AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except per share amounts)

(UNAUDITED)



	September 30,		December 31,			March 31,		December 31,
Assets	2017		2016			2018		2017
Property, plant and equipment, at cost	$	6,857,093	$	6,509,117		$	7,088,016	$	7,003,993
Less: accumulated depreciation		1,580,619		1,507,502			1,627,797		1,604,133
Net property, plant and equipment		5,276,474		5,001,615			5,460,219		5,399,860

Current assets:
Cash and cash equivalents		4,139		3,763			3,202		4,204
Accounts receivable and unbilled revenues, net		104,894		97,394			91,818		98,596
Inventory, materials and supplies		16,557		12,961			15,290		14,361
Prepayments and other current assets		11,209		12,804			12,274		12,542
Assets held for sale		1,543		1,728			1,558		1,543
Total current assets		138,342		128,650			124,142		131,246

Regulatory assets		1,044,787		948,647			731,417		713,971
Deferred charges and other assets		36,169		30,845
Deferred charges and other assets, net							38,696		38,485
Investment in joint venture		7,379		7,026			7,004		6,671
Goodwill		42,230		42,208			42,230		42,230
Total assets	$	6,545,381	$	6,158,991		$	6,403,708	$	6,332,463
Liabilities and Equity
Stockholders' equity:
Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,669,222 and 180,311,345 as of September 30, 2017 and December 31, 2016	$	90,334	$	90,155
Common stock at $.50 par value, authorized 300,000,000 shares, issued 180,955,861 and 180,700,251 as of March 31, 2018 and December 31, 2017						$	90,478	$	90,350
Capital in excess of par value		804,753		797,513			809,624		807,135
Retained earnings		1,115,601		1,032,844			1,147,828		1,132,556
Treasury stock, at cost, 2,984,973 and 2,916,969 shares as of September 30, 2017 and December 31, 2016		(73,229)		(71,113)
Treasury stock, at cost, 3,058,248 and 2,986,308 shares as of March 31, 2018 and December 31, 2017							(75,771)		(73,280)
Accumulated other comprehensive income		806		669			-		860
Total stockholders' equity		1,938,265		1,850,068			1,972,159		1,957,621

Long-term debt, excluding current portion		1,974,327		1,759,962			2,084,283		2,029,358
Less: debt issuance costs		21,854		22,357			21,217		21,605
Long-term debt, excluding current portion, net of debt issuance costs		1,952,473		1,737,605			2,063,066		2,007,753
Commitments and contingencies (See Note 13)
Commitments and contingencies (See Note 14)

Current liabilities:
Current portion of long-term debt		84,704		150,671			103,832		113,769
Loans payable		20,990		6,535			20,342		3,650
Accounts payable		63,358		59,872			40,211		59,165
Book overdraft							12,685		21,629
Accrued interest		23,210		18,367			24,624		21,359
Accrued taxes		21,745		25,607			22,971		23,764
Other accrued liabilities		38,943		40,484			34,470		41,152
Total current liabilities		252,950		301,536			259,135		284,488

Deferred credits and other liabilities:
Deferred income taxes and investment tax credits		1,391,096		1,269,253			786,014		769,073
Customers' advances for construction		107,715		91,843			90,599		93,186
Regulatory liabilities		239,469		250,635			543,449		541,910
Other		110,412		115,583			107,746		107,341
Total deferred credits and other liabilities		1,848,692		1,727,314			1,527,808		1,511,510

Contributions in aid of construction		553,001		542,468			581,540		571,091
Total liabilities and equity	$	6,545,381	$	6,158,991		$	6,403,708	$	6,332,463

See notes to consolidated financial statements beginning on page 9 of this report.
See notes to consolidated financial statements beginning on page 8 of this report.					See notes to consolidated financial statements beginning on page 8 of this report.

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)

Three Months Ended

September 30,

2017

2016
Operating revenues

$
215,008

$
226,593

Operating expenses:

Operations and maintenance

67,982

79,812
Depreciation

34,264

33,881
Amortization

42

389
Taxes other than income taxes

15,234

14,712
Total operating expenses

117,522

128,794

Operating income

97,486

97,799

Other expense (income):

Interest expense, net

22,411

20,168
Allowance for funds used during construction

(3,914)

(2,267)
Gain on sale of other assets

(43)

(62)
Equity earnings in joint venture

(593)

(1,621)
Income before income taxes

79,625

81,581
Provision for income taxes

3,400

8,411
Net income

$
76,225

$
73,170

Net income per common share:

Basic

$
0.43

$
0.41
Diluted

$
0.43

$
0.41

Average common shares outstanding during the period:

Basic

177,660

177,336
Diluted

178,124

177,817

Cash dividends declared per common share

$
0.2047

$
0.191

See notes to consolidated financial statements beginning on page 9 of this report.

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF NET INCOME~~

~~(In thousands, except per share amounts)~~

~~(UNAUDITED)~~



	Nine Months Ended					Three Months Ended
	September 30,					March 31,
	2017		2016			2018		2017
Operating revenues	$	606,213	$	623,076		$	194,347	$	187,787

Operating expenses:
Operations and maintenance		207,963		227,347			73,946		67,890
Depreciation		101,508		97,645			35,967		33,837
Amortization		358		1,367			130		189
Taxes other than income taxes		44,390		43,094			14,967		14,737
Total operating expenses		354,219		369,453			125,010		116,653

Operating income		251,994		253,623			69,337		71,134

Other expense (income):
Interest expense, net		65,124		60,136			23,471		21,326
Allowance for funds used during construction		(10,570)		(6,446)			(2,867)		(3,193)
Gain on sale of other assets		(322)		(390)			(196)		(269)
Equity earnings in joint venture		(402)		(1,143)
Equity (earnings) loss in joint venture							(382)		30
Other							603		1,238
Income before income taxes		198,164		201,466			48,708		52,002
Provision for income taxes		11,899		16,933
Provision for income tax (benefit) expense							(2,131)		2,930
Net income	$	186,265	$	184,533		$	50,839	$	49,072

Net income per common share:
Basic	$	1.05	$	1.04		$	0.29	$	0.28
Diluted	$	1.05	$	1.04		$	0.29	$	0.28

Average common shares outstanding during the period:
Basic		177,583		177,243			177,801		177,479
Diluted		178,103		177,781			178,238		177,969

Cash dividends declared per common share	$	0.5873	$	0.5473		$	0.2047	$	0.1913

See notes to consolidated financial statements beginning on page 9 of this report.
See notes to consolidated financial statements beginning on page 8 of this report.					See notes to consolidated financial statements beginning on page 8 of this report.

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of dollars)

(UNAUDITED)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
Net income

$
76,225

$
73,170

$
186,265

$
184,533
Other comprehensive income, net of tax:

Unrealized holding gain on investments, net of tax expense of $22 and $11 for the three months, and $73 and $14 for the nine months ended September 30, 2017 and 2016, respectively

42

20

137

26
Reclassification of gain on sale of investment to net income, net of tax of $30 for the nine months ended September 30, 2016 (1)

-

-

-

(57)
Comprehensive income

$
76,267

$
73,190

$
186,402

$
184,502

(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 nine months ended September 30, 2016.

See notes to consolidated financial statements beginning on page 9 of this report.



	Three Months Ended
	March 31,
	2018		2017
Net income	$	50,839	$	49,072
Other comprehensive income, net of tax:
Unrealized holding gain on investments, net of tax expense of $31 for the three months ended March 31, 2017		-		58
Comprehensive income	$	50,839	$	49,130

See notes to consolidated financial statements beginning on page 8 of this report.

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CAPITALIZATION

(In thousands of dollars, except per share amounts)

(UNAUDITED)



		September 30,		December 31,			March 31,		December 31,
		2017		2016			2018		2017
Stockholders' equity:
Common stock, $.50 par value		$	90,334	$	90,155		$	90,478	$	90,350
Capital in excess of par value			804,753		797,513			809,624		807,135
Retained earnings			1,115,601		1,032,844			1,147,828		1,132,556
Treasury stock, at cost			(73,229)		(71,113)			(75,771)		(73,280)
Accumulated other comprehensive income	Accumulated other comprehensive income		806		669	Accumulated other comprehensive income		-		860
Total stockholders' equity			1,938,265		1,850,068			1,972,159		1,957,621

Long-term debt of subsidiaries (substantially collateralized by utility plant):	Long-term debt of subsidiaries (substantially collateralized by utility plant):					Long-term debt of subsidiaries (substantially collateralized by utility plant):
Interest Rate Range	Maturity Date Range					Maturity Date Range
0.00% to 0.99%	2023 to 2033		4,196		4,661	2023 to 2033		4,148		4,196
1.00% to 1.99%	2019 to 2035		13,196		15,539	2019 to 2035		12,626		12,914
2.00% to 2.99%	2024 to 2033		19,689		19,668	2019 to 2033		18,817		19,254
3.00% to 3.99%	2019 to 2056		475,904		381,944	2019 to 2056		474,525		475,232
4.00% to 4.99%	2020 to 2054		556,681		487,318	2020 to 2057		631,513		631,599
5.00% to 5.99%	2019 to 2043		205,703		213,078	2019 to 2043		205,445		205,578
6.00% to 6.99%	2017 to 2036		44,000		52,985	2018 to 2036		44,000		44,000
7.00% to 7.99%	2022 to 2027		32,521		33,066	2022 to 2027		32,146		32,335
8.00% to 8.99%	2021 to 2025		6,214		6,565	2021 to 2025		5,968		6,092
9.00% to 9.99%	2018 to 2026		25,700		26,400	2018 to 2026		25,700		25,700
10.00% to 10.99%	2018		6,000		6,000	2018		6,000		6,000
			1,389,804		1,247,224			1,460,888		1,462,900

Notes payable to bank under revolving credit agreement, variable rate, due 2021	Notes payable to bank under revolving credit agreement, variable rate, due 2021		49,000		25,000	Notes payable to bank under revolving credit agreement, variable rate, due 2021		117,000		60,000
Unsecured notes payable:
Bank notes at 1.975% and 2.48% due 2018 and 2019			100,000		100,000	Bank notes at 1.975% and 2.48% due 2018 and 2019		100,000		100,000
Notes ranging from 3.01% to 3.59% due 2027 through 2041			245,000		245,000
Notes at 3.01% and 3.59% due 2027 and 2041						Notes at 3.01% and 3.59% due 2027 and 2041		245,000		245,000
Notes ranging from 4.62% to 4.87%, due 2018 through 2024	Notes ranging from 4.62% to 4.87%, due 2018 through 2024		122,800		133,600	Notes ranging from 4.62% to 4.87%, due 2018 through 2024		122,800		122,800
Notes ranging from 5.20% to 5.95%, due 2018 through 2037	Notes ranging from 5.20% to 5.95%, due 2018 through 2037		152,427		159,809	Notes ranging from 5.20% to 5.95%, due 2018 through 2037		142,427		152,427
Total long-term debt			2,059,031		1,910,633			2,188,115		2,143,127

Current portion of long-term debt			84,704		150,671			103,832		113,769
Long-term debt, excluding current portion	Long-term debt, excluding current portion		1,974,327		1,759,962	Long-term debt, excluding current portion		2,084,283		2,029,358
Less: debt issuance costs			21,854		22,357			21,217		21,605
Long-term debt, excluding current portion, net of debt issuance costs	Long-term debt, excluding current portion, net of debt issuance costs		1,952,473		1,737,605	Long-term debt, excluding current portion, net of debt issuance costs		2,063,066		2,007,753

Total capitalization		$	3,890,738	$	3,587,673		$	4,035,225	$	3,965,374

See notes to consolidated financial statements beginning on page 9 of this report.
See notes to consolidated financial statements beginning on page 8 of this report.						See notes to consolidated financial statements beginning on page 8 of this report.

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, 2016

$
90,155

$
797,513

$
1,032,844

$
(71,113)

$
669

$
1,850,068
Net income

-

-

186,265

-

-

186,265
Other comprehensive income, net of income tax of $73

-

-

-

-

137

137
Dividends

-

-

(104,286)

-

-

(104,286)
Sale of stock (34,814 shares)

17

1,067

-

-

-

1,084
Repurchase of stock (68,004 shares)

-

-

-

(2,116)

-

(2,116)
Equity compensation plan (165,442) shares)

83

(83)

-

-

-

-
Exercise of stock options (157,621) shares)

79

2,524

-

-

-

2,603
Stock-based compensation

-

4,379

(204)

-

-

4,175
Cumulative effect of change in accounting principle - windfall tax benefit

-

-

982

-

-

982
Other

-

(647)

-

-

-

(647)
Balance at September 30, 2017

$
90,334

$
804,753

$
1,115,601

$
(73,229)

$
806

$
1,938,265

Refer to Note 15 - Recent Accounting Pronouncements for a discussion of the cumulative effect of change in accounting principle - windfall tax benefit
See notes to consolidated financial statements beginning on page 9 of this report.




									Accumulated
			Capital in						Other
	Common		Excess of		Retained		Treasury		Comprehensive
	Stock		Par Value		Earnings		Stock		Income		Total
Balance at December 31, 2017	$	90,350	$	807,135	$	1,132,556	$	(73,280)	$	860	$	1,957,621
Net income		-		-		50,839		-		-		50,839
Dividends		-		-		(36,386)		-		-		(36,386)
Sale of stock (11,252 shares)		6		355		-		-		-		361
Repurchase of stock (71,940 shares)		-		-		-		(2,491)		-		(2,491)
Equity compensation plan (181,670 shares)		91		(91)		-		-		-		-
Exercise of stock options (62,688 shares)		31		979		-		-		-		1,010
Stock-based compensation		-		1,443		(41)		-		-		1,402
Cumulative effect of change in accounting principle - financial instruments		-		-		860		-		(860)		-
Other		-		(197)		-		-		-		(197)
Balance at March 31, 2018	$	90,478	$	809,624	$	1,147,828	$	(75,771)	$	-	$	1,972,159

Refer to Note 15 - Recent Accounting Pronouncements for a discussion of the cumulative effect of change in accounting principle - financial instruments
See notes to consolidated financial statements beginning on page 8 of this report.

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(In thousands of dollars)

(UNAUDITED)


		Nine Months Ended					Three Months Ended
		September 30,					March 31,
		2017		2016			2018		2017
Cash flows from operating activities:
Net income		$	186,265	$	184,533		$	50,839	$	49,072
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization			101,866		99,012			36,097		34,026
Deferred income taxes			9,774		15,345			(2,849)		2,681
Provision for doubtful accounts			3,476		3,533			896		1,111
Stock-based compensation			4,379		3,642			1,444		1,312
Loss (gain) on sale of utility system and market-based business unit			324		(1,824)
Loss on sale of market-based business unit								-		278
Gain on sale of other assets			(322)		(390)			(196)		(269)
Net change in receivables, inventory and prepayments			(13,550)		(15,235)			5,402		5,729
Net change in payables, accrued interest, accrued taxes and other accrued liabilities			3,705		(241)			(996)		(4,519)
Pension and other postretirement benefits contributions			(15,421)		(8,145)			(5,217)		(7,711)
Other			1,565		8,404			2,934		(507)
Net cash flows from operating activities			282,061		288,634			88,354		81,203
Cash flows from investing activities:
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $2,533 and $1,626			(337,731)		(270,019)
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $782 and $721								(105,136)		(94,562)
Acquisitions of utility systems and other, net			(5,860)		(5,626)			(190)		(220)
Net proceeds from the sale of utility system and other assets			1,144		6,545
Net proceeds from the sale of market-based business unit and other assets								174		639
Other			1,448		(32)			(75)		(171)
Net cash flows used in investing activities			(340,999)		(269,132)			(105,227)		(94,314)
Cash flows from financing activities:
Customers' advances and contributions in aid of construction			5,648		6,006			1,742		1,585
Repayments of customers' advances			(3,519)		(1,882)			(1,014)		(511)
Net proceeds of short-term debt			14,455		31,269			16,692		21,197
Proceeds from long-term debt			441,294		234,288			66,996		117,879
Repayments of long-term debt			(293,270)		(181,359)			(21,898)		(89,666)
Change in cash overdraft position			(1,932)		(12,586)			(8,944)		(2,403)
Proceeds from issuing common stock			1,084		1,029			361		360
Proceeds from exercised stock options			2,603		3,836			1,010		1,536
Stock-based compensation windfall tax benefits			-		1,263
Repurchase of common stock			(2,116)		(2,905)			(2,491)		(2,053)
Dividends paid on common stock			(104,286)		(96,994)			(36,386)		(33,945)
Other			(647)		(984)			(197)		(206)
Net cash flows from (used in) financing activities			59,314		(19,019)
Net cash flows from financing activities								15,871		13,773
Net change in cash and cash equivalents			376		483			(1,002)		662
Cash and cash equivalents at beginning of period			3,763		3,229			4,204		3,763
Cash and cash equivalents at end of period		$	4,139	$	3,712		$	3,202	$	4,425

Non-cash investing activities:	Non-cash investing activities:					Non-cash investing activities:
Property, plant and equipment additions purchased at the period end, but not yet paid for		$	35,145	$	23,548		$	23,629	$	27,084
Non-cash customer advances and contributions in aid of construction			31,615		20,065			4,979		4,282

Refer to Note 3 - Acquisitions for a description of non-cash activities
See notes to consolidated financial statements beginning on page 9 of this report.
See notes to consolidated financial statements beginning on page 8 of this report.						See notes to consolidated financial statements beginning on page 8 of this report.

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 ~~September 30, 2017,~~March 31, 2018, the consolidated statements of net income and comprehensive income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ the consolidated statements of cash flow for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ and the consolidated statement of equity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present a fair statement of its consolidated financial position, consolidated changes in equity, consolidated results of operations, and 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, ~~2016.~~2017. 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, ~~2016~~2017 consolidated balance sheet data presented herein was derived from the Company’s December 31, ~~2016~~2017 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 to conform to the current period presentation in the consolidated statements of ~~cash flows:~~

~~pension and other postretirement benefit contributions, and~~

as a result of the early adoption, in the third quarter of 2017, of the Financial Accounting Standards Board’s (“FASB”) accounting guidance on the classification of certain cash receipts and cash payments, the presentation of debt extinguishment costsnet income as a result of the adoption, in the first quarter of 2018, of the Financial Accounting Standards Board’s (“FASB”) accounting guidance on the presentation of net periodic pension and postretirement benefit cost (refer to Note 15 – Recent Accounting Pronouncements).

The preparation of financial statements often requires the selection of specific accounting methods and policies. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in its consolidated balance sheets, the revenues and expenses in its consolidated statements of net income, and the information that is contained in its summary of significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that the Company includes currently in its consolidated financial statements, summary of significant accounting policies, and notes.

There have been no changes to the summary of significant accounting policies, other than as described in Note 2 – Revenue Recognition as a result of the adoption of a new accounting pronouncement adopted on January 1, 2018, previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~ 2017.

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 2 – Revenue Recognition

The Company recognizes revenue as water and wastewater services are provided to our customers, which happens over time as the service is delivered and the performance obligation is satisfied. The Company’s utility revenues recognized in an accounting period include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the last billing to the end of the accounting period. Unbilled amounts are calculated by deriving estimates based on average usage of the prior month. The Company’s actual results could differ from these estimates, which would result in operating revenues being adjusted in the period that the revision to our estimates is determined. Unbilled amounts are included in accounts receivable and unbilled revenues, net on the consolidated balance sheet.

Generally, payment is due within 30 days once a bill is issued to a customer. Sales tax and other taxes we collect on behalf of government authorities, concurrent with our revenue-producing activities, are primarily excluded from revenue. The Company has determined that its revenue recognition is not materially different under the FASB’s new accounting standard for revenue from contracts with customer, and has not made any changes to our accounting policy. The Company’s revenues are being reported identical to how they were reported under the FASB’s former accounting standard for revenue recognition. The following table presents our revenues disaggregated by major source and customer class:


	Three Months Ended
	March 31,2018
	Water Revenues		Wastewater Revenues		Other Revenues
Regulated:
Residential	$	113,837	$	17,532	$	-
Commercial		30,342		2,888		-
Fire protection		7,938		-		-
Industrial		6,360		463		-
Other water		11,021		-		-
Other wastewater		-		791		-
Other utility		-		-		2,335
Regulated segment total		169,498		21,674		2,335
Other and eliminations		-		-		840
Consolidated	$	169,498	$	21,674	$	3,175

Regulated Segment Revenues – These revenues are composed of three main categories: water, wastewater, and other. Water revenues represent revenues earned for supplying customers with water service. Wastewater revenues represent revenues earned for treating wastewater and releasing it into the water supply. Other revenues are associated fees that relate to the regulated business but are not water and wastewater revenues. See description below for a discussion on the performance obligation for each of these revenue streams.

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Tariff Revenues – These revenues are categorized by customer class: residential, commercial, fire protection, industrial, and other water and other wastewater. The rates that generate these revenues are approved by the respective state utility commission, and revenues are billed cyclically and accrued for when unbilled. Other water and other wastewater revenues consist primarily of fines, penalties, surcharges, and availability lot fees. Our performance obligation for tariff revenues is to provide potable water or wastewater treatment service to customers. This performance obligation is satisfied over time as the services are rendered.

Other Utility Revenues – Other utility revenues represent revenues earned primarily from: antenna revenues, which represent fees received from telecommunication operators that have put cellular antennas on our water towers, operation and maintenance and billing contracts, which represent fees earned from municipalities for our operation of their water or wastewater treatment services or performing billing services, and fees earned from developers for accessing our water mains. The performances obligations vary for these revenues, but all are primarily recognized over time as the service is delivered.

Other and Eliminations – Other and eliminations consist of our market-based revenues, which comprises: Aqua Infrastructure and Aqua Resources (described below), and intercompany eliminations for revenue billed between our subsidiaries.

Aqua Infrastructure is the holding company for our 49% investment in a joint venture that operates a private pipeline system to supply raw water to natural gas well drilling operations in the Marcellus Shale of north central Pennsylvania. The joint venture earns revenues through providing non-utility raw water supply services to companies which enter into a water supply contract in the natural gas drilling industry. The performance obligation is to deliver non-potable water to its customers. Aqua Infrastructure’s share of the revenues recognized by the joint venture is reflected, net, in equity earnings in joint venture on our consolidated statements of net income.

Aqua Resources earns revenues by providing non-regulated water and wastewater services through operating and maintenance contracts, and third party water and sewer line repair service. The performance obligations are performing agreed upon services in the contract, most commonly operation of third party water or wastewater treatment services, or billing services, or allowing the use of our logo to a third party water and sewer line repair service. Revenues are primarily recognized over time as service is delivered.

Note 23 – Goodwill

The following table summarizes the changes in the Company’s goodwill, by business segment:

Regulated

Segment

Other

Consolidated
Balance at December 31, 2016

$
37,367

$
4,841

$
42,208
Goodwill acquired

72

-

72
Reclassification to utility plant acquisition adjustment

(50)

-

(50)
Balance at September 30, 2017

$
37,389

$
4,841

$
42,230



	Regulated
	Segment		Other		Consolidated
Balance at December 31, 2017	$	37,389	$	4,841	$	42,230
Goodwill acquired		-		-		-
Balance at March 31, 2018	$	37,389	$	4,841	$	42,230

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.

Goodwill is not amortized but is tested for impairment annually, or more often, if circumstances indicate a possible impairment may exist, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. When testing goodwill for impairment, the Company may assess qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and entity specific events. Alternatively, the Company may bypass this qualitative assessment for some of its reporting units and perform a quantitative goodwill impairment test by determining the fair value of a reporting unit based on a discounted cash flow analysis. The Company tested the goodwill attributable to each of its reporting units for impairment as of July 31, 2017, in conjunction with the timing of its annual strategic business plan, and concluded that the estimated fair value of each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount, indicating that none of the Company’s goodwill was impaired.

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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 34 – Acquisitions

During the first ~~nine~~three months of 2018, the Company completed three acquisitions of water and wastewater utility systems in various states adding 448 customers. The total purchase price of these utility systems consisted of $190 in cash. The purchase price allocation for these acquisition consisted primarily of acquired property, plant and equipment. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.

During 2017, the Company completed four acquisitions of water and wastewater utility systems in various states adding 1,003 customers. The total purchase price of these utility systems consisted of $5,860 in cash, which resulted in $72 of goodwill being recorded. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.

As part of the Company’s growth-through-acquisition strategy, the Company has entered into purchase agreements to acquire the water or wastewater utility system assets of ~~five~~six municipalities for a total combined purchase price in cash of ~~$145,700.~~$150,700, which we plan to finance by the issuance of long-term debt. The purchase price for these pending acquisitions is subject to certain adjustments at closing, and isthe pending acquisitions are subject to regulatory ~~approvals. Closing~~approvals, including the final determination of the fair value of the rate base acquired. Closings for these acquisitions are expected to occur by ~~mid-year~~the end of 2018, ~~which is~~ subject to the timing of the regulatory approval process. These acquisitions ~~will~~are expected to add approximately ~~14,900~~16,325 customers in two of the states that the Company operates in.

Pursuant to its 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 consisted 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, the Company completed eighteen acquisitions of water and wastewater utility systems in various states adding 2,469 customers. The total purchase price of these utility systems consisted of $5,518 in cash, which resulted in $1,756 of goodwill being recorded. The pro forma effect of the businesses acquired is not material either individually or collectively to the Company’s results of operations.

Note 45 – Assets Held for Sale

In the first quarter of 2017, the Company decided to market for sale a water system that serves approximately 265 customers. This water system is reported as assets held for sale in the Company’s consolidated balance sheet.

In the second quarter of 2016, the Company decided to market for sale two business units that are reported within the Company’s market-based subsidiary, Aqua Resources. One business unit installed and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, for which the sale was completed in January 2017. The other business unit repairs and performs maintenance on water and wastewater systems, for which the sale was completed in June 2017.

]

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(In thousands of dollars, except per share amounts)~~

~~(UNAUDITED)~~

~~Note 5 –~~ ~~Capitalization~~

In October 2017, Aqua Pennsylvania issued $75,000 of first mortgage bonds, of which $35,000 is due in 2054, $20,000 is due in 2055, and $20,000 is due in 2057 with interest rates of 4.06%, 4.07%, and 4.09%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.

~~In July 2017, Aqua Illinois issued $100,000 of first mortgage bonds consisting of the following:~~

\

Amount
Interest Rate
Maturity
$25,000
3.64%
2032
$6,000
3.89%
2037
$15,000
3.90%
2038
$10,000
4.18%
2047
$22,000
4.22%
2049
$22,000
4.24%
2050

~~The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.~~

In July 2017, Aqua Pennsylvania issued $80,000 of first mortgage bonds, of which $40,000 is due in 2055 and $40,000 is due in 2057 with interest rates of 4.04% and 4.06%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.

In January 2017, Aqua Pennsylvania issued $50,000 of first mortgage bonds, of which $10,000 is due in 2042 and $40,000 is due in 2044 with interest rates of 3.65% and 3.69%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.

Note 6 –~~Fair Value of~~ Financial Instruments

The Company follows the FASB’s 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.~~

1211

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

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 ~~September 30, 2017.~~March 31, 2018.

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 ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the carrying amount of the Company’s loans payable was ~~$20,990~~$20,342 and ~~$6,535,~~$3,650, respectively, which equates to their estimated fair value. The Company’s assets underlying the deferred compensation ~~plan liability is~~and non-qualified pension plans are determined by the fair value of mutual funds, which are based on quoted market prices from active markets utilizing Level 1 methods and assumptions. As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the carrying amount of these securities was ~~$18,145~~$21,576 and ~~$17,072,~~$21,776, which equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assets. The fair value of cash and cash equivalents, which is comprised of ~~a money market fund,~~uninvested cash, is determined based on the net asset value per unit utilizing Level 21 methods and assumptions. As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the carrying amounts of the Company's cash and cash equivalents was ~~$4,139~~$3,202 and ~~$3,763,~~$4,204, respectively, which equates to their fair value.

Unrealized gain and losses on equity securities held in conjunction with our non-qualified pension plan is as follows:



	Three Months Ended
	March 31,
	2018
Net loss recognized during the period on equity securities	$	21
Less: net gain / loss recognized during the period on equity securities sold during the period		-
Unrealized loss recognized during the reporting period on equity securities still held at the reporting date	$	21

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The net loss recognized on equity securities is presented on the consolidated statements of net income on the line item “Other.” Additionally, the unrealized gain recognized during the three months ended March 31, 2017, was reported on the consolidated statements of comprehensive income.

The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:

September 30,

December 31,

2017

2016
Carrying Amount

$
2,059,031

$
1,910,633
Estimated Fair Value

2,185,051

2,018,933

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 ~~$107,715~~$90,599 as of ~~September 30, 2017,~~March 31, 2018, and ~~$91,843~~$93,186 as of December 31, ~~2016.~~2017. 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.~~rates. Portions of these non-interest bearing instruments are payable annually through ~~2027~~2028 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

~~Table of Contents~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~(In thousands of dollars, except per share amounts)~~

~~(UNAUDITED)~~

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 stock-based compensation 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		Nine Months Ended		Three Months Ended
	September 30,		September 30,		March 31,
	2017	2016	2017	2016	2018	2017
Average common shares outstanding during the period for basic computation	177,660	177,336	177,583	177,243	177,801	177,479
Dilutive effect of employee stock-based compensation	464	481	520	538	437	490
Average common shares outstanding during the period for diluted computation	178,124	177,817	178,103	177,781	178,238	177,969

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ 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.

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. No further grants may be made under the 2004 Plan. 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 ~~September 30, 2017, 3,741,526~~March 31, 2018, 3,454,922 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:

The following table summarizes the PSU transactions for the ~~nine~~three months ended ~~September 30, 2017:~~March 31, 2018:

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 ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 was $37.65 and ~~2016 was~~ $30.79, ~~and $28.89,~~ 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 the Company’s 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 the compensation cost and income tax benefit for stock-based compensation related to RSUs:

The following table summarizes the RSU transactions for the ~~nine~~three months ended ~~September 30, 2017:~~March 31, 2018:

The per unit weighted-average fair value at the date of grant for RSUs granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 was $34.91 and ~~2016 was~~ $30.37, ~~and $32.09,~~ respectively.

Stock Options – A stock option represents the option to purchase a number of shares of common stock of the Company as specified in the stock option grant agreement at the exercise price per share as determined by the closing market price of our common stock on the grant date. Stock options are exercisable in installments of 33% annually, starting one year from the grant date and expire 10 years from the grant date. The fair value of each stock option is amortized into compensation expense using the graded-vesting method, which results in the recognition of compensation costs over the requisite service period for each separately vesting tranche of the stock options as though the stock options were, in substance, multiple stock option grants. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock options:

The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model. The following assumptions were used in the application of this valuation model:

Historical information was the principal basis for the selection of the expected term and dividend yield. The expected volatility is based on a weighted-average combination of historical and implied volatilities over a time period that approximates the expected term of the option. The risk-free interest rate was ~~selected based upon the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.~~

For the nine months ended September 30, 2016, there were no compensation costs for stock-based compensation related to stock options, as the previous stock option grant that occurred in 2010 became fully amortized in 2013. Additionally, there were no stock options granted during the nine months ended September 30, 2016.

~~The following table summarizes stock option transactions for the nine months ended September 30, 2017:~~

selected based upon the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.

The following table summarizes stock option transactions for the three months ended March 31, 2018:

Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. The issuance of stock awards results in compensation expense which is equal to the fair market value of the stock on the grant date, and is expensed immediately upon grant. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock awards:

The following table summarizes stock award transactions for the ~~nine~~three months ended ~~September 30, 2017:~~March 31, 2018:

The per unit weighted-average fair value at the date of grant for stock awards granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017 was $33.90 and ~~2016 was $32.92 and $32.57,~~$32.15, respectively.

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								Pension Benefits
	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2018		2017
Service cost	$	794	$	784	$	2,382	$	2,394	$	812	$	794
Interest cost		3,108		3,251		9,324		9,787		2,874		3,108
Expected return on plan assets		(4,270)		(4,215)		(12,810)		(12,696)		(4,553)		(4,270)
Amortization of prior service cost		145		145		435		435		132		145
Amortization of actuarial loss		2,001		1,797		6,003		5,354		1,823		2,001
Settlement charge		-		-		-		3,028
Special termination benefit charge		-		-		-		302
Net periodic benefit cost	$	1,778	$	1,762	$	5,334	$	8,604	$	1,088	$	1,778

	Other								Other
	Postretirement Benefits								Postretirement Benefits
		Three Months Ended				Nine Months Ended				Three Months Ended
		September 30,				September 30,				March 31,
	2017		2016		2017		2016		2018		2017
Service cost	$	255	$	253	$	765	$	761	$	262	$	255
Interest cost		737		726		2,211		2,202		708		737
Expected return on plan assets		(647)		(645)		(1,941)		(2,001)		(677)		(647)
Amortization of prior service cost		(127)		(137)		(381)		(411)		(127)		(127)
Amortization of actuarial loss		291		220		873		707		296		291
Net periodic benefit cost	$	509	$	417	$	1,527	$	1,258	$	462	$	509

~~Effective July 1, 2015,~~The components of net periodic benefit cost other than service cost are presented on the ~~Company added a permanent lump sum option to~~consolidated statements of net income on 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.line item “Other.”

The Company made cash contributions of ~~$15,421~~$5,198 to its Pension Plan during the first ~~six~~three months of ~~2017, which completed~~2018, and intends to make additional cash contributions of $7,286 to the ~~Company’s 2017 cash contributions.~~Pension Plan during the remainder of 2018.

During the first ~~nine~~three months of ~~2017,~~2018, the Company’s operating divisions in ~~Indiana~~Illinois and Ohio were granted base rate increases designed to increase total operating revenues on an annual basis by ~~$7,403.~~$8,640. On April 6, 2018, the base rate case in Illinois was petitioned for a rehearing; however, this petition was

denied on April 19, 2018. The other parties to the case have thirty days to file an appeal. The approved rates, for which we have billed $300 to date in March 2018, are in effect, but could be subject to refund if an appeal is granted. Further, during the first ~~nine~~three months of ~~2017,~~2018, the Company’s operating divisions in ~~Illinois, New Jersey,~~Pennsylvania and North Carolina received approval to bill infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by ~~$3,659.~~$9,731.

As of February 10, 2018, the Company has been billing interim rates in Virginia, which has a base rate case filing in progress. As of March 31, 2018, $821 of billings is subject to refund pending the conclusion of the rate case.

The Company has ten operating segments and one reportable segment. The Regulated segment, the Company’s single reportable segment, is comprised of eight operating segments representing its water and wastewater regulated utility companies which are organized by the states where the Company provides water and wastewater services. These operating segments are aggregated into one reportable segment because each of these operating segments has the following similarities: economic characteristics, nature of services, production processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment.

Two operating segments are included within the Other category below. These segments are not quantitatively significant and are comprised of Aqua ~~Resources~~Infrastructure and Aqua ~~Infrastructure.~~Resources. Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry. Aqua Resources provides water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to its utility companies’ service territories; and offers, through a third party, water and sewer line repair service and protection solutions to households. ~~Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry.~~ In addition to these segments, Other is comprised of other business activities not included in the reportable segment, including corporate costs that have not been allocated to the Regulated segment and intersegment eliminations. Corporate costs include general and administrative expenses, and interest expense. Additionally, contained within total assets for the Other category, in the table below, is a regulatory asset for postretirement benefits for the underfunded status of the Company’s pension and other postretirement benefit plans and an intercompany receivable.

The following table presents information about the Company’s reportable segment:



	Three Months Ended						Three Months Ended						Three Months Ended						Three Months Ended
	September 30, 2017						September 30, 2016						March 31, 2018						March 31, 2017
	Regulated		Other		Consolidated		Regulated		Other		Consolidated		Regulated		Other		Consolidated		Regulated		Other		Consolidated
Operating revenues	$	214,032	$	976	$	215,008	$	222,231	$	4,362	$	226,593	$	193,507	$	840	$	194,347	$	186,349	$	1,438	$	187,787
Operations and maintenance expense		70,772		(2,790)		67,982		73,013		6,799		79,812		71,303		2,643		73,946		66,272		1,618		67,890
Depreciation		34,533		(269)		34,264		34,025		(144)		33,881		35,958		9		35,967		33,666		171		33,837
Operating income (loss)		94,142		3,344		97,486		100,563		(2,764)		97,799
Interest expense, net		20,753		1,658		22,411		19,167		1,001		20,168
Allowance for funds used during construction		3,914		-		3,914		2,267		-		2,267
Income tax expense (benefit)		3,138		262		3,400		9,027		(616)		8,411
Net income (loss)		74,208		2,017		76,225		74,681		(1,511)		73,170

	Nine Months Ended						Nine Months Ended
	September 30, 2017						September 30, 2016
	Regulated		Other		Consolidated		Regulated		Other		Consolidated
Operating revenues	$	602,341	$	3,872	$	606,213	$	606,323	$	16,753	$	623,076
Operations and maintenance expense		210,842		(2,879)		207,963		210,014		17,333		227,347
Depreciation		102,340		(832)		101,508		98,445		(800)		97,645
Amortization														88		42		130		209		(20)		189
Operating income (loss)		246,361		5,633		251,994		255,431		(1,808)		253,623		72,058		(2,721)		69,337		72,305		(1,171)		71,134
Interest expense, net		60,277		4,847		65,124		57,061		3,075		60,136		21,708		1,763		23,471		19,777		1,549		21,326
Allowance for funds used during construction		10,570		-		10,570		6,446		-		6,446		2,867		-		2,867		3,193		-		3,193
Income tax expense (benefit)		12,243		(344)		11,899		18,610		(1,677)		16,933		(643)		(1,488)		(2,131)		3,856		(926)		2,930
Net income (loss)		184,733		1,532		186,265		186,579		(2,046)		184,533		54,027		(3,188)		50,839		50,896		(1,824)		49,072
Capital expenditures		337,321		410		337,731		269,046		973		270,019		105,136		-		105,136		94,409		153		94,562

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 ~~September 30, 2017,~~March 31, 2018, the aggregate amount of ~~$16,898~~$20,231 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 March 31, 2018, estimates that approximately $8,231 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.

Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of its properties is

~~cash flows. Further,~~ the ~~Company has insurance coverage for certain of these loss contingencies, and as of September 30, 2017, estimates~~subject that ~~approximately $5,415 of the amount accrued for these matters~~ are ~~probable of recovery through insurance, which amount is also reported in~~material or are expected to have a material effect on the Company’s ~~consolidated balance sheet as deferred charges and other assets.~~financial position, results of operations, or cash flows.

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 $1,451 at ~~September 30, 2017~~March 31, 2018 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, the Company’s Federal net operating loss (“NOL”) carryforward decreased by ~~$31,935.~~$6,760. In addition, during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, the Company’s state NOL carryforward increased by ~~$23,173.~~$3,866. As of ~~September 30, 2017,~~March 31, 2018, the balance of the Company’s Federal NOL was ~~$81,208.~~$56,542. The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires no valuation allowance. As of ~~September 30, 2017,~~March 31, 2018, the balance of the Company’s gross state NOL was ~~$600,358,~~$631,124, a portion of which is offset by a valuation allowance because the Company does not believe the state 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 ~~$64,738~~$64,814 and ~~$85,523,~~$85,380, respectively. The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions were ~~$145,947~~$121,356 and ~~$685,880~~$716,504 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 ~~third~~first quarter of 2018 and 2017 was -4.4% and ~~2016 was 4.3% and 10.3%, respectively, and for the first nine months of 2017 and 2016 was 6.0% and 8.4%~~5.6%, respectively.

As of September 30, 2017 regulatory assets increased by $96,140, as compared to the beginning of the year, primarily due to the effect of additional tax deductions for certain qualifying infrastructure improvements, which results in differences between costs capitalized for book and deducted as an expense for tax purposes.

~~As of September 30, 2017,~~March 31, 2018, the total gross unrecognized tax benefit was ~~$28,938, of which $23,700, if recognized, would affect the Company’s effective tax rate as~~$18,143. As a result of the regulatory treatment afforded for qualifying infrastructure improvements in ~~Pennsylvania.~~Pennsylvania, $24,834, if recognized, would affect the Company’s effective tax rate. At December 31, ~~2016,~~2017, the Company had unrecognized tax benefits of ~~$28,099.~~$17,583.

Accounting rules for uncertain tax positions specify that tax positions for which the timing of resolution is uncertain should be classified as long-term liabilities. Judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes. Management believes that an adequate provision has been made for any adjustments that may result from tax

examinations. Although the timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, the Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.

On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Acts” (the “TCJA”) into law. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Code and the taxation of business entities, and includes specific provisions related to regulated public utilities. Significant changes that

impact the Company included in the TCJA are a reduction in the corporate federal income tax rate from 35% to 21%, effective January 1, 2018, and a limitation of the utilization of NOLs arising after December 31, 2017 to 80% of taxable income with an indefinite carryforward. The specific TCJA provisions related to our regulated entities generally allow for the continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain property acquired after September 27, 2017 and the continuation of certain rate normalization requirements for accelerated depreciation benefits. Our market-based companies still qualify for 100% deductibility of qualifying property acquired after September 27, 2017.

In accordance with the FASB’s accounting guidance for income taxes, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted, or December 22, 2017 for the TCJA. Additionally, deferred tax assets and liabilities are required to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rate. For our regulated entities, the change in deferred taxes is recorded as either an offset to a regulatory asset or liability and may be subject to refund to customers. In instances where the deferred tax balances are not in ratemaking, such as the Company’s market-based operations, the change in deferred taxes is recorded as an adjustment to our deferred tax provision.

The staff of the SEC has recognized the complexity of reflecting the impacts of the TCJA, and on December 22, 2017 issued guidance, which clarifies accounting for income taxes if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting (the measurement period). The guidance describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform: (1) a company is complete with itsaccounting for certain effects of tax reform, (2) a company is able to determine areasonable estimate for certain effects of tax reform and records that estimate as aprovisional amount, or (3) a company is not able to determine a reasonable estimate andtherefore continues to apply the FASB’s accounting guidance, based on the provisions of the taxlaws that were in effect immediately prior to the TCJA being enacted.

The Company has completed or has made a reasonable estimate for the measurement and accounting of the effect of the TCJA which were reflected in the December 31, 2017 financial statements, which resulted in a decrease to the accumulated deferred income tax liability of $303,320. Additionally, due to the reduction in the Company’s corporate income tax rate, in the first quarter of 2018, the Company reserved $2,532 for amounts expected to be refundable to utility customers. During the first quarter of 2018, in Illinois and Virginia, the Company’s base rates have been adjusted to reflect the lower corporate income tax rate, and Texas and New Jersey implemented adjusted tariff rates in the second quarter of 2018.

One of our states, Pennsylvania, has not yet issued an accounting or procedural order addressing how the TCJA changes are to be reflected in our utility customer rates. As of December 31, 2017, the Company had provisionally estimated that $175,108 of deferred income tax liabilities for our Pennsylvania subsidiary will be a regulatory liability. Additionally, two operating divisions in Ohio operate under locally-negotiated contractual rates with their respective counties, and it is expected that negotiations will result in a contract that will return to customers the effects of the reduction in the corporate net income tax rate under the TCJA; however, these negotiations have not yet started. As of December 31, 2017, the Company had provisionally estimated that $9,419 of deferred income tax liabilities for these two

divisions will be a regulatory liability. Overall, the Company has applied a reasonable interpretation of the impact of the TCJA and a reasonable estimate of the regulatory resolution. Further clarification of the TCJA and regulatory resolution may change the amounts estimated of the deferred income tax provision and the accumulated deferred income tax liability.

The Company’s regulated operations accounting for income taxes are impacted by the FASB’s accounting guidance for regulated operations. Reductions in accumulated deferred income tax balances due to the reduction in the Federal corporate income tax rates to 21% under the provisions of the TCJA will result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers, generally through reductions in future rates. The TCJA includes provisions that stipulate how these excess deferred taxes related to certain accelerated tax depreciation deduction benefits are to be passed back to customers. Potential refunds of other deferred taxes will be determined by our state regulators. Our state regulatory commissions have or are in the process of issuing procedural orders directing how the tax law changes are to be reflected in our utility customer rates.

In March 2017, the FASB issued updated accounting guidance on the presentation of net periodic pension and postretirement benefit cost (net benefit cost). Historically, net benefit cost is reported as an employee cost within operating income, net of amounts capitalized. The guidance requires the bifurcation of net benefit cost. The service cost component will be presented with other employee compensation costs in operating income and the other components of net benefit cost will be reported separately outside of operating income, and will not be eligible for capitalization. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period, and is to be applied retrospectively for the presentation of the service cost component and the other components of net benefit cost, and on a prospective basis for the capitalization of only the service cost component of net benefit cost. ~~The~~On January 1, 2018, the Company ~~is evaluating the requirements of~~adopted the updated guidance, ~~to determine the impact of adoption, and does~~which did not ~~believe it will~~ have a material impact on its results of operations or financial ~~position.~~

In January 2017, the FASB issued updated accounting guidance that eliminates step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be effective for annual reporting periods beginning after December 15, 2019,position, and interim periods within that reporting period, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The Company has elected to early adopt the provisions of the updated guidance, for its annual impairment valuation performed in the third quarter of 2017, and the provisions of the updated guidance did not have an impact on its results of operations or financial position.

In August 2016, the FASB issued updated accounting guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company has elected to early adopt the provisions of the updated guidance, which resulted in the reclassification, ~~of $375 debt extinguishment costs,~~ for the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2017, of $1,238 for the other components of net benefit cost from ~~cash flows from operating~~operations and maintenance expense to ~~financing activities to conform to~~other in the ~~new classification.~~

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 was effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption available. On January 1, 2017, the Company adopted the updated guidance, prospectively, and recognized a previously unrecognized windfall tax benefit for stock-based compensation of $982 associated with the Company’s 2012 Federal net operating loss, which was recorded as an adjustment to deferred income taxes and retained earnings (refer to the presentation of “cumulative effect of change in accounting principle - windfall tax benefit” on the Company’s Consolidated Statement of Equity). Additionally, income tax benefits in excess of compensation costs or tax deficiencies for share-based compensation are now recorded to the Company’s income tax provision, instead of historically to stockholder’s equity, which impacts its effective tax rate. Lastly, all tax-related cash flows resulting from share-based payments are reported prospectively as operating activities on the statement of cash flows, a change from the historical requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities.income.

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 January 2016, the FASB issued updated accounting guidance on the recognition and measurement of financial assets and financial liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The updated guidance is effective for interim and annual periods beginning after December 31, 2017. ~~The~~On January 1, 2018, the Company ~~does not expect the provisions of~~adopted the updated guidance, towhich did not have a material impact on its results of operations or financial ~~position.~~position, and resulted in the recognition of $860 of previous unrealized gains, which was recorded as an adjustment to beginning retained earnings (refer to the presentation of “cumulative effect of change in accounting principle – financial instruments” on the Company’s consolidated statement of equity).

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 recognition. 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. Additionally, the accounting for contributions in aid of construction may be impacted by the updated accounting guidance if the contributions are determined to be in scope. In July 2015, the FASB approved a one year deferral to the original effective date of this guidance. The updated guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the updated guidance in each prior reporting period, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the updated guidance recognized through retained earnings at the date of adoption. In 2016, the Company performed an evaluation of the requirements of the updated guidance and ~~based on current interpretations of the updated guidance~~ believes that the impact of adoption will not result in a material change in the Company’s measurement of ~~revenue and timing of recognition if contributions in aid of construction are determined to not be in scope.~~revenue. In 2017, the American Institute of Certified Public Accountants ~~(AICPA)~~(“AICPA”) power and utility entities revenue recognition task force ~~has~~ determined that contributions in aid of construction are not in the scope of the new standard, and submitted its recommendation to the AICPA’s revenue recognition working group for approval. The Company ~~plans to implement~~implemented the updated guidance using the modified retrospective approach on January 1, ~~2018.~~2018, which did not result in a change in the Company’s measurement of revenue, and reached the following conclusions:

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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, ~~2016~~2017 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 Infrastructure, LLC and Aqua Resources, Inc. Aqua Infrastructure provides non-utility raw water supply services for firms in the natural gas drilling industry. 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; and offers, through a third party, water and wastewater line repair service and protection solutions to households.

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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)

During 2016, we completed the sale of business units within Aqua Resources which provided liquid waste hauling and disposal services, and inspection, cleaning and repair of storm and sanitary wastewater lines. Additionally, in 2016, we decided to market for sale two business units that are reported within the Company’s market-based subsidiary, Aqua Resources. One business unit installed and tested devices that prevent the contamination of potable water and repaired water and wastewater systems, for which the sale was completed in January 2017. The other business unit repairs and performs maintenance on water and wastewater systems, for which the sale was completed in June 2017.

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 opportunistically pursue growth ventures in select market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated businesses.

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 ~~nine~~three months of ~~2017,~~2018, we had ~~$337,731~~$105,136 of capital expenditures, expended ~~$5,860~~$190 for the acquisition of water and wastewater utility systems, issued ~~$441,294~~$66,996 of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of ~~$293,270.~~$21,898. 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 and the issuances of $80,000 and $50,000 of first mortgage bonds by Aqua Pennsylvania in July and January 2017 and $100,000 of first mortgage bonds by Aqua Illinois in July 2017.~~facility.

At ~~September 30, 2017,~~March 31, 2018, we had ~~$4,139~~$3,202 of cash and cash equivalents compared to ~~$3,763~~$4,204 at December 31, ~~2016.~~2017. During the first ~~nine~~three months of ~~2017,~~2018, 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.

~~Table of Contents~~

~~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 ~~September 30, 2017,~~March 31, 2018, our $250,000 unsecured revolving credit facility, which expires in February 2021, had ~~$183,547~~$113,189 available for borrowing. At ~~September 30, 2017,~~March 31, 2018, we had short-term lines of credit of $135,500, of which ~~$114,510~~$115,158 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 ~~September 30, 2017, $80,000~~March 31, 2018, $79,658 was available for borrowing. In July we issued $180,000 of long-term debt, the proceeds of which were used to reduce our borrowings under our revolving credit facilities. Subsequently, in October we issued $75,000 of long-term debt, the proceeds of which were used to reduce our borrowings under our revolving credit facilities.

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.

Table of Contents

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)

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 ~~Third~~First Quarter of ~~2017~~2018 Compared to ~~Third~~First Quarter of ~~2016~~2017

Revenues ~~decreased~~increased by ~~$11,585~~$6,560 or ~~5.1%~~3.5%, primarily due to ~~a decrease~~an increase in customer water consumption, ~~and a decrease in market-based activities revenue of $3,431 associated with the dispositions of business units, offset by~~ an increase in water and wastewater rates and infrastructure rehabilitation surcharges of ~~$1,759,~~$5,097, and additional water and wastewater revenues of ~~$505~~$1,634 associated with a larger customer base due to organic growth and utility ~~acquisitions.~~acquisitions, offset by a reserve, recognized in the first quarter of 2018, of $2,532 for amounts expected to be refundable to utility customers associated with the decrease in the corporate income tax rate from 35% to 21% due to the TCJA.

Operations and maintenance expenses ~~decreased~~increased by ~~$11,830~~$6,056 or ~~14.8%~~8.9%, primarily due to ~~a reduction~~an increase in ~~operating~~labor expense of $1,559, which included additional overtime expenses for Aqua Resources of $4,249 associated with the completion of the disposition of business units, which was finalized in June 2017, a decrease in water production costs of $2,928, a decrease in the Company’s self-insured employee medical benefit program expense of $2,425, and a decreaseincreased maintenance activities, an increase in postretirement benefits ~~expense~~ of ~~$1,011. The decrease~~$1,442, and an increase in ~~water production costs is~~maintenance expenses of $1,057, mainly resulting from expenses incurred due to ~~a reduction in purchased water expense of $1,907 due to replacing a purchased water supply coincident with the Company securing its own water supply source.~~more severe winter weather conditions.

Depreciation expense increased by ~~$383~~$2,130 or ~~1.1%~~6.3%, primarily due to the utility plant placed in service since ~~September 30, 2016.~~March 31, 2017.

Interest expense increased by ~~$2,243~~$2,145 or ~~11.1%~~10.1%, primarily due to an increase in average ~~borrowings.~~borrowings, offset by a decrease in our effective interest rate.

Allowance for funds used during construction (“AFUDC”) decreased by $326, due to a decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.

Equity earnings in joint venture increased by $412 due to an increase in the sale of raw water to firms in the natural gas drilling industry.

Other decreased by $635 primarily due to a decrease in the non-service cost components of our net benefit cost for pension and postretirement benefits.

Our effective income tax rate was -4.4% in the first quarter of 2018 and 5.6% in the first quarter of 2017. The effective income tax rate decreased due to the reduction in the corporate income tax rate from 35% to 21%, and the effect of additional tax deductions recognized in the first quarter of 2018 for certain qualifying infrastructure improvements for Aqua Pennsylvania. A revenue reserve has been recognized in the first quarter of 2018 for the amounts expected to be refundable to utility customers associated with the decrease in the corporate income tax rate from 35% to 21% due to the TCJA.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

Allowance for funds used during construction (“AFUDC”) increased by $1,647, 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 as a result of an increase in the amount of AFUDC related to equity.

Our effective income tax rate was 4.3% in the third quarter of 2017 and 10.3% in the third quarter of 2016. The effective income tax rate decreased due to the effect of additional tax deductions recognized in the third quarter of 2017 for certain qualifying infrastructure improvements for Aqua Pennsylvania.

Net income increased by ~~$3,055~~$1,767 or ~~4.2%, primarily as a result of the factors described above.~~

~~Analysis of First Nine Months of 2017 Compared to First Nine Months of 2016~~

Revenues decreased by $16,863 or 2.7%, primarily due to a decrease in market-based activities revenue of $12,970 associated with the dispositions of business units, and a decrease in customer water consumption, offset by an increase in water and wastewater rates and infrastructure rehabilitation surcharges of $4,586, additional water and wastewater revenues from organic growth of $2,296, and additional water and wastewater revenues of $1,257 associated with a larger customer base due to utility acquisitions.

Operations and maintenance expenses decreased by $19,384 or 8.5%, primarily due to a reduction in operating expenses for Aqua Resources of $12,981 associated with the completion of the disposition of business units, which was finalized in June 2017, a decrease in water production costs of $4,459, a decrease in the Company’s self-insured employee medical benefit program expense of $4,239, and a decrease in postretirement benefits expense of $2,946, offset by the prior year effect of a gain on sale of a utility system of $1,215. 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. The decrease in water production costs is due to a reduction in purchased water expense of $2,886 due to replacing a purchased water supply coincident with the Company securing its own water supply source.

~~Depreciation expense increased by $3,863 or 4.0%, primarily due to the utility plant placed in service since September 30, 2016.~~

Taxes other than income taxes increased by $1,296 or 3.0% primarily due to an increase in property taxes of $489 primarily due to the effect of a benefit recorded in 2016 for Ohio based on the final settlement of a property tax bill, and an increase in pumping fees of $319 in Texas due to higher rates and water production.

~~Interest expense increased by $4,988 or 8.3%, primarily due to an increase in average borrowings.~~

AFUDC increased by $4,124, 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 as a result of an increase in the amount of AFUDC related to equity.

~~Table of Contents~~

~~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)~~

Our effective income tax rate was 6.0% in the first nine months of 2017 and 8.4% in the first nine months of 2016. The effective income tax rate decreased due to the effect of additional tax deductions recognized in the first nine months of 2017 for certain qualifying infrastructure improvements for Aqua Pennsylvania.

~~Net income increased by $1,732 or 0.9%~~3.6%, 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, to 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, ~~2016.~~2017. Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017, filed February 28, 2018, 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, ~~2016~~2017, filed February 28, 2018, 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 ~~September 30, 2017:~~March 31, 2018:

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
July 1-31, 2017

196

$
33.46

-

-
August 1-31, 2017

513

$
33.86

-

-
September 1-30, 2017

-

$
-

-

-
Total

709

$
33.75

-

-


	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
January 1-31, 2018	2,662	$	36.37	-	-
February 1-28, 2018	68,805	$	34.56	-	-
March 1-31, 2018	473	$	33.84	-	-
Total	71,940	$	34.63	-	-

(1)

These amounts include the following: (a) ~~196~~63,941 shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of stock-based compensation; and (b) ~~513~~7,999 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. These features of our equity compensation plan are available to all employees who receive stock-based compensation under the plan. We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day prior to the option exercise.

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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EXHIBIT INDEX


Exhibit No.		Description
~~4.1~~		~~Bond Purchase Agreement, dated July 10, 2017 by and among Aqua Illinois, Inc., Teachers Insurance and Annuity Association of America~~
~~4.2~~		Bond Purchase Agreement, dated July 20, 2017 by and among Aqua Pennsylvania, Inc., New York Life Insurance Company, New York Life Insurance and Annuity Corporation, New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 3), New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 3-2)
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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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.

~~November 2, 2017~~May 9, 2018


		Aqua America, Inc.
		Registrant



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



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

3432


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)


Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐ (do not check if a smaller reporting company)	Smaller reporting company ☐
Emerging growth company ☐


	Page
Part I – Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets (unaudited) – ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017	2

Consolidated Statements of Net Income (unaudited) – Three Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~	3

~~Consolidated Statements of Net Income (unaudited) –~~ ~~Nine Months Ended September 30, 2017 and 2016~~	4

Consolidated Statements of Comprehensive Income (unaudited) – Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~	54

Consolidated Statements of Capitalization (unaudited) – ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017	65

Consolidated Statement of Equity (unaudited) – ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2018	76

Consolidated Statements of Cash Flow (unaudited) – ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~	87

Notes to Consolidated Financial Statements (unaudited)	98

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2625

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3129

Item 4. Controls and Procedures	3129

Part II – Other Information

Item 1. Legal Proceedings		3129

Item 1A. Risk Factors		3129

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		3230

Item 6. Exhibits		3230

Exhibit Index		3331

Signatures		3432



	Number	Weighted		Number	Weighted
	of	Average		of	Average
	Share Units	Fair Value		Share Units	Fair Value
Nonvested share units at beginning of period	476,896	$	27.96	452,333	$	26.16
Granted	125,202		30.79	87,593		37.65
Performance criteria adjustment	(64,398)		27.75	(33,109)		29.71
Forfeited	(16,306)		28.26	(5,522)		29.59
Share units vested in prior period and issued in current period	32,400		25.31	9,400		26.54
Share units issued	(125,999)		36.37	(136,081)		31.70
Nonvested share units at end of period	427,795	$	26.13	374,614		26.48



	Number	Weighted		Number	Weighted
	of	Average		of	Average
	Stock Units	Fair Value		Stock Units	Fair Value
Nonvested stock units at beginning of period	109,273	$	28.48	116,787	$	29.46
Granted	41,293		30.37	54,073		34.91
Stock units vested in prior period and issued in current period				1,467		31.47
Stock units vested and issued	(26,914)		26.18	(42,836)		26.39
Forfeited	(2,287)		30.52	-		-
Nonvested stock units at end of period	121,365	$	29.60	129,491		31.78

\
Amount	Interest Rate	Maturity
$25,000	3.64%	2032
$6,000	3.89%	2037
$15,000	3.90%	2038
$10,000	4.18%	2047
$22,000	4.22%	2049
$22,000	4.24%	2050


	~~2017~~
~~Expected term (years)~~	~~5.45~~
~~Risk-free interest rate~~	~~2.01%~~
~~Expected volatility~~	~~17.7%~~
~~Dividend yield~~	~~2.51%~~
~~Grant date fair value per option~~	~~$ 4.07~~


	2018	2017
Expected term (years)	5.46	5.45
Risk-free interest rate	2.72%	2.01%
Expected volatility	17.2%	17.7%
Dividend yield	2.37%	2.51%
Grant date fair value per option	$ 5.10	$ 4.07



		Weighted		Weighted
		Average		Average	Aggregate
		Exercise		Remaining	Intrinsic
	Shares	Price		Life (years)	Value
Outstanding at beginning of period	427,335	$	15.55
Granted	120,127		30.47
Forfeited	(2,439)		30.47
Expired / Cancelled	(2,812)		14.26
Exercised	(157,621)		16.51
Outstanding at end of period	384,590	$	19.73	3.9	$	5,175

Exercisable at end of period	266,902	$	15.00	1.4	$	4,855



		Weighted		Weighted
		Average		Average	Aggregate
		Exercise		Remaining	Intrinsic
	Shares	Price		Life (years)	Value
Outstanding at beginning of period	364,932	$	19.83
Granted	160,859		34.51
Forfeited	(2,371)		30.47
Expired / Cancelled	(41)		30.47
Exercised	(62,688)		16.11
Outstanding at end of period	460,691	$	25.40	6.2	$	4,060

Exercisable at end of period	225,594	$	17.24	2.6	$	3,794

December 31,

Carrying amount

Estimated fair value