods, generally 36 months.  The accrual of compensation costs is based on our estimate of the final expected value of the award, and is adjusted as required for the portion based on the performance-based condition.  The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.  As the payout of the PSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the PSUs.  The recording of compensation expense for PSUs has no impact on net cash flows.   
﻿
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.  The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense.  As the payout of the RSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the RSUs.  The following table provides compensation costs for stock-based compensation related to RSUs:
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	Three Months Ended	 	Six Months Ended	
﻿	 	June 30,	 	June 30,	
﻿	 	2016	 	2015	 	2016	 	2015	
Stock-based compensation within operations and maintenance expenses	 	$	296 	 	$	415 	 	$	464 	 	$	678 	
Income tax benefit	 	 	122 	 	 	172 	 	 	191 	 	 	281 	
 
﻿
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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 the RSU transactions for the six months ended June 30, 2016: 
﻿
﻿	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	
﻿	 	 	Number	 	Weighted	
﻿	 	 	of	 	Average	
﻿	 	 	Stock Units	 	Fair Value	
Nonvested stock units at December 31, 2015	 	 	88,353 	 	$	24.94 	
Granted	 	 	50,324 	 	 	32.09 	
Stock units vested and issued	 	 	(24,318)	 	 	23.37 	
Forfeited	 	 	(2,458)	 	 	26.92 	
Nonvested stock units at June 30, 2016	 	 	111,901 	 	$	28.45 	
 
﻿
The per unit weighted-average fair value at the date of grant for RSUs granted during the six months ended June 30, 2016 and 2015 was $32.09 and $26.26, respectively.    
﻿
Stock Options – The following table provides the income tax benefit for stock-based compensation related to stock options granted in prior periods:
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	Three Months Ended	 	Six Months Ended	
﻿	 	June 30,	 	 	June 30,	
﻿	 	2016	 	2015	 	2016	 	2015	
Income tax benefit	 	$	18 	 	$	11 	 	$	234 	 	$	115 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
For the six months ended June 30, 2016 and 2015, there were no compensation costs for stock-based compensation related to stock options, as stock options were fully amortized in 2013.  Additionally, there were no stock options granted during the six months ended June 30, 2016 or 2015. 
﻿
The following table summarizes stock option transactions for the six months ended June 30, 2016:
﻿	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	Weighted	 	Weighted	 	 	 	
﻿	 	 	 	Average	 	Average	 	Aggregate	
﻿	 	 	 	Exercise	 	Remaining	 	Intrinsic	
﻿	 	Shares	 	Price	 	Life (years)	 	Value	
Outstanding at December 31, 2015	 	659,533 	 	$	16.62 	 	 	 	 	 	
Forfeited	 	 -	 	 	 -	 	 	 	 	 	
Expired / Cancelled	 	(3,436)	 	 	16.15 	 	 	 	 	 	
Exercised	 	(188,439)	 	 	18.94 	 	 	 	 	 	
Outstanding and exercisable at June 30, 2016	 	467,658 	 	$	15.69 	 	2.3 	 	$	9,339 	
 
﻿
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
Stock Awards –    The following table provides compensation costs for stock-based compensation related to stock awards:
﻿
﻿
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	Three Months Ended	 	Six Months Ended	
﻿	 	June 30,	 	June 30,	
﻿	 	2016	 	2015	 	2016	 	2015	
Stock-based compensation within operations and maintenance expenses	 	$	131 	 	$	365 	 	$	244 	 	$	365 	
Income tax benefit	 	 	54 	 	 	151 	 	 	101 	 	 	151 	
﻿
The following table summarizes stock award transactions for the six months ended June 30, 2016:
 
﻿
﻿	 	 	 	 	 	
﻿	 	 	 	 	 	
﻿	 	Number	 	Weighted	
﻿	 	of	 	Average	
﻿	 	Stock Awards	 	Fair Value	
Nonvested stock awards at December 31, 2015	 	 -	 	$	 -	
Granted	 	7,246 	 	 	33.64 	
Vested	 	(7,246)	 	 	33.64 	
Nonvested stock awards at June 30, 2016	 	 -	 	$	 -	
﻿
The per unit weighted-average fair value at the date of grant for stock awards granted during the six months ended June 30, 2016 and 2015 was $33.64 and $26.44, 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,	
﻿	 	2016	 	2015	 	2016	 	2015	
Service cost	 	$	784 	 	$	925 	 	$	1,610 	 	$	1,850 	
Interest cost	 	 	3,251 	 	 	3,222 	 	 	6,536 	 	 	6,444 	
Expected return on plan assets	 	 	(4,215)	 	 	(4,674)	 	 	(8,481)	 	 	(9,348)	
Amortization of prior service cost	 	 	145 	 	 	43 	 	 	290 	 	 	86 	
Amortization of actuarial loss	 	 	1,797 	 	 	1,532 	 	 	3,557 	 	 	3,064 	
Settlement charge	 	 	-  	 	 	-  	 	 	3,028 	 	 	-  	
Special termination benefit charge	 	 	-  	 	 	-  	 	 	302 	 	 	-  	
Net periodic benefit cost	 	$	1,762 	 	$	1,048 	 	$	6,842 	 	$	2,096 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	Other	
﻿	 	Postretirement Benefits	
﻿	 	 	Three Months Ended	 	 	Six Months Ended	
﻿	 	 	June 30,	 	 	June 30,	
﻿	 	2016	 	2015	 	2016	 	2015	
Service cost	 	$	253 	 	$	273 	 	$	508 	 	$	679 	
Interest cost	 	 	726 	 	 	681 	 	 	1,476 	 	 	1,439 	
Expected return on plan assets	 	 	(645)	 	 	(731)	 	 	(1,356)	 	 	(1,461)	
Amortization of prior service cost	 	 	(137)	 	 	(211)	 	 	(274)	 	 	(265)	
Amortization of actuarial loss	 	 	220 	 	 	309 	 	 	487 	 	 	663 	
Net periodic benefit cost	 	$	417 	 	$	321 	 	$	841 	 	$	1,055 	
﻿
Effective July 1, 2015, the Company added a permanent lump sum option to the form of benefit payments offered to participants of the qualified defined benefit pension plan and non-qualified retirement plans upon retirement or termination.  During the first quarter of 2016, the lump sum payments paid to participants who elected this option for payments from the non-qualified retirement plans resulted in a settlement charge.  The Company made cash contributions of $6,787 to its Pension Plan during the first six months of 2016,  and intends to make cash contributions of $1,357 to the Pension Plan during the remainder of 2016. 
﻿
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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 2016, the Company’s operating divisions in Ohio, Texas, and Virginia were granted base rate increases designed to increase total operating revenues on an annual basis by $3,234.  Further, during the first six months of 2016, the Company’s operating divisions in Illinois, Pennsylvania (wastewater), and North Carolina received approval to bill infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $1,365.
﻿
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,	
﻿	 	2016	 	2015	 	2016	 	2015	
Property	 	$	6,928 	 	$	7,007 	 	$	13,113 	 	$	13,831 	
Capital stock	 	 	430 	 	 	541 	 	 	857 	 	 	1,080 	
Gross receipts, excise and franchise	 	 	2,683 	 	 	2,554 	 	 	5,202 	 	 	4,996 	
Payroll	 	 	2,299 	 	 	2,075 	 	 	5,635 	 	 	5,353 	
Regulatory assessments	 	 	681 	 	 	687 	 	 	1,352 	 	 	1,340 	
Other	 	 	1,221 	 	 	931 	 	 	2,223 	 	 	1,816 	
Total taxes other than income	 	$	14,242 	 	$	13,795 	 	$	28,382 	 	$	28,416 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	
﻿
﻿
﻿
﻿
Note 12 – Segment Information 
 
The Company has identified ten operating segments and has one reportable segment named the “Regulated” segment.  The reportable segment is comprised of eight operating segments for the Company’s water and wastewater regulated utility companies which are organized by the states where we provide these services.  In addition, two segments are not quantitatively significant to be reportable and are comprised of the Company’s market-based activities:  Aqua Resources, Inc. and Aqua Infrastructure, LLC.  Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties in close proximity to our utility companies’ service territories; offers, through a third party, water and wastewater line repair service and protection solutions to households; and inspects, cleans and repairs storm and sanitary wastewater lines.  In addition, Aqua Resources provided liquid waste hauling and disposal services in a business unit that the Company sold in the second quarter of 2016, and that was reported as assets held for sale in the Company’s consolidated balance sheets included in this report.  Additionally, Aqua Resources installs and tests devices that prevent the contamination of potable water; designs and builds water and wastewater systems; and provides other market-based water and wastewater services in business units that,  in the second quarter of 2016, the Company decided to market for sale.  These business units are reported as assets held for sale in the Company’s consolidated balance sheets included in this report.  Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry.  These two segments are included as a component of “Other” in the tables below.  Also included in “Other” are corporate costs that have not
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
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, 2016	 	June 30, 2015	
﻿	 	Regulated	 	Other	 	Consolidated	 	Regulated	 	Other	 	Consolidated	
Operating revenues	 	$	198,086 	 	$	5,790 	 	$	203,876 	 	$	196,932 	 	$	8,828 	 	$	205,760 	
Operations and maintenance expense	 	 	69,676 	 	 	4,318 	 	 	73,994 	 	 	71,248 	 	 	8,498 	 	 	79,746 	
Depreciation	 	 	32,214 	 	 	(595)	 	 	31,619 	 	 	30,948 	 	 	101 	 	 	31,049 	
Operating income	 	 	82,018 	 	 	1,475 	 	 	83,493 	 	 	80,649 	 	 	(403)	 	 	80,246 	
Interest expense, net	 	 	19,093 	 	 	1,022 	 	 	20,115 	 	 	17,944 	 	 	956 	 	 	18,900 	
Allowance for funds used during construction	 	 	1,871 	 	 	 -	 	 	1,871 	 	 	1,040 	 	 	 -	 	 	1,040 	
Income tax expense (benefit)	 	 	5,910 	 	 	(395)	 	 	5,515 	 	 	5,429 	 	 	(510)	 	 	4,919 	
Net income (loss)	 	 	59,004 	 	 	622 	 	 	59,626 	 	 	58,311 	 	 	(929)	 	 	57,382 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
﻿	 	Six Months Ended	 	Six Months Ended	
﻿	 	June 30, 2016	 	June 30, 2015	
﻿	 	Regulated	 	Other	 	Consolidated	 	Regulated	 	Other	 	Consolidated	
Operating revenues	 	$	384,092 	 	$	12,391 	 	$	396,483 	 	$	377,496 	 	$	18,590 	 	$	396,086 	
Operations and maintenance expense	 	 	137,001 	 	 	10,534 	 	 	147,535 	 	 	138,266 	 	 	14,669 	 	 	152,935 	
Depreciation	 	 	64,420 	 	 	(656)	 	 	63,764 	 	 	61,386 	 	 	163 	 	 	61,549 	
Operating income	 	 	154,868 	 	 	956 	 	 	155,824 	 	 	149,273 	 	 	2,140 	 	 	151,413 	
Interest expense, net	 	 	37,894 	 	 	2,074 	 	 	39,968 	 	 	35,846 	 	 	1,719 	 	 	37,565 	
Allowance for funds used during construction	 	 	4,179 	 	 	 -	 	 	4,179 	 	 	2,222 	 	 	 -	 	 	2,222 	
Income tax expense (benefit)	 	 	9,583 	 	 	(1,061)	 	 	8,522 	 	 	9,796 	 	 	(283)	 	 	9,513 	
Net income (loss)	 	 	111,898 	 	 	(535)	 	 	111,363 	 	 	106,016 	 	 	(89)	 	 	105,927 	
Capital expenditures	 	 	167,900 	 	 	687 	 	 	168,587 	 	 	150,063 	 	 	221 	 	 	150,284 	
﻿	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
﻿
﻿
﻿	 	 	 	 	 	 	
﻿	 	June 30,	 	December 31,	
﻿	 	2016	 	2015	
Total assets:	 	 	 	 	 	 	
  Regulated	 	$	5,735,411 	 	$	5,541,335 	
  Other	 	 	187,428 	 	 	176,538 	
  Consolidated	 	$	5,922,839 	 	$	5,717,873 	
﻿	 	 	 	 	 	 	

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, 2016, the aggregate amount of $12,337 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
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, 2016, estimates that approximately $1,475 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 $1,496 at June 30, 2016 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.  
﻿
﻿
Note 14 – Income Taxes 
 
During the six months ended June 30, 2016, the Company utilized $10,056 of its Federal net operating loss (“NOL”) carryforward.  In addition, during the six months ended June 30, 2016, the Company’s state NOL carryforward increased by $9,972.  As of June 30, 2016, the balance of the Company’s Federal NOL was $148,220.  The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires no valuation allowance.  As of June 30, 2016, the balance of the Company’s gross state NOL was $558,644, a portion of which is offset by a valuation allowance because the Company does not believe the NOLs are more likely than not to be realized.  The Company’s Federal and state NOL carryforwards begin to expire in 2032 and 2023, respectively.  The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of $63,852 and $89,651, respectively.  The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were $212,072 and $648,295 respectively.  The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability. 
﻿
In accordance with a 2012 settlement agreement with the Pennsylvania Public Utility Commission, Aqua Pennsylvania expenses, for tax purposes, qualifying utility asset improvement costs, which results in a substantial reduction in income tax expense and greater net income and cash flows.  The Company’s effective income tax rate for the second quarter of 2016 and 2015, was 8.5% and 7.9%, respectively, and for the first six months of 2016 and 2015 was 7.1% and 8.2%, respectively. 
﻿
As of June 30, 2016, the total gross unrecognized tax benefit was $28,434, of which $19,541, if recognized, would affect the Company’s effective tax rate as a result of the regulatory treatment afforded for qualifying infrastructure improvements in Pennsylvania.  At December 31, 2015, the Company had unrecognized tax benefits of $28,016. 
﻿
Accounting rules for uncertain tax positions specify that tax positions for which the timing of resolution is uncertain should be classified as long-term liabilities.  Judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes.  Management believes that an adequate provision has been made for any adjustments that may result from tax examinations.  Although the timing of income tax audit resolutions and negotiations with taxing
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
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 March 2016, the FASB issued updated accounting guidance on simplifying the accounting for share-based payments, which includes several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.   The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption available.  The Company is evaluating the requirements of the updated guidance to determine the impact of adoption.    
﻿
In February 2016, the FASB issued updated accounting guidance on accounting for leases, which requires lessees to establish a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  For income statement purposes, leases will be classified as either operating or finance.  Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern.  The updated accounting guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption available.  The Company is evaluating the requirements of the updated guidance to determine the impact of adoption.
﻿
In September 2015, the FASB issued updated accounting guidance on simplifying measurement-period adjustment in business combinations, which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively.  Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment.  The Company adopted the provisions of this accounting standard,  as required on January 1, 2016, and it did not have an impact on its results of operations or financial position.  
 
In April 2015, the FASB issued updated accounting guidance on simplifying the presentation of debt issuance costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability.  Previously, debt issuance costs were presented in the balance sheet as a deferred charge.    The Company adopted the provisions of this accounting standard as required on January 1, 2016.  The adoption of this standard was applied retrospectively and resulted in the reclassification of $23,165 from deferred charges and other assets, net to debt issuance costs, which is reported as a reduction to long-term debt, in the December 31, 2015 consolidated balance sheet.  
﻿
In August 2014, the FASB issued an accounting standard that will require management to assess an entity’s ability to continue as a going concern for each annual and interim reporting period and to provide related footnote disclosures in circumstances in which substantial doubt exists.  The accounting standard is effective in the first annual reporting period ending after December 15, 2016.  The Company does not expect the provisions of this accounting standard to have an impact on its results of operations or financial position.
﻿
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AQUA AMERICA, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
  
In May 2014, the FASB issued updated accounting guidance on recognizing revenue from contracts with customers, which outlines a single comprehensive model that an entity will apply to determine the measurement of revenue and timing of when it is recognized.  The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.  The updated guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract.  In July 2015, the FASB approved a one year deferral to the original effective date of this guidance.  The updated guidance is effective for reporting periods beginning after December 15, 2017, and will be applied retrospectively.  The Company is evaluating the requirements of the updated guidance to determine the impact of adoption.   
﻿
﻿
 
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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,” “in the event” 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, 2015 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such report.  As a result, readers are cautioned not to place undue reliance on any forward-looking statements.  We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.      
 
General Information 
 
Aqua America, Inc. (“we”,  “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water or wastewater services to what we estimate to be almost three million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, and Virginia.  Our largest operating subsidiary, Aqua Pennsylvania,  provides water or wastewater services to approximately one-half of the total number of people we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 27 other counties in Pennsylvania.  Our other regulated utility subsidiaries provide similar services in seven other states.  In addition, the Company’s market-based activities are conducted through Aqua Resources, Inc. and Aqua Infrastructure, LLC.  Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to our utility companies’ service territories; offers, through a third party, water and wastewater line repair service and protection solutions to households; and inspects, cleans and repairs storm and sanitary wastewater lines.  In addition, Aqua Resources provided liquid waste hauling and disposal services in a business unit that the Company sold in the second quarter of 2016, and that was reported as assets held for sale in the Company’s consolidated balance sheets included in this report.  Additionally, Aqua Resources installs and tests
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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)
 
devices that prevent the contamination of potable water and repairs water and wastewater systems, which in the second quarter of 2016, the Company decided to market for sale.  These business units are reported as assets held for sale in the Company’s consolidated balance sheets included in this report.  Aqua Infrastructure provides non-utility raw water supply services for firms 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, formerly known as Philadelphia Suburban Water Company.  In the early 1990s, we 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.  Currently, the Company seeks to acquire businesses in the U.S. regulated sector, which includes water and wastewater utilities and other regulated utilities, and to pursue growth ventures in market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated businesses.
﻿
Beginning in 2010, and substantially completed in 2013, we pursued a portfolio rationalization strategy to focus our operations in areas where we have critical mass and economic growth potential and to divest operations where limited customer growth opportunities exist, or where we are unable to achieve favorable operating results or a return on equity that we consider acceptable.  In 2014, we sold our operation in Georgia; in 2013, we sold our operations in Florida; in 2012, we sold our operations in Maine and New York; in 2011, we sold our operations in Missouri; and in 2010, we sold our operations in South Carolina.  In connection with the sale of our New York and Missouri operations, we acquired additional utility systems (and customers) in Ohio and Texas, two of the larger states in our portfolio.         
﻿
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 2016, we had $168,587 of capital expenditures, expended $5,626 for the acquisition of water and wastewater utility systems, issued $169,297 of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of $112,650. The capital expenditures were related to new and replacement water mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, and other enhancements and improvements.  The issuance of long-term debt was comprised principally of the funds borrowed under our revolving credit facility.  In addition, we issued 439,943 shares of the Company’s common stock, and paid $3,905 in cash for the acquisition of Superior Water Company, Inc. as described in Note 3 –  Acquisitions .         
 
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AQUA AMERICA, INC. AND SUBSIDIARIES 
 
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
 
At June 30, 2016, we had $4,923 of cash and cash equivalents compared to $3,229 at December 31, 2015.  During the first six months of 2016, we used the proceeds from the issuance of long-term debt and internally generated funds to fund the cash requirements discussed above and to pay dividends.   
 
At June 30, 2016, our $250,000 unsecured revolving credit facility, which was amended and now expires in February 2021, had $93,690 available for borrowing.  At June 30, 2016, we had short-term lines of credit of $135,500, of which $109,260 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, 2016, $74,751 was available for borrowing. 
﻿
Our short-term lines of credit of $135,500 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. 
﻿
Results of Operations 
﻿
Analysis of Second Quarter of 2016 Compared to Second Quarter of 2015 
  
Revenues decreased by $1,884 or 0.9%, primarily due to a decrease in market-based activities revenues of $3,043 and lower customer water consumption, offset by additional water and wastewater revenues of $2,047 associated with a larger customer base due to utility acquisitions, an increase in infrastructure rehabilitation surcharges of $1,300, and an increase in water rates of $698.  The market-based activities revenues decreased due to a reduction in revenues associated with the inspection, cleaning and repairing of storm and sanitary wastewater lines, and the second quarter of 2016 sale of a business unit that provided liquid waste hauling and disposal services.    
  
Operations and maintenance expenses decreased by $5,752 or 7.2%, primarily due to the effects of additional operating costs recognized in the second quarter of 2015 of $1,862 for the recording of a reserve for water rights held for future use and $1,848 for leadership transition expenses, a decrease in insurance expense of $1,796, a gain of $1,135 recognized for the buyout of an operating contract, and lower water production costs of $1,002, offset by an increase in postretirement benefits expense of $2,687 and additional operating costs associated with acquired utility systems of $1,215.   
 
Depreciation expense increased by $570 or 1.8%, primarily due to the utility plant placed in service since June 30, 2015. 
   
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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)
 
Taxes other than income taxes increased by $447 or 3.2%, primarily due to increases in other taxes of $290 primarily due to fees assessed for the pumping of water in Texas resulting from an increase in water production and payroll taxes of $224.    
﻿
Interest expense increased by $1,215 or 6.4%, primarily due to an increase in average borrowings. 
﻿
Allowance for funds used during construction (“AFUDC”) increased by $831, due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied and an increase in the AFUDC rate. 
﻿
Our effective income tax rate was 8.5% in the second quarter of 2016 and 7.9% in the second quarter of 2015.  The effective income tax rate increased due to the effect of lower tax deductions recognized in the second quarter of 2016 for certain qualifying infrastructure improvements for Aqua Pennsylvania.     
  
Net income increased by $2,244 or 3.9%, primarily as a result of the factors described above. 
﻿
Analysis of First Six Months of 2016 Compared to First Six Months of 2015 
﻿
Revenues increased by $397 or 0.1%, primarily due to additional water and wastewater revenues of $5,611 associated with a larger customer base due to utility acquisitions, an increase in infrastructure rehabilitation surcharges of $2,416, and an increase in water and wastewater rates of $1,961, offset by a decrease in market-based activities revenues of $6,205 and lower customer water consumption.  The market-based activities revenues decreased due to the completion in the second quarter of 2015 of a significant short-term wastewater services contract that occurred in the first half of 2015.    
 
Operations and maintenance expenses decreased by $5,400 or 3.5%, primarily due to decreases in market-based activities expenses of $3,208, water production costs of $2,058, the effects of additional operating costs recognized in the second quarter of 2015 of $1,862 for the recording of a reserve for water rights held for future use and $1,848 for leadership transition expenses, a gain of $1,135 recognized for the buyout of an operating contract, offset by increases in operating costs associated with acquired utility systems of $3,625, postretirement benefits expense of $2,530,  and the Company’s self-insured employee medical benefit program expense of $1,443.   
﻿
Depreciation expense increased by $2,215 or 3.6%, primarily due to the utility plant placed in service since June 30, 2015. 
   
Interest expense increased by $2,403 or 6.4%, primarily due to an increase in average borrowings. 
﻿
AFUDC increased by $1,957, due to an increase in the average balance of utility plant construction work in progress, to which AFUDC is applied and an increase in 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)
 
Equity loss in joint venture decreased by $320 primarily due to a reduction in depreciation expense resulting from the noncash impairment charge recognized by the joint venture on its long-lived assets in the fourth quarter of 2015.
﻿
Our effective income tax rate was 7.1% in the first six months of 2016 and 8.2% in the first six months of 2015.  The effective income tax rate decreased due to the effect of additional tax deductions recognized in 2016 for certain qualifying infrastructure improvements for Aqua Pennsylvania.     
﻿
Net income increased by $5,436 or 5.1%, primarily as a result of the factors described above. 
﻿
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, 2015.  Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for additional information.
﻿
Item 4  – Controls and Procedures 
 
 	(a)	 	Evaluation of Disclosure Controls and Procedures 	
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.   
 
 	(b)	 	Changes in Internal Control over Financial Reporting 	
 
No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
﻿
Part II.  Other Information
 
Item 1 – Legal Proceedings 
 
We are party to various legal proceedings.  Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our properties is the subject that we believe are material or are expected to have a material adverse effect on our financial position, results of operations or cash flows.     
 
Item 1A – Risk Factors 
 
There have been no material changes to the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015  under “Part 1, Item 1A – Risk Factors.”
28

 
Table of Contents
 
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, 2016:
﻿
﻿	 	 	 	 	 	 	 	 	 	
﻿	 	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, 2016	 	-  	 	$	-  	 	-  	 	720,348 	
May 1-31, 2016	 	953 	 	$	32.83 	 	-  	 	720,348 	
June 1-30, 2016	 	-  	 	$	-  	 	-  	 	720,348 	
Total	 	953 	 	$	32.83 	 	-  	 	720,348 	

 	(1)	 	These amounts include shares we acquired from our employees who elected to pay the exercise price of their stock options (and then hold shares of the stock), upon exercise, by delivering to us shares of our common stock in accordance with the terms of our equity compensation plan that were previously approved by our shareholders and disclosed in our proxy statements.  This feature of our equity compensation plan is available to all employees who receive stock-based compensation under the plan.  We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day prior to the option exercise.     	
﻿
 	(2)	 	In December 2014, our Board of Directors authorized a share buyback program of up to 1,000,000 shares to minimize share dilution through timely and orderly share repurchases.  In December 2015, our Board of Directors added 400,000 shares to this program.  This program expires on the earliest of December 31, 2016 or when all authorized repurchases have been made.     	
﻿
﻿
Item 6 – Exhibits  
 
The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference.
29

 
Table of Contents
 
﻿
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 3, 2016
﻿

﻿	 	Aqua America, Inc.                  	
﻿	 	Registrant	
﻿	 	 	 	
﻿	 	 	 	
﻿	 	 	 	
﻿	 	/s/ Christopher H. Franklin	
﻿	 	Christopher H. Franklin	
﻿	 	President and	
﻿	 	Chief Executive Officer	
﻿	 	 	 	
﻿	 	 	 	
﻿	 	 	 	
﻿	 	/s/ David P. Smeltzer	
﻿	 	David P. Smeltzer	
﻿	 	Executive Vice President and	
﻿	 	Chief Financial Officer 	
﻿

 
30

 

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	
﻿
  
﻿
*Indicates management contract
31

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

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

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

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

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

 	b.	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 	
﻿
﻿
﻿
﻿
﻿	
/s/ Christopher H. Franklin 	
Christopher H. Franklin 	
President and Chief Executive Officer 	
August 3, 2016 	
﻿

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

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

 	b.	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 	
﻿
﻿
﻿
﻿
﻿	
/s/ David P. Smeltzer	
David P. Smeltzer 	
Executive Vice President and Chief Financial Officer 	
August 3, 2016	
﻿

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, 2016 of Aqua America, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher H. Franklin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 

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

 
 
﻿	 	
/s/ Christopher H. Franklin	 	
Christopher H. Franklin 	 	
President and Chief Executive Officer 	 	
August 3, 2016	 	
﻿

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, 2016 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 or Section 78o); 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 3, 2016	 	
﻿