UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

FORM 10-Q

(Mark One)

x	~~QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.~~

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended ~~September 30, 2013~~March 31, 2014

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

¨	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.~~

For the transition period ~~from~~from_______________ to _______________

Commission File Number 1-6659

AQUA AMERICA, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania		23-1702594
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)		~~(I.R.S. Employer~~ Identification No.)


762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania		~~19010-3489~~ 19010 -3489
(Address of principal executive offices)		(Zip Code)

(610) 527-8000
(Registrant’s telephone number, including area code)

~~(610) 527-8000~~

~~(Registrant’s telephone number, including area code)~~

(Former Name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12(b)-2 of the Exchange Act.:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒

Indicate the number of shares outstanding of each of the ~~issuer’s~~issuer's classes of common stock, as of ~~October 24, 2013: 176,709,658~~

April 23, 2014: 177,060,756

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


	Page

Part I – Financial Information


Item 1. Financial Statements:

Consolidated Balance Sheets (unaudited) – ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012~~2013		2

Consolidated Statements of Net Income (unaudited) ~~– Nine~~- Three Months Ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012~~		3

~~Consolidated Statements of Net Income (unaudited) – Three Months Ended September 30, 2013 and 2012~~		4

Consolidated Statements of Comprehensive Income (unaudited) – ~~Nine and~~ Three Months Ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012~~		5	4

Consolidated Statements of Capitalization (unaudited) – ~~September 30, 2013~~ March 31, 2014 and December 31, ~~2012~~2013		6	5

Consolidated Statement of Equity (unaudited) – ~~Nine~~ Three Months Ended ~~September 30, 2013~~March 31, 2014		7	6

Consolidated Statements of Cash Flow (unaudited) – ~~Nine~~ Three Months Ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012~~		8	7

Notes to Consolidated Financial Statements (unaudited)		9	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30	26

Item 3. Quantitative and Qualitative Disclosures About Market Risk		39	32

Item 4. Controls and Procedures		39	32

Part II – Other Information

Item 1. Legal Proceedings		39	32

Item 1A. Risk Factors		42	34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43	35

Item 6. Exhibits		44	36

Signatures		45	37

Exhibit Index		46	38

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CO~~CONSOLIDATED BALANCE~~NSOLIDATED BALANCE SHEETS

(In thousands of dollars, except per share amounts)

(UNAUDITED)



	March 31,		December 31,
Assets	2014		2013
Property, plant and equipment, at cost	$	5,397,141	$	5,348,195
Less: accumulated depreciation		1,237,686		1,211,806
Net property, plant and equipment		4,159,455		4,136,389
Current assets:
Cash and cash equivalents		17,508		5,058
Accounts receivable and unbilled revenues, net		89,892		94,704
Income tax receivable		1,211		7,873
Deferred income taxes		49,846		40,038
Inventory, materials and supplies		11,794		11,353
Prepayments and other current assets		11,129		11,081
Assets of discontinued operations held for sale		32,250		32,926
Total current assets		213,630		203,033

Regulatory assets		599,717		585,140
Deferred charges and other assets, net		51,253		50,290
Investment in joint venture		47,666		48,695
Funds restricted for construction activity		47		47
Goodwill		27,999		28,223
Total assets	$	5,099,767	$	5,051,817
Liabilities and Equity
Aqua America stockholders' equity:
Common stock at $.50 par value, authorized 300,000,000 shares, issued 178,316,578 and 177,928,922 as of March 31, 2014 and December 31, 2013	$	89,158	$	88,964
Capital in excess of par value		748,080		743,335
Retained earnings		745,161		729,272
Treasury stock, at cost, 1,258,279 and 1,178,323 shares in March 31, 2014 and December 31, 2013		(29,055)		(27,082)
Accumulated other comprehensive income		667		346
Total Aqua America stockholders' equity		1,554,011		1,534,835

Noncontrolling interest		223		208

Total equity		1,554,234		1,535,043

Long-term debt, excluding current portion		1,498,040		1,468,583
Commitments and contingencies (See Note 13)		-		-

Current liabilities:
Current portion of long-term debt		97,789		86,288
Loans payable		27,913		36,740
Accounts payable		31,547		65,815
Accrued interest		21,175		13,615
Accrued taxes		13,362		14,176
Other accrued liabilities		30,419		33,596
Liabilities of discontinued operations held for sale		29,037		29,649
Total current liabilities		251,242		279,879

Deferred credits and other liabilities:
Deferred income taxes and investment tax credits		901,391		866,211
Customers' advances for construction		73,728		73,892
Regulatory liabilities		278,283		281,014
Other		75,230		81,552
Total deferred credits and other liabilities		1,328,632		1,302,669

Contributions in aid of construction		467,619		465,643
Total liabilities and equity	$	5,099,767	$	5,051,817

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

   September 30, December 31,
   2013 2012
Assets
Property, plant and equipment, at cost
   $ 5,265,148    $ 5,050,400
Less: accumulated depreciation
   1,174,775    1,114,237


Net property, plant and equipment
   4,090,373    3,936,163


Current assets:

Cash and cash equivalents
   6,393    5,521
Accounts receivable and unbilled revenues, net
   98,303    92,921
Income tax receivable
   16,082    16,082
Deferred income taxes
   40,385    37,818
Inventory, materials and supplies
   12,433    11,757
Prepayments and other current assets
   9,353    10,372
Assets of discontinued operations held for sale
   28,607    86,423


Total current assets
   211,556    260,894


Regulatory assets
   637,314    521,264
Deferred charges and other assets, net
   50,031    49,852
Investment in joint venture
   45,316    38,620
Funds restricted for construction activity
   11,626    23,572
Goodwill
   27,882    28,152


   $ 5,074,098    $ 4,858,517


Liabilities and Equity
Aqua America stockholders’ equity:

Common stock at $.50 par value, authorized 300,000,000 shares, issued 177,880,647 and 175,985,437 in 2013 and 2012
   $ 88,940    $ 70,472
Capital in excess of par value
   739,062    718,482
Retained earnings
   698,689    611,303
Treasury stock, at cost, 1,177,959 and 776,355 shares in 2013 and 2012
   (27,074 ) (14,668 )
Accumulated other comprehensive income
   223    115


Total Aqua America stockholders’ equity
   1,499,840    1,385,704
Noncontrolling interest
   197    188


Total equity
   1,500,037    1,385,892


Long-term debt, excluding current portion
   1,439,338    1,543,954
Commitments and contingencies (See Note 13)
   —      —
Current liabilities:

Current portion of long-term debt
   81,449    45,038
Loans payable
   109,786    80,383
Accounts payable
   41,382    55,506
Accrued interest
   20,450    14,026
Accrued taxes
   20,458    28,214
Other accrued liabilities
   27,392    27,360
Liabilities of discontinued operations held for sale
   17,352    23,637


Total current liabilities
   318,269    274,164


Deferred credits and other liabilities:

Deferred income taxes and investment tax credits
   835,003    723,367
Customers’ advances for construction
   71,927    71,595
Regulatory liabilities
   284,823    241,363
Other
   152,703    157,978


Total deferred credits and other liabilities
   1,344,456    1,194,303


Contributions in aid of construction
   471,998    460,204


   $ 5,074,098    $ 4,858,517

~~See notes to consolidated financial statements beginning on page 9~~

Table of ~~this report.~~Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STAT~~CONSOLIDATED STATEMENTS~~EMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)


	Three Months Ended
	March 31,
	2014		2013

Operating revenues	$	182,672	$	178,552

Operating expenses:
Operations and maintenance		71,686		67,794
Depreciation		30,981		29,045
Amortization		1,133		1,377
Taxes other than income taxes		12,102		13,398
Total operating expenses		115,902		111,614

Operating income		66,770		66,938

Other expense (income):
Interest expense, net		19,310		19,275
Allowance for funds used during construction		(1,167)		(552)
Loss (gain) on sale of other assets		348		(92)
Equity loss in joint venture		686		656
Income from continuing operations before income taxes		47,593		47,651
Provision for income taxes		5,192		6,787
Income from continuing operations		42,401		40,864

Discontinued operations:
Income from discontinued operations before income taxes		772		8,925
Provision for income taxes		314		3,224
Income from discontinued operations		458		5,701
Net income attributable to common shareholders	$	42,859	$	46,565

Income from continuing operations per share:
Basic	$	0.24	$	0.23
Diluted	$	0.24	$	0.23

Income from discontinued operations per share:
Basic	$	0.00	$	0.03
Diluted	$	0.00	$	0.03

Net income per common share:
Basic	$	0.24	$	0.27
Diluted	$	0.24	$	0.26

Average common shares outstanding during the period:
Basic		176,839		175,415
Diluted		177,810		176,499

Cash dividends declared per common share	$	0.152	$	0.140

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

   Nine Months Ended
   September 30,
   2013 2012
Operating revenues
   $ 580,035    $ 570,279
Operating expenses:

Operations and maintenance
   211,234    199,664
Depreciation
   88,971    82,736
Amortization
   3,903    3,773
Taxes other than income taxes
   40,321    34,700


   344,429    320,873


Operating income
   235,606    249,406
Other expense (income):

Interest expense, net
   57,834    58,384
Allowance for funds used during construction
   (1,468 ) (3,484 )
Gain on sale of other assets
   (121 ) (826 )
Equity loss (earnings) in joint venture
   1,732    (931 )


Income from continuing operations before income taxes
   177,629    196,263
Provision for income taxes
   19,366    77,310


Income from continuing operations
   158,263    118,953
Discontinued operations:

Income from discontinued operations before income taxes
   8,524    18,813
Provision for income taxes
   3,019    7,758


Income from discontinued operations
   5,505    11,055


Net income attributable to common shareholders
   $ 163,768    $ 130,008


Income from continuing operations per share:

Basic
   $ 0.90    $ 0.68


Diluted
   $ 0.90    $ 0.68


Income from discontinued operations per share:

Basic
   $ 0.03    $ 0.06


Diluted
   $ 0.03    $ 0.06


Net income per common share:

Basic
   $ 0.93    $ 0.75


Diluted
   $ 0.93    $ 0.74


Average common shares outstanding during the period:

Basic
   175,964    173,981


Diluted
   176,732    174,688


Cash dividends declared per common share
   $ 0.432    $ 0.536

~~See notes to consolidated financial statements beginning on page 9~~

Table of ~~this report.~~Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~NET~~COMPREHENSIVE INCOME

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

(UNAUDITED)



	Three Months Ended
	March 31,
	2014		2013


Net income attributable to common shareholders	$	42,859	$	46,565
Other comprehensive income, net of tax:
Unrealized holding gain (loss) on investments, net of tax of $38 and $(5) for the three months ended, March 31, respectively		72		(9)
Reclassification adjustment for loss reported in net income, net of tax benefit of $(134) for the three months ended, March 31, 2014 (1)		249		-
Comprehensive income	$	43,180	$	46,556

(1) Amount of pre-tax loss of $383 reclassified from accumulated other comprehensive income to loss on sale of other assets on the consolidated statements of net income for the three months ended March 31, 2014.

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

   Three Months Ended
   September 30,
   2013 2012
Operating revenues
   $ 204,345    $ 214,565
Operating expenses:

Operations and maintenance
   72,065    71,268
Depreciation
   30,188    28,251
Amortization
   1,175    1,320
Taxes other than income taxes
   13,537    13,191


   116,965    114,030


Operating income
   87,380    100,535
Other expense (income):

Interest expense, net
   19,350    19,597
Allowance for funds used during construction
   (426 ) (919 )
Gain on sale of other assets
   (138 ) (320 )
Equity earnings in joint venture
   (78 ) (682 )


Income from continuing operations before income taxes
   68,672    82,859
Provision for income taxes
   5,188    32,575


Income from continuing operations
   63,484    50,284
Discontinued operations:

Income from discontinued operations before income taxes
   193    819
Provision for income taxes
   60    444


Income from discontinued operations
   133    375


Net income attributable to common shareholders
   $ 63,617    $ 50,659


Income from continuing operations per share:

Basic
   $ 0.36    $ 0.29


Diluted
   $ 0.36    $ 0.29


Income from discontinued operations per share:

Basic
   $ 0.00    $ 0.00


Diluted
   $ 0.00    $ 0.00


Net income per common share:

Basic
   $ 0.36    $ 0.29


Diluted
   $ 0.36    $ 0.29


Average common shares outstanding during the period:

Basic
   176,483    174,596


Diluted
   177,575    175,608


Cash dividends declared per common share
   $ —      $ 0.272

~~See notes to consolidated financial statements beginning on page 9~~

Table of ~~this report.~~Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~

~~(In thousands of dollars)~~

~~(UNAUDITED)~~

   Nine Months Ended Three Months Ended
   September 30, September 30,
   2013    2012 2013    2012
Net income attributable to common shareholders
   $ 163,768       $ 130,008    $ 63,617       $ 50,659
Other comprehensive income, net of tax:

Unrealized holding gain on investments, net of tax of $9 and $73 for the nine months and $32 and $22 for the three months ended, September 30, respectively
   18       139    60       42
Reclassification adjustment for loss (gain) reported in net income, net of tax (benefit) of $(49) and $172 for the nine months and $82 for the three months ended, September 30, respectively (1) (2)
   90       (319 ) —         (153 )






Comprehensive income
   $ 163,876       $ 129,828    $ 63,677       $ 50,548

~~(1)~~

Amount of pre-tax loss (gain) of $139 and $(491) reclassified from accumulated other comprehensive income to loss (gain) on sale of other assets on the consolidated statements of net income for the nine months ended September 30, 2013 and 2012, respectively.

~~(2)~~

Amount of pre-tax gain of $(235) reclassified from accumulated other comprehensive income to gain on sale of other assets on the consolidated statements of net income for the three months ended September 30, 2012.

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

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

CAP~~CONSOLIDATED STATEMENTS OF CAPITALIZATION~~ITALIZATION

(In thousands of dollars, except per share amounts)

(UNAUDITED)



		March 31,		December 31,
		2014		2013
Aqua America stockholders' equity:
Common stock, $.50 par value		$	89,158	$	88,964
Capital in excess of par value			748,080		743,335
Retained earnings			745,161		729,272
Treasury stock, at cost			(29,055)		(27,082)
Accumulated other comprehensive income			667		346
Total Aqua America stockholders' equity			1,554,011		1,534,835

Noncontrolling interest			223		208

Total equity			1,554,234		1,535,043

Long-term debt:
Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range	Maturity Date Range
0.00% to 0.99%	2023 to 2033		6,093		5,035
1.00% to 1.99%	2014 to 2035		26,911		28,615
2.00% to 2.99%	2024 to 2031		15,890		14,903
3.00% to 3.99%	2016 to 2047		166,794		167,365
4.00% to 4.99%	2020 to 2048		444,574		447,297
5.00% to 5.99%	2015 to 2043		256,514		284,362
6.00% to 6.99%	2015 to 2036		64,929		64,923
7.00% to 7.99%	2022 to 2027		34,900		35,056
8.00% to 8.99%	2021 to 2025		19,192		19,283
9.00% to 9.99%	2018 to 2026		28,500		28,500
10.40%	2018		6,000		6,000
			1,070,297		1,101,339

Notes payable to bank under revolving credit agreement, variable rate, due March 2017			72,000		-
Unsecured notes payable:
Notes at 3.57% due 2027			50,000		50,000
Notes ranging from 4.62% to 4.87%, due 2014 through 2024			171,400		171,400
Notes ranging from 5.01% to 5.95%, due 2015 through 2037			232,132		232,132
			1,595,829		1,554,871
Current portion of long-term debt			97,789		86,288
Long-term debt, excluding current portion			1,498,040		1,468,583
Total capitalization		$	3,052,274	$	3,003,626

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

      September 30, December 31,
      2013 2012
Aqua America stockholders’ equity:

Common stock, $.50 par value
      $ 88,940    $ 70,472
Capital in excess of par value
      739,062    718,482
Retained earnings
      698,689    611,303
Treasury stock, at cost
      (27,074 ) (14,668 )
Accumulated other comprehensive income
      223    115


Total Aqua America stockholders’ equity
      1,499,840    1,385,704
Noncontrolling interest
      197    188


Total equity
      1,500,037    1,385,892


Long-term debt:

Long-term debt of subsidiaries (substantially secured by utility plant):

Interest Rate Range

Maturity Date Range

0.00% to 0.99%
   2023 to 2031    4,576    2,884
1.00% to 1.99%
   2014 to 2035    29,485    27,251
2.00% to 2.99%
   2024 to 2031    15,825    17,120
3.00% to 3.99%
   2016 to 2047    141,195    107,477
4.00% to 4.99%
   2020 to 2048    397,499    367,657
5.00% to 5.99%
   2014 to 2043    309,488    320,729
6.00% to 6.99%
   2015 to 2036    64,918    64,903
7.00% to 7.99%
   2022 to 2027    35,211    35,660
8.00% to 8.99%
   2021 to 2025    19,371    19,632
9.00% to 9.99%
   2013 to 2026    28,687    34,547
10.40%
   2018    6,000    6,000


      1,052,255    1,003,860
Notes payable to bank under revolving credit agreement, variable rate, due March 2017
      5,000    100,000
Unsecured notes payable:

Notes at 3.57% due 2027
      50,000    50,000
Notes ranging from 4.62% to 4.87%, due 2014 through 2024
      171,400    193,000
Notes ranging from 5.01% to 5.95%, due 2015 through 2037
      242,132    242,132


      1,520,787    1,588,992
Current portion of long-term debt
      81,449    45,038


Long-term debt, excluding current portion
      1,439,338    1,543,954


Total capitalization
      $ 2,939,375    $ 2,929,846

~~See notes to consolidated financial statements beginning on page 9~~

Table of ~~this report.~~Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF ~~EQUITY~~EQUITY

(In thousands of dollars)

(UNAUDITED)




									Accumulated
			Capital in						Other
	Common		Excess of		Retained		Treasury		Comprehensive		Noncontrolling
	Stock		Par Value		Earnings		Stock		Income		Interest		Total
Balance At December 31, 2013	$	88,964	$	743,335	$	729,272	$	(27,082)	$	346	$	208	$	1,535,043
Net income		-		-		42,859		-		-		15		42,874
Other comprehensive income, net of income tax of $172		-		-		-		-		321		-		321
Dividends		-		-		(26,873)		-		-		-		(26,873)
Repurchase of stock (79,961 shares)		-		-		-		(1,973)		-		-		(1,973)
Equity compensation plan (198,920 shares)		100		(100)		-		-		-		-		-
Exercise of stock options (188,736, shares)		94		2,663		-		-		-		-		2,757
Stock-based compensation		-		1,322		(97)		-		-		-		1,225
Employee stock plan tax benefits		-		1,041		-		-		-		-		1,041
Other		-		(181)		-		-		-		-		(181)
Balance At March 31, 2014	$	89,158	$	748,080	$	745,161	$	(29,055)	$	667	$	223	$	1,554,234

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

      Accumulated
      Capital in Other
   Common    Excess of Retained Treasury Comprehensive    Noncontrolling
   Stock    Par Value Earnings Stock Income    Interest    Total
Balance At December 31, 2012
   $ 70,472    $ 718,482 $ 611,303 $ (14,668 ) $ 115    $ 188    $ 1,385,892
Net income
   —         —      163,768 —      —         9    163,777
Other comprehensive income, net of income tax of $58
   —         —      —      —      108    —         108
Dividends paid
   —         —      (76,028 ) —      —         —         (76,028 )
Stock split
   17,655    (17,655 ) —      —      —         —         —
Sale of stock (449,129 shares)
   188    9,881 —      409 —         —         10,478
Repurchase of stock (414,869 shares)
   —         —      —      (12,815 ) —         —         (12,815 )
Equity compensation plan (43,500 shares)
   17    (17 ) —      —      —         —         —
Exercise of stock options (1,517,804 shares)
   608    24,333 —      —      —         —         24,941
Stock-based compensation
   —         4,038 (354 ) —      —         —         3,684








Balance At September 30, 2013
   $ 88,940    $ 739,062 $ 698,689 $ (27,074 ) $ 223    $ 197    $ 1,500,037

~~See notes to consolidated financial statements beginning on page 9~~

Table of ~~this report.~~Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CASH~~CASH FLOW

(In thousands of dollars)

(UNAUDITED)



	Three Months Ended
	March 31,
	2014			2013
Cash flows from operating activities:
Net income	$	42,859		$	46,565
Income from discontinued operations		458	��		5,701
Income from continuing operations		42,401			40,864
Adjustments to reconcile income from continuing operations
to net cash flows from operating activities:
Depreciation and amortization		32,114			30,422
Deferred income taxes		3,692			11,189
Provision for doubtful accounts		1,508			925
Stock-based compensation		1,331			1,015
Loss (gain) on sale of other assets		348			(92)
Net increase in receivables, inventory and prepayments		3,644			5,492
Net increase in payables, accrued interest, accrued taxes and other accrued liabilities		13,269			514
Other		(7,833)			(1,704)
Operating cash flows from continuing operations		90,474			88,625
Operating cash flows (used in) from discontinued operations, net		(545)			361
Net cash flows from operating activities		89,929			88,986
Cash flows from investing activities:
Property, plant and equipment additions, including the non-equity component of allowance for funds used during construction of $367 and $472		(59,819)			(59,085)
Acquisitions of utility systems and other, net		(4,045)			(10,674)
Additions to funds restricted for construction activity		-			(2)
Release of funds previously restricted for construction activity		-			394
Net proceeds from the sale of utility system and other assets		133			95
Investment in joint venture		-			(4,900)
Other		(91)			(233)
Investing cash flows used in continuing operations		(63,822)			(74,405)
Investing cash flows from discontinued operations, net		39			51,312
Net cash flows used in investing activities		(63,783)			(23,093)
Cash flows from financing activities:
Customers' advances and contributions in aid of construction		1,142			794
Repayments of customers' advances		(234)			(577)
Net (repayments) proceeds of short-term debt		(8,827)			17,453
Proceeds from long-term debt		73,192			35,010
Repayments of long-term debt		(31,874)			(77,991)
Change in cash overdraft position		(21,753)			(11,881)
Proceeds from issuing common stock		-			3,427
Proceeds from exercised stock options		2,757			7,901
Stock-based compensation windfall tax benefits		964			-
Repurchase of common stock		(1,973)			(1,618)
Dividends paid on common stock		(26,873)			(24,562)
Other		(181)			-
Financing cash flows used in continuing operations		(13,660)			(52,044)
Financing cash flows used in discontinued operations, net		(36)			(17)
Net cash flows used in financing activities		(13,696)			(52,061)

Net increase in cash and cash equivalents		12,450			13,832
Cash and cash equivalents at beginning of period		5,058			5,521
Cash and cash equivalents at end of period	$	17,508		$	19,353

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

   Nine Months Ended
   September 30,
   2013 2012
Cash flows from operating activities:

Net income
   $ 163,768 $ 130,008
Income from discontinued operations
   5,505 11,055


Income from continuing operations
   158,263 118,953


Adjustments to reconcile income from continuing operations to net cash flows from operating activities:

Depreciation and amortization
   92,874 86,509
Deferred income taxes
   19,895 59,498
Provision for doubtful accounts
   3,338 3,072
Stock-based compensation
   4,043 4,020
Gain on sale of utility system
   (1,025 ) —
Gain on sale of other assets
   (121 ) (826 )
Net increase in receivables, inventory and prepayments
   (2,786 ) (18,254 )
Net increase in payables, accrued interest, accrued taxes and other accrued liabilities
   2,353 25,896
Other
   2,293 (2,649 )


Operating cash flows from continuing operations
   279,127 276,219
Operating cash flows from (used in) discontinued operations, net
   471 (10,005 )


Net cash flows from operating activities
   279,598 266,214


Cash flows from investing activities:

Property, plant and equipment additions, including allowance for funds used during construction of $1,468 and $3,484
   (216,062 ) (262,832 )
Acquisitions of utility systems and other, net
   (14,404 ) (116,050 )
Additions to funds restricted for construction activity
   (6 ) (2,086 )
Release of funds previously restricted for construction activity
   11,952 55,416
Net proceeds from the sale of utility system and other assets
   3,187 3,766
Investment in joint venture
   (9,800 ) (19,156 )
Other
   (439 ) (1,701 )


Investing cash flows used in continuing operations
   (225,572 ) (342,643 )
Investing cash flows from discontinued operations, net
   51,076 74,009


Net cash flows used in investing activities
   (174,496 ) (268,634 )


Cash flows from financing activities:

Customers’ advances and contributions in aid of construction
   3,529 5,742
Repayments of customers’ advances
   (2,020 ) (3,840 )
Net proceeds (repayments) of short-term debt
   29,403 (10,121 )
Proceeds from long-term debt
   188,321 179,166
Repayments of long-term debt
   (258,295 ) (109,265 )
Change in cash overdraft position
   (11,881 ) (14,108 )
Proceeds from issuing common stock
   10,478 9,732
Proceeds from exercised stock options
   24,941 12,733
Stock-based compensation windfall tax benefits
   —      603
Repurchase of common stock
   (12,815 ) (1,464 )
Dividends paid on common stock
   (76,028 ) (68,932 )


Financing cash flows (used in) from continuing operations
   (104,367 ) 246
Financing cash flows from discontinued operations, net
   137 92


Net cash flows (used in) from financing activities
   (104,230 ) 338


Net increase (decrease) in cash and cash equivalents
   872 (2,082 )
Cash and cash equivalents at beginning of period
   5,521 8,204


Cash and cash equivalents at end of period
   $ 6,393 $ 6,122

~~See notes to consolidated financial statements beginning on page 9~~

Table of ~~this report.~~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~~

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, 2013,~~March 31, 2014, the consolidated statements of net income and comprehensive income for the ~~nine and~~ three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012~~ the consolidated statements of cash flow for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012~~ and the consolidated statement of equity for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in equity, the consolidated results of operations, and the consolidated cash flow for the periods presented. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2012.~~2013. The results of operations for interim periods may not be indicative of the results that may be expected for the entire year. The December 31, ~~2012~~2013 consolidated balance sheet data presented herein was derived from the Company’s December 31, ~~2012~~2013 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements. All common share, per common share, stock unit, and per stock unit data, for all periods presented, has been adjusted to give effect to the September 1, 2013 five-for-four stock split effected in the form of a 25% stock distribution (see Note 5). Certain prior period amounts have been reclassified to conform to the reporting of discontinued operations (see Note 4).

~~Note 2~~

~~Goodwill~~

Note 2 Goodwill

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

   Regulated
   Segment Other    Consolidated
Balance at December 31, 2012
   $ 24,031    $ 4,121       $ 28,152
Reclassifications to utility plant acquisition adjustment
   (270 ) —         (270 )




Balance At September 30, 2013
   $ 23,761    $ 4,121       $ 27,882



	Regulated
	Segment		Other		Consolidated

Balance at December 31, 2013	$	24,102	$	4,121	$	28,223
Reclassifications to utility plant acquisition adjustment		(202)		-		(202)
Other		(22)		-		(22)
Balance at March 31, 2014	$	23,878	$	4,121	$	27,999

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The reclassification of goodwill to utility plant acquisition adjustment in the table above results from a mechanism approved by the applicable public utility commission. The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with certain acquisitions upon achieving certain objectives.

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

~~As of July 31, 2013, management performed its annual test of goodwill~~

Note 3 Acquisitions

In May 2014, the Company entered into an asset purchase agreement for ~~impairment, in conjunction with~~ the ~~preparation~~acquisition of the ~~Company’s annual five-year financial plan. Based on~~water and wastewater utility system assets of North Maine Utilities owned by the ~~Company’s comparison~~Village of Glenview, Illinois serving approximately 7,200 customers, for cash at closing of up to $22,000, subject to final adjustment pursuant to the ~~estimated fair value~~purchase agreement. Closing of ~~its reporting units~~this acquisition is anticipated to ~~their respective carrying amounts, management concluded that the estimated fair value of each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount by an amount~~occur in ~~excess of 10%.~~mid-year 2015.

~~Note 3~~

~~Acquisitions~~

In March 2014, the Company acquired the wastewater utility system assets of Penn Township located in Chester County, Pennsylvania serving approximately 800 customers. The total purchase price consisted of $3,668 in cash.

In March 2013, the Company acquired the water and wastewater utility system assets of Total Environmental Solutions, Inc. located in Clearfield County, Pennsylvania serving approximately 4,200 customers. The total purchase price consisted of $10,350 in cash.

In May 2012, the Company purchased all of the stock of the subsidiary that holds American Water Works Company, Inc.’s regulated water and wastewater operations in Ohio serving approximately 59,000 customers. The total purchase price consisted of $102,154 in cash plus certain assumed liabilities, including debt of $14,281.

~~Note 4~~

~~Discontinued Operations and Other Disposition~~

Note 4Discontinued Operations and Other Disposition

Discontinued Operations – In September 2012, the Company began to market for sale its water and wastewater operations in Florida, which served approximately 38,000 customers, and the Company’s wastewater treatment facility in Georgia. In March, April, and December ~~2012,~~2013, through five separate sales transactions, the Company ~~entered into a definitive agreement to sell 80~~completed the sale of its water and wastewater utility systems in Florida, ~~to the Florida Governmental Utility Authority (“FGUA”). These 80 systems represented approximately 56% of our customers served in Florida. In March 2013, the Company completed~~which concluded its sale to FGUA. In addition, in March 2013, the Company sold 15 of its Florida water and wastewater systems representing approximately 9% of our customers served in Florida in separate transactions with separate buyers. Further, in April 2013, the Company sold its water and wastewater systems in DeSoto County, Florida to DeSoto County representing approximately 2% of our customers servedregulated operations in Florida. The Company received total net proceeds from these sales of ~~$52,276,~~$88,934 and recognized a gain on sale of ~~$5,469~~$21,178 ($~~3,555~~13,766 after-tax), including a first quarter 2013 gain on sale of $6,451 ($4,193 after-tax). ~~Lastly,~~One of the Company’s sales in ~~June~~Florida, which was completed in March 2013, and represented approximately 8% of its customers served in Florida, remains subject to customary regulatory review, for which the Company ~~entered into a definitive agreement~~expects to ~~sell its water~~receive the regulator’s decision by midyear 2014. If the regulator does not approve this sale, the purchase price would be refunded and ~~wastewater systems in Sarasota, Florida~~the assets sold would revert back to ~~Sarasota County for cash at closing of $36,800, which is subject to certain adjustments. In July 2013,~~the Company. On March 12, 2014, the Company received a threat of a legal challenge to this transaction that may have delayed or ultimately terminated this transaction; however, in September 2013, the Company reached a settlement of the matter, subject to the satisfaction of certain conditions at settlement. The Company believes it will be able to completecompleted the sale of these assets at either the end of 2013 or during the first quarter of 2014, which will conclude the Company’s operations in Florida. The Company has accounted for its Sarasota, Florida operations and its wastewater treatment facility in ~~Georgia as businesses held for sale, and the sale of the Company’s wastewater treatment facility in Georgia will conclude the Company’s operations in this state.~~

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

In July 2011, the Company entered into a definitive agreement with Connecticut Water Service, Inc. to sell its operations in Maine, which served approximately 16,000 customers, for cash at closing plus certain assumed liabilities, including debt of $17,364. On January 1, 2012, the Company completed the sale for net proceeds of $36,870, and recognized a gain on sale of $17,699 ($10,821 after-tax).

In July 2011, the Company entered into a definitive agreement with American Water Works Company, Inc. to sell its operations in New York for its book value at closing plus certain assumed liabilities, including debt of approximately $23,000. On May 1, 2012, the Company completed the sale for net proceeds of $36,688 in cash as adjusted pursuant to the sale agreement based on book value at closing. During the second quarter of 2012, the Company recognized a loss on sale of $2,736 ($1,874 after-tax), resulting from charges incurred from the sale. The Company’s New York operations served approximately 51,000 customers. In conjunction with the sale of our New York operations, we acquired additional utility systems (and approximately 59,000 customers) in Ohio, one of the larger states in Aqua America’s portfolio.

The operating results, cash flows, and financial position of the Company’s operations named above, during the periods owned, have been presented in the Company’s consolidated statements of net income, consolidated statements of cash flow, and consolidated balance sheets as discontinued operations. These operations were included in the Company’s “Regulated” segment.

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

~~A summary of discontinued operations presented in the consolidated statements of net income include the following:~~

   Nine Months Ended
September 30, Three Months Ended
September 30,
   2013 2012 2013    2012
Operating revenues
   $ 10,496    $ 25,308    $ 2,078       $ 5,934
Total operating expenses
   7,440    20,212    1,884       4,206




Operating income
   3,056    5,096    194       1,728
Other (income) expense:

Gain on sale
   (5,469 ) (14,718 ) —         —
Other, net
   1    1,001    1       909




Income from discontinued operations before income taxes
   8,524    18,813    193       819
Provision for income taxes
   3,019    7,758    60       444




Income from discontinued operations
   $ 5,505    $ 11,055    $ 133       $ 375

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

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

   September 30,    December 31,
   2013    2012
Property, plant and equipment, at cost
   $ 46,933       $ 128,463
Less: accumulated depreciation
   19,891       48,856




Net property, plant and equipment
   27,042       79,607
Current assets
   1,429       4,656
Regulatory assets
   136       2,034
Other assets
   —         126




Assets of discontinued operations held for sale
   28,607       86,423
Current liabilities
   6,574       2,074
Deferred income taxes and investment tax credits
   2,443       5,166
Contributions in aid of construction
   7,506       15,560
Other liabilities
   829       837




Liabilities of discontinued operations held for sale
   17,352       23,637




Net assets
   $ 11,255       $ 62,786

~~Other Dispositions~~ – In June 2013, the Company sold a water and wastewater utility system for net proceeds of $3,400. The sale resulted in the recognition of a gain on sale of these assets, net of expenses, of $1,025. The utility system represented approximately 0.04% of the Company’s total assets. This disposition has not been presented as discontinued operations in the Company’s consolidated financial statements as the Company does not believe that disclosure of this disposed water and wastewater utility system as discontinued operations is meaningful to the reader of the financial statements for making investment decisions, either individually or in the aggregate. The gain is reported in the consolidated statements of net income as a reduction to operations and maintenance expense.

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

Georgia.

The City of Fort Wayne, Indiana (the “City”) has authorized the acquisition by eminent domain of the northern portion of the utility system of one of the Company’s operating subsidiaries in Indiana (the “Northern Assets”). In January 2008, the Company reached a settlement with the City to transition the Northern Assets in February 2008 upon receipt

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

of the City’s initial valuation payment of $16,911. The settlement agreement specifically stated that the final valuation of the Northern Assets will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation. On February 12, 2008, the Company turned over the Northern Assets to the City upon receipt of the initial valuation payment. The proceeds received by the Company are in excess of the book value of the assets relinquished. No gain has been recognized due to the contingency over the final valuation of the assets. The net book value of the Northern Assets has been removed from the consolidated balance sheet and the difference between the net book value and the initial payment received has been deferred and is recorded in other accrued liabilities on the Company’s consolidated balance sheet. Once the contingency is resolved and the asset valuation is finalized, through the finalization of the litigation between the Company and the City, ~~of Fort Wayne,~~ the amounts deferred will be recognized in the Company’s consolidated statement of net income. On March 16, 2009, oral argument was held on certain procedural aspects with respect to the valuation evidence that may be presented and whether the Company is entitled to a jury trial. On October 12, 2010, the Wells County Indiana Circuit Court ruled that the Company is not entitled to a jury trial, and that the Wells County judge should review the City of Fort Wayne Board of Public Works’ assessment based upon a “capricious, arbitrary or an abuse of discretion” standard. The Company disagreed with the Court’s decision and appealed the Wells County Indiana Circuit Court’s decision to the Indiana Court of Appeals. On January 13, 2012, the Indiana Court of Appeals reached a decision upholding the Wells County Indiana Circuit Court decision. On February 10, 2012, the Company filed a petition for transfer requesting that the Indiana Supreme Court review the matter. On April 11, 2013, the Indiana Supreme Court ~~of Indiana~~ ruled that the statute at issue gives the Company the right to a full evidentiary hearing before a jury regarding the value of the assets and remanded the case to the trial court for a proceeding consistent with that ruling. The Company continues to evaluate its legal options with respect to this decision. Depending upon the outcome of all of the legal proceedings, including the planned transaction below, which would resolve this litigation, the Company may be required to refund a portion of the initial valuation payment, or may receive additional proceeds. The Northern Assets relinquished ~~represents~~represent approximately 0.4% of the Company’s total assets.

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

In addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public convenience and necessity” to acquire certain of the ~~Company’s~~Company's water utility system assets located in the southwest section of the City and in Allen County (the “Southern Assets”), and if negotiations with Fort Wayne officials were to fail, to condemn the Southern Assets. The first public hearing on the ordinance was held on January 22, 2013 and a subsequent hearing scheduled for February 5, 2013 was not held due to ongoing settlement discussions between the parties. On July 2, 2013, the Company’s operating subsidiary and the City signed a letter of intent, which among other items, addresses many of the terms by which the City would purchase the Company’s Southern Assets, will resolve the litigation between the Company and the City with respect to the Northern Assets, and will establish the terms by which the Company’s operating

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

subsidiary will treat wastewater sent to it by the City. The letter of intent states that the City agrees to pay the Company $50,100 for the Northern Assets and Southern Assets in addition to the $16,911 paid to the Company by the City in 2008 as an initial valuation payment for the Northern Assets (for a total payment of $67,011). The letter of intent is conditioned on the Company’s Board of Directors and City Council approving the final terms of the possible transaction, and the Company and the City entering into several definitive agreements that cover the subject matter of the letter of intent. On February 27, 2014, the Company’s Board of Directors authorized management to enter into agreements with the City on terms and conditions that are consistent with the July 2, 2013 letter of intent, for among other items, the sale of the Company’s Northern Assets and Southern Assets to the City. Further, the completion of the transaction is subject to regulatory requirements and approval. The planned sale of these operations is accounted for as businesses held for sale beginning in the first quarter of 2014. If this transaction is consummated, the Company will expand its sewer customer base inby accepting new wastewater from the City. The completion of the transaction is not expected to close until the ~~third~~fourth quarter of 2014. The Company continues to evaluate its legal and operational options on an ongoing basis.

~~Note 5~~

~~Capitalization~~

~~In October 2013,~~The operating results, cash flows, and financial position of the Company’s ~~operating subsidiary, Aqua Pennsylvania, Inc., issued $75,000 of first mortgage bonds, of which $25,000 is due~~operations named above, during the periods owned, have been presented in 2031, $25,000 in 2045, and $25,000 in 2046 with interest rates of 3.94%, 4.61%, and 4.62%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.

~~In October 2013,~~ the Company’s ~~Board~~consolidated statements of ~~Directors approved a resolution authorizing the Company to purchase, from time to time, up to 685,348 shares~~net income, consolidated statements of ~~its common stock~~cash flow, and consolidated balance sheets as discontinued operations. These operations were included in the ~~open market or through privately negotiated transactions. This authorization renewed~~Company’s “Regulated” segment.

A summary of discontinued operations presented in the ~~number~~consolidated statements of ~~shares that had remained, when affected for stock splits, from an existing~~net income include the following:



	Three Months Ended
	March 31,
	2014		2013
Operating revenues	$	1,579	$	7,493
Total operating expenses		673		5,020
Operating income		906		2,473
Other (income) expense:
Loss (gain) on sale		134		(6,451)
Other, net		-		(1)
Income from discontinued operations before income taxes		772		8,925
Provision for income taxes		314		3,224
Income from discontinued operations	$	458	$	5,701

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share ~~buy-back authorization from 1997.~~ amounts)

(UNAUDITED)

The ~~specific timing, amount~~assets and ~~other terms~~liabilities of ~~repurchases will depend on market conditions, regulatory requirements and other factors.~~discontinued operations presented in the consolidated balance sheets include the following:



	March 31,		December 31,
	2014		2013

Property, plant and equipment, at cost	$	39,747	$	39,976
Less: accumulated depreciation		8,753		8,872
Net property, plant and equipment		30,994		31,104
Current assets		814		1,362
Regulatory assets		442		460
Assets of discontinued operations held for sale		32,250		32,926

Current liabilities		15,209		16,212
Deferred income taxes and investment tax credits		1,725		1,308
Contributions in aid of construction		10,935		10,935
Other liabilities		1,168		1,194
Liabilities of discontinued operations held for sale		29,037		29,649

Net assets	$	3,213	$	3,277

In May 2013, the Company’s operating subsidiary, Aqua Ohio, Inc., issued $85,000 of first mortgage bonds, of which $35,000 is due in 2033, $30,000 in 2044, and $20,000 in 2048 with interest rates of 3.75%, 4.18%, and 4.43%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.]

Note 5 Capitalization

In May 2013, the Board of Directors of the Company approved a five-for-four stock split to be effected in the form of a 25% stock distribution to shareholders of record on August 16, 2013. Common shares outstanding do not include shares held by the Company in treasury. The new shares were distributed on September 1, 2013. Aqua America’s par value of $0.50 per share did not change as a result of the common stock distribution, and $17,655 was transferred from capital in excess of par value to common stock to record the stock split. All common share, per common share, stock unit, and per stock unit data, for all periods presented, has been adjusted to give effect to the stock split.

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

~~Note 6~~

~~Fair Value of Financial Instruments~~

Note 6 Fair Value of Financial Instruments

The Company follows the Financial Accounting Standards Board’s (“FASB”) accounting guidance for fair value measurements and disclosures, which defines fair value and establishes a framework for using fair value to measure assets and liabilities. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

used to measure fair value. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in non-active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

Level 3: inputs that are unobservable and significant to the fair value measurement.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. There have been no changes in the valuation techniques used to measure fair value or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended ~~September 30, 2013.~~March 31, 2014.

Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented. The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments.

The fair value of funds restricted for construction activity and loans payable are determined based on their carrying amount and utilizing Level 1 methods and assumptions. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, the carrying amount of the Company’s funds restricted for construction activity was ~~$11,626~~$47 and ~~$23,572,~~$47, respectively, which equates to their estimated fair value. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, the carrying amount of the Company’s loans payable was ~~$109,786~~$27,913 and ~~$80,383,~~$36,740, respectively, which equates to their estimated fair value. The fair value of cash and cash equivalents, which is comprised of a money market fund, is determined based on the net asset value per unit utilizing Level 2 methods and assumptions. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, the carrying amounts of the ~~Company’s~~Company's cash and cash equivalents was ~~$6,393~~$17,508 and ~~$5,521,~~$5,058, respectively, which equates to their fair value.

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

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



	March 31,		December 31,
	2014		2013
Carrying Amount	$	1,595,829	$	1,554,871
Estimated Fair Value		1,622,265		1,540,296

   September 30,    December 31,
   2013    2012
Carrying Amount
   $ 1,520,787       $ 1,588,992
Estimated Fair Value
   1,530,187       1,702,997

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 ~~$71,927~~$73,728 as of ~~September 30, 2013,~~March 31, 2014, and ~~$71,595~~$73,892 as of December 31, ~~2012.~~2013. Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rate increases. Portions of these non-interest bearing instruments are payable annually through ~~2028~~2029 and amounts not paid by the respective contract expiration dates become non-refundable. The fair value of these amounts would, however, be less than their carrying value due to the non-interest bearing feature.

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

~~Note 7~~

~~Net Income per Common Share~~

Note 7 Net Income per Common Share

Basic net income per common share is based on the weighted average number of common shares outstanding. Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share. The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation. The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share:

   Nine Months Ended    Three Months Ended
   September 30,    September 30,
   2013    2012    2013    2012
Average common shares outstanding during the period for basic computation
   175,964       173,981       176,483       174,596
Dilutive effect of employee stock-based compensation
   768       707       1,092       1,012








Average common shares outstanding during the period for diluted computation
   176,732       174,688       177,575       175,608



	Three Months Ended
	March 31,
	2014	2013
Average common shares outstanding during the period for basic computation	176,839	175,415
Dilutive effect of employee stock-based compensation	971	1,084
Average common shares outstanding during the period for diluted computation	177,810	176,499

For the ~~nine and~~ three months ended ~~September 30, 2013,~~March 31, 2014, all of the Company’s employee stock options were included in the calculations of diluted net income per share as the calculated cost to

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

exercise the stock options was less than the average market price of the Company’s common stock during these periods. For the ~~nine and~~ three months ended ~~September 30, 2012,~~March 31, 2013, employee stock options to purchase ~~534,940~~494,156 shares of common stock, were excluded from the calculations of diluted net income per share as the calculated cost to exercise the stock options was greater than the average market price of the Company’s common stock during these periods.

~~Note 8~~

~~Stock-based Compensation~~

Note 8 Stock-based Compensation

Under the Company’s 2009 Omnibus Equity Compensation Plan (the “2009 Plan”), as approved by the Company’s shareholders to replace the 2004 Equity Compensation Plan (the “2004 Plan”), stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors. The 2009 Plan authorizes 6,250,000 shares for issuance under the plan. A maximum of 50% of the shares available for issuance under the 2009 Plan may be issued pursuant to stock awards, stock units and other stock-based awards and the maximum number of shares that may be subject to grants under the 2009 Plan to any one individual in any one year is 250,000. Awards under the 2009 Plan are made by a committee of the Board of Directors. At ~~September 30, 2013, 4,647,025~~March 31, 2014, 4,483,011 shares underlying stock-based compensation awards were still available for grants under the 2009 Plan. No further grants may be made under the 2004 Plan.

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

Performance Share Units– A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the three year performance period specified in the grant, subject to certain exceptions through the respective vesting period, ~~which range from two to~~generally three years. Each grantee is granted a target award of PSUs, and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals. The following table provides compensation costs for stock-based compensation related to performance share units:



	Three Months Ended
	March 31,
	2014		2013
Stock-based compensation for performance share units within operations and maintenance expenses	$	1,002	$	715
Income tax benefit		410		291

   Nine Months Ended
September 30,    Three Months Ended
September 30,
   2013    2012    2013    2012
Stock-based compensation for performance share units within operations and maintenance expenses
   $ 2,723       $ 1,613       $ 1,044       $ 571

~~The following table summarizes nonvested PSU transactions for the nine months ended September 30, 2013:~~

   Weighted
   Number of Average
   Share Units Fair Value
Nonvested share units at beginning of period
   414,168    $ 18.82
Granted
   166,641    26.88
Performance criteria adjustment
   14,098    19.77
Forfeited
   (15,061 ) 26.22
Vested
   (18,000 ) 19.51
Share unit awards issued
   —      —


Nonvested share units at end of period
   561,846    $ 21.01

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The following table summarizes nonvested PSU transactions for the three months ended March 31, 2014:



	Number	Weighted
	of	Average
	Share Units	Fair Value

Nonvested share units at beginning of period	528,092	$	21.25
Granted	143,630		25.31
Performance criteria adjustment	16,927		19.45
Forfeited	(3,939)		22.23
Share units vested in prior period and issued in current period	18,000		19.51
Share units issued	(174,148)		18.93
Nonvested share units at end of period	528,562	$	22.99

A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions associated with the PSUs using the Monte Carlo valuation method. The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied. The per unit weighted-average fair value at the date of grant for PSUs granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013 was $25.31 and ~~2012 was~~ $26.88, ~~and $19.11,~~ respectively. The fair value of each PSU grant is amortized monthly into compensation expense on a straight-line basis over their respective vesting periods, ~~which range from 24 to~~generally 36 months. The accrual of compensation costs is based on our estimate of the final expected value of the award, and is adjusted as required for the portion based on the performance-based condition. The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense. As the payout of the PSUs includes dividend equivalents, no dividend yield assumption is required in calculating the fair value of the PSUs. The recording of compensation expense for PSUs has no impact on net cash flows.

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Restricted Stock Units –A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock. RSUs are eligible to be earned at the end of a specified restricted period, generally three years, beginning on the date of grant. In some cases the right to receive the shares is subject to certain performance goals established at the time the grant is made. The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense. The following table provides compensation costs for stock-based compensation related to restricted stock units:



	Three Months Ended
	March 31,
	2014		2013
Stock-based compensation for restricted stock units within operations and maintenance expenses	$	236	$	178
Income tax benefit		98		73

   Nine Months Ended
September 30,    Three Months Ended
September 30,
   2013    2012    2013    2012
Stock-based compensation for restricted stock units within operations and maintenance expenses
   $ 612       $ 468       $ 214       $ 167

The following table summarizes nonvested RSU transactions for the ~~nine~~three months ended ~~September 30, 2013:~~March 31, 2014:

   Number of
Stock Units Weighted
Average
Fair Value
Nonvested stock units at beginning of period
   85,597    $ 17.89
Granted
   48,133    23.28
Vested
   (19,500 ) 17.83
Forfeited
   (1,564 ) 20.78


Nonvested stock units at end of period
   112,666    $ 20.16



	Number	Weighted
	of	Average
	Stock Units	Fair Value

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

The per unit weighted-average fair value at the date of grant for RSUs granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013 was $24.80 and ~~2012 was~~ $23.28, ~~and $17.99,~~ respectively.

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Stock Options–The fair value of stock options is estimated at the grant date using the Black-Scholes option-pricing model. The following table provides compensation costs for stock-based compensation related to stock options granted in prior periods:

   Nine Months Ended
September 30,    Three Months Ended
September 30,
   2013    2012    2013    2012
Stock-based compensation for stock options within operations and maintenance expenses
   $ 30       $ 487       $ —         $ 122
Income tax benefit
   433       492       110       220



	Three Months Ended
		March 31,
	2014		2013

Stock-based compensation for stock options within operations and maintenance expenses	$	-	$	30
Income tax benefit		73		238

There were no stock options granted during the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 or ~~2012.~~2013.

The following table summarizes stock option transactions for the ~~nine~~three months ended ~~September 30, 2013:~~March 31, 2014:



		Weighted		Weighted
		Average		Average	Aggregate
		Exercise		Remaining	Intrinsic
	Shares	Price		Life (years)	Value
Outstanding at beginning of period	1,538,110	$	16.82
Forfeited	-		-
Expired	(2,707)		17.98
Exercised	(188,736)		14.61
Outstanding and exercisable at end of period	1,346,667	$	17.13	3.7	$	10,692

   Shares Weighted
Average
Exercise
Price    Weighted
Average
Remaining
Life (years)    Aggregate
Intrinsic
Value
Outstanding at beginning of period
   3,121,378    $ 16.65
Granted
   —      —
Forfeited
   —      —
Expired
   (17,189 ) 22.84
Exercised
   (1,517,804 ) 16.44



Outstanding and exercisable at end of period
   1,586,385    $ 16.79       3.9       $ 12,600

Restricted Stock– The following table provides compensation costs for stock-based compensation related to restricted stock:


	Three Months Ended
	March 31,
	2014		2013
Stock-based compensation for restricted stock within operations and maintenance expenses	$	92	$	92
Income tax benefit		38		38

   Nine Months Ended
September 30,    Three Months Ended
September 30,
   2013    2012    2013    2012
Stock-based compensation for restricted stock within operations and maintenance expenses
   $ 678       $ 1,444       $ 92       $ 312

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The following table summarizes nonvested restricted stock transactions for the ~~nine~~three months ended ~~September 30, 2013:~~March 31, 2014:



	Number	Weighted
	of	Average
	Shares	Fair Value

Nonvested shares at beginning of period	62,500	$	17.70
Granted	-		-
Vested	(31,250)		17.70
Forfeited	-		-
Nonvested shares at end of period	31,250	$	17.70

   Number of
Shares Weighted
Average
Fair Value
Nonvested shares at beginning of period
   147,160    $ 15.38
Granted
   16,000    25.09
Vested
   (100,660 ) 15.49
Forfeited
   —      —


Nonvested shares at end of period
   62,500    $ 17.70

~~The per unit weighted-average fair value at the date of grant for~~There was no restricted stock granted during the ~~nine~~three months ended ~~September 30, 2013 and 2012 was $25.09 and $18.47, respectively.~~March 31, 2014 or 2013.

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~Note 9~~

~~Pension Plans and Other Postretirement Benefits~~

Note 9 Pension Plans and Other Postretirement Benefits

The Company maintains a qualified defined benefit pension ~~plans,~~plan (the “Pension Plan”), a nonqualified pension ~~plans~~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 ~~costs:~~cost:



	Pension Benefits
	Three Months Ended
	March 31,
	2014		2013
Service cost	$	1,143	$	1,446
Interest cost		3,512		3,165
Expected return on plan assets		(4,305)		(3,693)
Amortization of prior service cost		69		57
Amortization of actuarial loss		500		2,016
Net periodic benefit cost	$	919	$	2,991

	Other
	Postretirement Benefits
		Three Months Ended
		March 31,
	2014		2013
Service cost	$	312	$	425
Interest cost		737		667
Expected return on plan assets		(683)		(560)
Amortization of prior service cost		(74)		(74)
Amortization of actuarial loss		82		345
Net periodic benefit cost	$	374	$	803

   Pension Benefits
   Nine Months Ended
September 30, Three Months Ended
September 30,
   2013 2012 2013 2012
Service cost
   $ 4,101    $ 3,662    $ 1,209    $ 1,258
Interest cost
   9,494    9,446    3,164    3,284
Expected return on plan assets
   (11,078 ) (9,994 ) (3,692 ) (3,595 )
Amortization of prior service cost
   171    208    57    69
Amortization of actuarial loss
   6,105    4,924    2,073    1,644
Capitalized costs
   (3,215 ) (2,781 ) (1,098 ) (998 )


Net periodic benefit cost
   $ 5,578    $ 5,465    $ 1,713    $ 1,662


   Other Postretirement Benefits
   Nine Months Ended
September 30, Three Months Ended
September 30,
   2013 2012 2013 2012
Service cost
   $ 1,188    $ 958    $ 338    $ 349
Interest cost
   1,956    1,906    622    665
Expected return on plan assets
   (1,694 ) (1,517 ) (574 ) (535 )
Amortization of transition obligation
   —      9    —      (9 )
Amortization of prior service cost
   (221 ) (202 ) (73 ) (98 )
Amortization of actuarial loss
   1,085    772    395    261
Amortization of regulatory asset
   —      69    —      1
Capitalized costs
   (569 ) (508 ) (191 ) (184 )


Net periodic benefit cost
   $ 1,745    $ 1,487    $ 517    $ 450

The Company made cash contributions of ~~$15,954~~$8,937 to its ~~defined benefit pension plans~~Pension Plan during the first ~~six~~three months of ~~2013, which completes~~2014, and intends to make cash contributions of $8,937 to the ~~Company’s 2013 cash contributions.~~Pension Plan during the remainder of 2014. In addition, the Company expects to make cash contributions of ~~$2,875~~$2,763, to the extent allowable for a tax deduction, for the funding of its other postretirement benefit plans during the remainder of ~~2013.~~2014.

In the first quarter of 2014 the Company offered a one-time voluntary lump sum window to certain eligible terminated vested participants in an effort to reduce its long-term obligations and plan volatility for its Pension Plan. In May 2014, the Pension Plan paid $11,417 to participants who elected to receive a lump sum distribution, which was funded from the existing Pension Plan assets.

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~Note 10~~

~~Water and Wastewater Rates~~

Note 10 Water and Wastewater Rates

During the first ~~nine~~three months of ~~2013,~~2014, the Company’s operating divisions in Ohio, Texas, ~~Ohio,~~New Jersey, Virginia, and ~~Virginia~~Indiana were granted base rate increases designed to increase total operating revenues on an annual basis by ~~$9,328.~~$2,715. Further, during the first ~~nine~~three months of ~~2013,~~2014, the Company’s operating divisions in Illinois and New Jersey ~~Ohio, and Illinois~~ received infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by ~~$3,027.~~$1,429.

In ~~August 2013,~~May 2014, the North Carolina Utilities Commission granted the Company’s operating subsidiary in North Carolina ~~filed an application with the North Carolina Utilities Commission~~a water and wastewater rate increase designed to increase ~~water and wastewater rates~~total operating revenue by ~~$8,611, or 19.2%,~~$2,471, on an annual basis. ~~The Company anticipates a final order to be issued by April 2014.~~

In February 2012, two of the Company’s operating divisions in Texas began to bill interim rates in accordance with authorization from the Texas Commission on Environmental Quality (the “TCEQ”). The additional revenue billed and collected prior to the TCEQ’s final ruling was subject to refund based on the outcome of the rate case. The rate case concluded with the issuance of an order on June 3, 2013, and no refunds of revenue previously billed and collected were required.

~~Note 11~~

~~Taxes Other than Income Taxes~~

Note 11 Taxes Other than Income Taxes

The following table provides the components of taxes other than income taxes:



	Three Months Ended
	March 31,
	2014		2013

Property	$	4,824	$	6,443
Capital stock		501		534
Gross receipts, excise and franchise		2,779		2,681
Payroll		2,654		2,420
Other		1,344		1,320
Total taxes other than income	$	12,102	$	13,398

   Nine Months Ended
September 30,    Three Months Ended
September 30,
   2013    2012    2013    2012
Property
   $ 19,355       $ 15,595       $ 6,357       $ 6,163
Capital stock
   1,600       2,393       488       745
Gross receipts, excise and franchise
   8,902       7,222       3,245       3,128
Payroll
   5,793       5,239       1,684       1,530
Other
   4,671       4,251       1,763       1,625








Total taxes other than income
   $ 40,321       $ 34,700       $ 13,537       $ 13,191

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~Note 12~~

~~Segment Information~~

Note 12 Segment Information

The Company has identified ~~twelve~~ten operating segments and has one reportable segment named the “Regulated” segment. The reportable segment is comprised of ~~ten~~eight operating segments for the Company’s water and wastewater regulated utility companies which are organized by the states where we provide these services. In addition, two segments are not quantitatively significant to be reportable and are comprised of the ~~businesses that provide sludge~~Company’s non-regulated subsidiaries: Aqua Resources, Inc. and Aqua Infrastructure LLC. Aqua Resources, Inc. provides water and wastewater services through operating and maintenance contracts with municipal authorities and other parties in close proximity to our utility companies’ service territories as well as offers, through a third party, water and sewer line repair service and protection solutions to households, liquid waste hauling ~~septage~~ and ~~grease services,~~disposal, backflow prevention, ~~services, certain~~construction, and other non-regulated water and wastewater ~~services, and~~services. Aqua Infrastructure LLC provides non-utility raw water supply services for ~~certain~~ firms, with which the Company enters into water supply contracts, in the natural gas ~~and oil~~ drilling industry. These two segments are included as a component of “Other” in the tables below. Also included in “Other” are corporate costs that have not been allocated to the Regulated segment and intersegment eliminations. Corporate costs include general and administrative expense, and interest expense.

The following table presents information about the Company’s ~~segment information for its continuing operations:~~reportable segment:



	Three Months Ended						Three Months Ended
	March 31, 2014						March 31, 2013
	Regulated		Other		Consolidated		Regulated		Other		Consolidated
Operating revenues	$	178,199	$	4,473	$	182,672	$	174,405	$	4,147	$	178,552
Operations and maintenance expense		68,456		3,230		71,686		65,410		2,384		67,794
Depreciation		30,881		100		30,981		29,510		(465)		29,045
Operating income		66,419		351		66,770		65,550		1,388		66,938
Interest expense, net of allowance for funds used during construction		16,804		1,339		18,143		16,951		1,772		18,723
Income tax expense (benefit)		6,087		(895)		5,192		7,352		(565)		6,787
Income (loss) from continuing operations		43,620		(1,219)		42,401		41,299		(435)		40,864
Capital expenditures		59,154		665		59,819		58,872		213		59,085

   Three Months Ended
September 30, 2013    Three Months Ended
September 30, 2012
   Regulated    Other Consolidated    Regulated    Other Consolidated
Operating revenues
   $ 199,882    $ 4,463 $ 204,345    $ 209,674    $ 4,891 $ 214,565
Operations and maintenance expense
   68,470    3,595 72,065    68,351    2,917 71,268
Depreciation
   30,081    107 30,188    28,764    (513 ) 28,251
Operating income
   87,117    263 87,380    98,503    2,032 100,535
Interest expense, net of AFUDC
   17,450    1,474 18,924    16,915    1,763 18,678
Income tax expense (benefit)
   5,740    (552 ) 5,188    32,682    (107 ) 32,575
Income (loss) from continuing operations
   64,010    (526 ) 63,484    48,971    1,313 50,284
   Nine Months Ended
September 30, 2013    Nine Months Ended
September 30, 2012
   Regulated    Other Consolidated    Regulated    Other Consolidated
Operating revenues
   $ 567,255    $ 12,780 $ 580,035    $ 556,847    $ 13,432 $ 570,279
Operations and maintenance expense
   202,909       8,325 211,234    190,276    9,388 199,664
Depreciation
   89,200       (229 ) 88,971    83,772    (1,036 ) 82,736
Operating income
   232,771       2,835 235,606    245,871    3,535 249,406
Interest expense, net of AFUDC
   51,746       4,620 56,366    50,401    4,499 54,900
Income tax expense (benefit)
   21,023       (1,657 ) 19,366    78,652    (1,342 ) 77,310
Income (loss) from continuing operations
   160,167       (1,904 ) 158,263    117,133    1,820 118,953
Capital expenditures
   215,230       832 216,062    262,104    728 262,832

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

   September 30,
2013    December 31,
2012
Total assets:

Regulated
   $ 4,858,111       $ 4,566,327
Other and eliminations
   215,987       292,190




Consolidated
   $ 5,074,098       $ 4,858,517


	March 31,		December 31,
	2014		2013
Total assets:
Regulated	$	4,938,191	$	4,893,573
Other and eliminations		161,576		158,244
Consolidated	$	5,099,767	$	5,051,817

~~Note 13~~

~~Commitments and Contingencies~~

Note 13 Commitments and Contingencies

The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved. As of ~~September 30, 2013,~~March 31, 2014, the aggregate amount of ~~$12,284~~$11,835 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 ~~September 30, 2013,~~March 31, 2014, estimates that approximately ~~$1,369~~$1,388 of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported in the Company’s consolidated balance sheet as deferred charges and other assets, net.

In addition to the aforementioned loss contingencies, the Company self-insures its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for these claims totaled ~~$1,771~~$1,965 at ~~September 30, 2013~~March 31, 2014 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.

Table of Contents

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

~~Note 14~~

~~Income Taxes~~

Note 14 Income Taxes

During the ~~nine~~three months ended ~~September 30, 2013,~~March 31, 2014, the ~~Company’s~~Company utilized $15,422 of its Federal net operating loss carryforward (“NOL”) ~~increased by $75,068.~~. In addition, during the ~~nine~~three months ended ~~September 30, 2013,~~March 31, 2014, the Company’s state NOL carryforward increased by ~~$161,769.~~$2,789. As of ~~September 30, 2013,~~March 31, 2014, the balance of the Company’s Federal NOL ~~is $290,653.~~was $242,671. The Company believes its Federal NOL carryforward is more likely than not to be recovered and requires no valuation allowance. As of ~~September 30, 2013,~~March 31, 2014, the balance of the Company’s state NOL ~~is $537,068,~~was $533,949, a portion of which iswas offset by a valuation allowance of ~~$7,715~~$5,229 because the Company does not believe the NOLs are more likely than not to be realized. The Company’s Federal and state NOL carryforwards begin to expire ~~2030~~2031 and ~~2021,~~2023, respectively. The Company has unrecognized tax positions that result in the associated tax benefit being unrecognized. The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a gross basis, of ~~$60,103~~$62,865 and ~~$84,822,~~$86,016, respectively, which results from the Company’s adoption in the third quarter of 2013 of the FASB’s accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amounts of the Company’s Federal and state NOL carryforwards prior to being reduced by the unrecognized tax positions ~~are $350,756~~were $305,536 and ~~$621,890,~~$619,965, respectively. The Company records its unrecognized tax benefit as a reduction to its deferred income tax liability.

~~On June 7,~~

In December 2012, the ~~Company’s~~Company changed its tax method of accounting for qualifying utility system repairs in Aqua Pennsylvania, ~~operating subsidiary~~Inc. (“Aqua Pennsylvania”) ~~reached a settlement agreement in its rate filing~~effective with the ~~Pennsylvania Public Utility Commission, which in addition to a water rate increase, provided~~tax year ended December 31, 2012 and for ~~the flow-through accounting treatment of certain income~~prior tax ~~benefits should Aqua Pennsylvania change its~~years. The tax accounting method was changed to permit the expensing of ~~certain~~qualifying utility asset improvement costs that ~~have historically been~~were previously being capitalized and depreciated for book and tax purposes (the “Repair Change”). In December 2012, Aqua Pennsylvania implemented the Repair Change, and recognized a tax deduction for 2012 infrastructure investments that were formerly capitalized for tax purposes, and the impact was recorded in the fourth quarter of 2012. During the third quarter of 2013, the Company recorded additional tax deductions for certain qualifying infrastructure improvements in connection with the preparation of its annual tax return filings, which resulted in both additional recognized and unrecognized tax benefits. In addition, the income tax benefits for qualifying capital expenditures made prior to 2012 (“catch-up adjustment”) have been deferred as of December 31, 2012 and, based on the settlement agreement, a ten-year amortization of the income tax benefits began in the first quarter of 2013. In accordance with the settlement agreement, the amortization is expected to reduce income tax expense during periods when certain qualifying parameters are met. As a result of the adoption of the Repair Change prior to the receipt of Aqua Pennsylvania’s next rate order, the Repair Change results in a substantial reduction in income tax expense and greater net income and cash flows. A portion of the additional tax deductions recognized in the third quarter of 2013 relate to a change in the Company’s tax method of accounting for certain qualifying utility system repairs in certain other operating divisions. These divisions currently do not employ a flow-through method of accounting and as such the change in the Company’s tax method of accounting in these other operating divisions had no impact on the Company’s effective income tax rate. The Company’s effective income tax rate for the first ~~nine months~~quarter of ~~2013~~2014 and ~~2012,~~2013, for its continuing operations, was 10.9% and ~~39.4%, respectively, and for the third quarter of 2013 and 2012, for its continuing operations, was 7.6% and 39.3%~~14.2%, respectively.

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

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

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

~~(UNAUDITED)~~

In September 2013, the Department of Treasury and the Internal Revenue Service issued “Guidance Regarding and Capitalization of Expenditures Related to Tangible Property” which contains standards for determining whether and when a taxpayer must capitalize costs incurred in acquiring, maintaining or improving tangible property. These regulations ~~will be~~are effective for the Company’s 2014 fiscal ~~year and early adoption is available.~~year. The Company ~~is currently reviewing~~has reviewed the regulations ~~to determine~~and concluded that the regulations will not have a material impact on the Company’s consolidated results of operations or consolidated financial ~~statements when they are fully adopted.~~

~~The following table provides the changes in the Company’s unrecognized tax benefits:~~position.

   2013
Balance at June 30,
   $ —
Increases in current period tax positions
   29,510


Balance at September 30,
   $ 29,510

~~The unrecognized tax benefits relate to the Company’s Repair Change, and the tax positions are attributable to temporary differences. As a result~~

Table of the regulatory treatment afforded the Repair Change in Pennsylvania and despite these positions being temporary differences, as of September 30, 2013, $9,023 of these tax benefits would have an impact on the Company’s effective income tax rate in the event that the Company does sustain all, or a portion, of its tax positions. The Company does not anticipate material changes to its unrecognized tax benefits within the next year.Contents

~~In April 2013, the Internal Revenue Service completed its examination of tax years 2010 and 2011. The statute of limitations for these tax years remains open until 2014 and 2015, respectively.~~

AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

As of March 31, 2014, the total gross unrecognized tax benefit was $28,850, of which $10,534, if recognized, would affect the Company’s effective tax rate as a result of the regulatory treatment afforded the Repair Change in Pennsylvania. At December 31, 2013, the Company had unrecognized tax benefits of $28,690. There was no unrecognized tax benefit at March 31, 2013 or December 31, 2012.

Accounting rules for uncertain tax positions specify that tax positions for which the timing of resolution is uncertain should be classified as long-term liabilities. Judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. Although the timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, the Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.

~~Note 15~~

~~Recent Accounting Pronouncements~~

Note 15 Recent Accounting Pronouncements

In ~~July 2013,~~April 2014, the FASB issued updated accounting guidance onwhich changes the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The update requires an entity to present in certain cases, an unrecognized tax benefit, or portion of an unrecognized tax benefit in the financial statementscriteria for determining which disposals can be presented as ~~a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement is available in this manner under the tax law.~~discontinued operations and modifies related disclosure requirements. The updated guidance is effective prospectively for reporting periods beginning after December 15, ~~2013,~~2014, with early adoption ~~permitted.~~available. The Company ~~early adopted~~will adopt the provisions of the updated guidance for its quarterly period beginning July 1, 2013, and the adoption of the revised guidance did not have a material impact on the Company’s consolidated results of operations or consolidated financial position.

~~In February 2013, the FASB issued updated~~ accounting guidance to improve the reporting of reclassifications out of accumulated other comprehensive income (“AOCI”). The update requires an entity to present information about the amounts reclassified from AOCI in their financial statements in either a single note or parenthetically on the face of the financial statements. The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted the provisions of the updated guidance for its quarterly reporting period beginning January 1, ~~2013,~~2015, and the Company does not expect the adoption of the ~~updated~~revised guidance ~~did not~~to have an impact on the Company’s consolidated results of operations or consolidated financial position.

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AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(In thousands of dollars, except per share amounts)

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

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: our belief in our ability to renew our short-term lines of credit; the impact and the actions we may need to take if we are unable to obtain sufficient capital; the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,”“intends,” “will,” “continue” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among others: the effects of regulation, abnormal weather, changes in capital requirements and funding, acquisitions, changes to the capital markets, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2012~~2013 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such report. As a result, readers are cautioned not to place undue reliance on any forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

General Information

Nature of Operations— - Aqua America, Inc. (“we”, “us”, or ~~“us”~~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, ~~Florida,~~ Indiana, ~~Virginia,~~ and ~~Georgia.~~Virginia. Our largest operating subsidiary, Aqua Pennsylvania, ~~Inc.,~~ provides water or wastewater services to approximately one-half of the total number of people we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 26 other counties in Pennsylvania. Our other regulated utility subsidiaries provide similar services in ~~nine~~seven other states. In addition, the Company’s non-regulated subsidiary, Aqua Resources, Inc., provides liquid waste hauling and disposal, water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to our utility companies’ service territories and offers, through a third party, water and sewer line repair service and protection solutions to households, backflow prevention,

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AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

construction, and other non-regulated water and wastewater services. The Company’s non-regulated subsidiary, Aqua Infrastructure, LLC, provides non-utility raw water supply services for firms, with which we enter into water supply contracts, in the natural gas drilling industry.

Aqua America, Inc., which prior to its name change in 2004 was known as Philadelphia Suburban Corporation, was formed in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania, Inc., formerly known as Philadelphia Suburban Water Company. Since the early 1990s, we have embarked on a growth-through-acquisition strategy focused on water and wastewater operations. Our most significant transactions to date have been the merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition of American Water Works Company, Inc.’s regulated operations in Ohio in 2012. Since the early 1990s, our business strategy has been primarily directed toward the regulated water and wastewater utility industry, where we have more than quadrupled the number of regulated customers we serve, and has extended our regulated operations from southeastern Pennsylvania to include operations in ~~nine~~seven other states.

Beginning in 2010, and ~~continuing into 2013,~~completed in 2014, we pursued a portfolio rationalization strategy to focus our operations in areas where we have critical mass and economic growth potential and to divest operations where limited customer growth opportunities exist, or where we are unable to achieve favorable operating results or a return on equity that we consider acceptable. In 2014, we sold our operation in Georgia; in 2013, we sold our operations in Florida; in 2012, we sold our operations in Maine and New ~~York,~~York; in 2011, we sold our operations in ~~Missouri,~~Missouri; and in 2010, we sold our operations in South Carolina. In connection with the sale of our New York and Missouri operations, we acquired additional utility systems (and customers) in Ohio and Texas, two of the larger states in ~~Aqua America’s~~our portfolio. Initiated in 2012, we began to market for sale our Florida utility operations and we believe the sale of our remaining operations in Florida will conclude at the end of 2013 or during the first quarter of 2014.

In July 2011, we entered into a definitive agreement to sell our operations in Maine, which served approximately 16,000 customers. The sale of our utility in Maine closed in January 2012, concluding our regulated operations in Maine. Also, in July 2011, we entered into a definitive agreement to purchase all of American Water Works Company, Inc.’s regulated operations in Ohio (the “Ohio acquisition”), which served approximately 59,000 customers, and to simultaneously sell our regulated water and wastewater operations in New York, which served approximately 51,000 customers. In May 2012, we completed this transaction, concluding our regulated operations in New York. The Ohio acquisition was initially financed by short-term debt. The proceeds from the dispositionsOne of our operations ~~in New York and Maine were used to paydown a portion of our short-term debt and other general corporate purposes. In September 2012, we began to market for sale our water and wastewater operations~~sold in Florida, which ~~served~~was completed in March 2013, and represented approximately 38,000 customers, and our waste water treatment facility in Georgia. In March and April 2013, we completed the sale of certain of our water and wastewater utility systems in Florida totaling approximately 67%8% of our customers served in Florida, and in June 2013, we entered into a definitive agreement to sell our remaining Florida water and wastewater systems in Sarasota, Florida to Sarasota County. In July 2013, we received a threat of a legal challenge to this transaction that may have delayed or ultimately terminated this transaction; however, in September 2013, we reached a settlement of the matter,remains subject to customary regulatory review, for which we expect to receive the ~~satisfaction of certain conditions at settlement. We believe that we will~~regulator’s decision by midyear 2014. If the regulator does not approve this sale, the purchase price would be ~~able~~refunded and the assets sold would revert back to ~~complete~~ the sale of these assets at either the end of 2013 or during the first quarter of 2014, which will conclude the Company’s operations in Florida. We have accounted for the sale of our water and wastewater operations in New York, Maine, and Florida and planned disposition of our wastewater operation in Georgia as discontinued operations.

~~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)~~

Company.

In January 2008, we reached a settlement agreement with the City of Fort Wayne, Indiana, (the “City”) to transition the northern portion of the utility system of one of the Company’s operating subsidiaries in Indiana (the “Northern Assets”), upon receipt of the City’s initial valuation payment of $16,911. The settlement agreement specifically stated that the final valuation of the Northern Assets will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation. In February 2008, we turned over the Northern Assets to the City upon receipt of the initial valuation payment. The proceeds received by the Company are in excess of the book value of the assets relinquished. No gain has been recognized due to the contingency over the final valuation of the assets. In December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public convenience and necessity” to acquire certain of our water utility assets located in the southwest section of the City and in Allen County (the “Southern Assets”), and if negotiations with Fort Wayne officials were to fail, to condemn the Southern

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AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

Assets. In July 2013, we signed a letter of intent with the City, which among other items, addresses many of the terms by which the City will purchase our Southern Assets, will resolve the litigation between us and the City with respect to the valuation of the former Northern Assets, and will establish the terms by which our Indiana operating subsidiary will treat wastewater sent to it by the City. The letter of intent states that the City agrees to pay us $50,100 for the Northern Assets and Southern Assets in addition to the $16,911 paid to us by the City in 2008 as an initial valuation payment for the Northern Assets (for a total payment of $67,011). The letter of intent is conditioned on our Board of Directors and City Council approving the final terms of the possible transaction, and the Company and the City entering into several definitive agreements that cover the subject matter of the letter of intent. On February 27, 2014, the Company’s Board of Directors authorized management to enter into agreements with the City on terms and conditions that are consistent with the July 2, 2013 letter of intent, for among other items, the sale of the Company’s Northern Assets and Southern Assets to the City. Further, the completion of the transaction is subject to regulatory requirements and approval. If this transaction is consummated, the Company will expand its sewer customer base inby accepting new wastewater from the City. The completion of the transaction is not expected to close until the ~~third~~fourth quarter of 2014. We continue to evaluate our legal and operational options on an ongoing basis.

~~In addition, we provide water~~

We have accounted for sales of our operations in Georgia and ~~wastewater service through operating~~Florida, and ~~maintenance contracts with municipal authorities and other parties close to~~planned disposition of our ~~utility companies’ service territories,~~Southern Assets in Indiana as well as sludge hauling, septage and grease services, backflow prevention services, certain other non-regulated water and wastewater services, and non-utility raw water supply services for certain firms in the natural gas and oil drilling industry.discontinued operations.

In 2011, one of our subsidiaries entered into a joint venture with a firm that operates natural gas pipelines and processing plants for the construction and operation of a private pipeline system to supply ~~non-utility~~ raw water to ~~certain~~ natural gas well drilling operations in Pennsylvania. The operation of the private pipeline system commenced in the second quarter of 2012 and marks an expansion of our growth venture in serving the raw water needs of firms in the natural gas ~~and oil~~ drilling industry.

~~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 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 ~~2013,~~2014, we had ~~$216,062~~$59,819 of capital expenditures, issued ~~$188,321~~$73,192 of long-term debt, and repaid debt and made sinking fund contributions and other loan repayments of ~~$258,295.~~$31,874. The capital expenditures were related to improvements to treatment plants, new and rehabilitated water mains, tanks, hydrants, and service lines, well and booster improvements, and other enhancements and improvements. The issuance of ~~$188,321~~$73,192 of long-term debt was comprised principally of the funds borrowed under our revolving credit facility of $99,000 and the issuance of $85,000 of first mortgage bonds. The repayment of debt and sinking fund contributions and other loan repayments of $258,295 were comprised of the repayment of funds borrowed under our revolving credit facility of $194,000 and sinking fund contributions and other loan repayments of $64,295.$72,000.

At ~~September 30, 2013~~March 31, 2014 we had ~~$6,393~~$17,508 of cash and cash equivalents compared to ~~$5,521~~$5,058 at December 31, ~~2012.~~2013. During the first ~~nine~~three months of ~~2013,~~2014, we used the proceeds from the issuance of long-term debt, internally generated funds, the sale of certain water and wastewater

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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)

utility systems, the sale of other assets, and the sale or issuance of common stock through our equity compensation plan, ~~and dividend reinvestment plan,~~ to fund the cash requirements discussed above and to pay dividends.

At ~~September 30, 2013,~~March 31, 2014, our $150,000 unsecured revolving credit facility, which expires in March 2017, had ~~$120,040~~$53,434 available for borrowing. At ~~September 30, 2013,~~March 31, 2014, we had short-term lines of credit of $160,500, of which ~~$50,714~~$132,587 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 three banks, which is used to provide working capital, and as of ~~September 30, 2013, $5,295~~March 31, 2014, $77,328 was available for borrowing.

Our short-term lines of credit of $160,500 are subject to renewal on an annual basis. Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be. The United States credit and liquidity crisis that occurred in 2008 and 2009 caused substantial volatility in capital markets, including credit markets and the banking industry, generally reduced the availability of credit from financing sources, and could reoccur in the future. If in the future, our credit facilities are not renewed or our short-term borrowings are called for repayment, we would have to seek alternative financing sources; however, there can be no assurance that these alternative financing sources would be available on terms acceptable to us. In the event we are not able to obtain sufficient capital, we may need to reduce our capital expenditures and our ability to pursue acquisitions that we may rely on for future growth could be impaired.

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 ~~and common stock~~ 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.

~~AQUA AMERICA, INC. AND SUBSIDIARIES~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

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

On June 7, 2012, the Company’s Pennsylvania operating subsidiary, (“Aqua ~~Pennsylvania”)~~Pennsylvania, reached a settlement agreement in its rate filing with the Pennsylvania Public Utility Commission, which in addition to a water rate increase, provided for the flow-through accounting treatment of certain income tax benefits upon Aqua Pennsylvania changing its tax accounting method to permit the expensing of certain utility asset improvement costs that have historically been capitalized and depreciated for book and tax purposes (the “Repair Change”). In December 2012, Aqua Pennsylvania implemented the Repair Change. During the third quarter of 2013, we recorded additional tax deductions for certain qualifying infrastructure improvements in connection with the preparation of our annual tax return filings, which resulted in both additional recognized and unrecognized tax benefits. As a result of the adoption of the Repair Change prior to the receipt of Aqua Pennsylvania’s next rate order, the Repair Change results in a substantial reduction in income tax expense and greater net income and cash flow, and as a result allowed the Company to suspend its Distribution System Improvement Charges (“DSIC”) in 2013 and lengthen the amount of time until the next Aqua Pennsylvania rate case is filed. A portion of the additional tax deductions recognized in the third quarter of 2013 relate to a change in our tax method of accounting for certain qualifying utility system repairs in certain other operating divisions. These divisions currently do not employ a flow-through method of accounting and as such the change in the Company’s tax method of accounting in these other operating divisions had no impact on our effective income tax rate.

~~In May 2013, the Board~~

Table of Directors of the Company approved an approximate 9% increase to the Company’s quarterly cash dividend effective with the September 1, 2013 dividend payment. The Board of Directors declared a dividend of $0.152 per share for the September 1, 2013 dividend, up from $0.14 per share as compared to the Company’s dividend paid on June 1, 2013. In addition, the Board of Directors approved a five-for-four stock split which was effected in the form of a 25% stock distribution on September 1, 2013 to shareholders of record on August 16, 2013. Aqua America’s par value of $0.50 per share did not change as a result of the common stock distribution, and as a result, on the distribution date $17,655 was transferred from capital in excess of par value to common stock to record the stock split.Contents

In October 2013, the Board of Directors of the Company approved a resolution authorizing the Company to purchase, from time to time, up to 685,348 shares of its common stock in the open market or through privately negotiated transactions. This authorization renewed the number of shares that had remained, when affected for stock splits, from an existing share buy-back authorization from 1997. The specific timing, amount and other terms of repurchases will depend on market conditions, regulatory requirements and other factors.

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

Results of Operations

~~Results of Operations~~

Analysis of First ~~Nine Months~~Quarter of ~~2013~~2014 Compared to First ~~Nine Months~~Quarter of ~~2012~~2013

Unless specifically noted, the following discussion of the Company’s results of operations for the first ~~nine months~~quarter of ~~2013~~2014 refers to the Company’s results of operations from continuing operations.

Revenues increased ~~$9,756~~by $4,120 or ~~1.7%~~2.3% primarily due to ~~additional revenues associated with~~ increased water and wastewater rates of ~~$25,060~~$1,401, an increase in customer water consumption, and additional water and wastewater revenues of ~~$15,245~~$645 associated with a larger customer base due to acquisitions, offset by a decrease in customer water consumption and a decrease in infrastructure rehabilitation surcharges of $10,804. The decrease in customer water consumption is largely due to unfavorable weather conditions in many of our service territories during the second and third quarters of 2013 and increases in water conservation awareness by our customers. The decrease in infrastructure rehabilitation surcharges results primarily from the January 1, 2013 suspension of Aqua Pennsylvania’s DSIC as a result of the implementation of the Repair Change.acquisitions.

Operations and maintenance expenses increased by ~~$11,570~~$3,892 or ~~5.8%~~5.7% primarily due to additional operating costs of $2,216 associated with severe winter weather conditions experienced in many of our service territories, the effect of the favorable recognition in the first quarter of 2013 of a legal settlement received of $871, and operating costs associated with acquired utility systems ~~and other growth ventures~~ of $8,095, the effect of the recognition in the second quarter of 2012 of a regulatory asset resulting from a completed rate case which when compared to the first nine months of 2013 resulted in an increase to operations and maintenance expense by $3,356, and normal increases in other operating costs, offset by a decrease in water production costs of $2,620 attributed to decreased customer water consumption in the second and third quarters of 2013 and the June 2013 gain on the sale of a utility system of $1,025.$292.

Depreciation expense increased ~~$6,235~~by $1,936 or ~~7.5%~~6.7% due to the utility plant placed in service since ~~September 30, 2012, and the utility plant added due to our Ohio acquisition in May of 2012.~~March 31, 2013.

Taxes other than income taxes ~~increased~~decreased by ~~$5,621~~$1,296 or ~~16.2%~~9.7% primarily due to ~~an increase~~a decrease in property taxes of ~~$3,760~~$1,619 associated with a reduction in the property tax rate assessed for our Ohio acquisition, an increase in gross receipts, excise and franchise taxes of $1,680 due primarily to our Ohio acquisition as well as the effect of a favorable adjustment recorded in the first quarter of 2012 related to gross receipts, excise and franchise taxes for one of our operating subsidiaries of $824 which had the effect of increasing the first nine months of 2013’s taxes other than income taxes.subsidiary.

Allowance for funds used during construction (“AFUDC”) ~~decreased~~increased by ~~$2,016~~$615 primarily due to ~~a decrease~~the usage of equity funds in the ~~average balance~~capitalization rate, which are a component of ~~proceeds held from tax-exempt bond issuances that are restricted to funding certain capital projects.~~

~~Gain on sale of other assets totaled $121 during~~ the ~~first nine months of 2013 and $826 during the first nine months of 2012. The decrease of $705 is principally due to the timing of sales of an equity investment, land and other property.~~

~~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)~~

AFUDC rate.

Equity loss in joint venture totaled $1,732 during the first nine months of 2013, or a decrease of $2,663 as compared to the first nine months of 2012, and reflects a decline in water sales, due to sluggish well drilling activity, in connection with serving the raw water needs of certain firms in the natural gas and oil drilling industry.

Our effective income tax rate was 10.9% ~~during~~in the first ~~nine months~~quarter of ~~2013~~2014 and ~~39.4% during~~14.2% in the first ~~nine months~~quarter of ~~2012.~~2013. The effective income tax rate decreased due to ~~Aqua Pennsylvania’s adoption~~an increase in ~~December 2012~~Repair Change tax deductions in the first quarter of 2014 as compared to the ~~Repair Change.~~first quarter of 2013. The ~~Repair Change~~repair change reduced the Company’s first quarter 2014 and 2013 income tax expense ~~for the first nine months of 2013~~ due to the flow-through treatment afforded by the Pennsylvania Public Utility Commission’s June 2012 rate order, thereby increasing net income. ~~There was no corresponding Repair Change tax deduction in the first nine months of 2012, as the adoption of the Repair Change began in the fourth quarter of 2012.~~

Income from continuing operations increased by ~~$39,310~~$1,537 or ~~33.0%~~3.8%, ~~in comparison to the same period in 2012~~ primarily as a result of the factors described above. On a diluted per share basis, income from continuing operations increased ~~$0.22~~by $0.01, reflecting the change in income from continuing operations and a ~~1.2% increase in the average number of common shares outstanding.~~

Income from discontinued operations decreased by $5,550 or $0.03 per diluted share, in comparison to the same period in 2012 primarily as a result of the effect of the prior year recognition of the gain on sale of our Maine operating subsidiary net of income taxes of $10,821, offset by the net gain on sale recognized on the sales of our Florida operations in 2013, net of income taxes, of $3,555 and the effect of the prior recognition of charges incurred from the disposal of our New York subsidiary of $2,069.

Net income attributable to common shareholders increased by $33,760 or 26.0%, in comparison to the same period in 2012 primarily as a result of the factors described above. On a diluted per share basis, earnings increased $0.19 reflecting the change in net income attributable to common shareholders and a 1.2%0.7% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through our equity compensation ~~plan and dividend reinvestment~~ plan.

~~Analysis of Third Quarter of 2013 Compared to Third Quarter of 2012~~

~~Unless specifically noted, the following discussion~~Income from discontinued operations decreased by $5,243 primarily as a result of the ~~Company’s results~~effect of ~~operations for~~ the ~~third~~recognition in the first quarter of 2013 ~~refers to~~of the ~~Company’s results~~gain on sale of ~~operations from continuing operations.~~

Revenues decreased $10,220 or 4.8% primarily due to a decrease in customer water consumption offset by additional water and wastewater revenues of $1,443 associated with a larger customer base due to acquisitions and additional revenues associated with increased water and wastewater rates of $899. The decrease in customer water consumption is largely due to unfavorable weather conditions in manycertain of our ~~service territories during the third quarter~~Florida operations net of ~~2013 and increases in water conservation awareness by our customers.~~income taxes of $4,193.

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AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(In thousands of dollars, except per share amounts)

~~Operations and maintenance expenses increased by $797 or 1.1% primarily due~~Net income attributable to operating costs associated with acquired utility systems and other growth ventures of $658, and normal increases in other operating costs, offset by a decrease in water production costs of $1,065 attributed to decreased customer water consumption during the third quarter of 2013.

~~Depreciation expense increased $1,937 or 6.9% due to the utility plant placed in service since September 30, 2012.~~

Taxes other than income taxes increased by $346 or 2.6% primarily due to an increase in property taxes of $194 associated with our Ohio acquisition, an increase in payroll taxes of $154, an increase in other taxes of $138 primarily due to a rate increase for fees assessed for the pumping of water in Texas, and an increase in gross receipts, excise and franchise taxes of $117, offset by a decrease in capital stock taxes of $257 associated with a decrease in capital stock taxes assessed for our Pennsylvania subsidiary.

~~AFUDC~~common shareholders decreased by ~~$493 primarily due to a decrease in the average balance of proceeds held from tax-exempt bond issuances that are restricted to funding certain capital projects.~~

Equity earnings in joint venture decreased $604 due to a decline in water sales, associated with sluggish well drilling activity, in connection with serving the raw water needs of certain firms in the natural gas and oil drilling industry.

Our effective income tax rate was 7.6% in the third quarter of 2013 and 39.3% in the third quarter of 2012. The effective income tax rate decreased due to Aqua Pennsylvania’s adoption in December 2012 of the Repair Change. The Repair Change reduced the Company’s third quarter 2013 income tax expense due to the flow-through treatment afforded by the Pennsylvania Public Utility Commission’s June 2012 rate order, thereby increasing net income. There was no corresponding Repair Change tax deduction in the third quarter of 2012, as the adoption of the Repair Change began in the fourth quarter of 2012.

~~Income from continuing operations increased by $13,200~~$3,706 or ~~26.3%, in comparison to the same period in 2012~~8.0% primarily as a result of the factors described above. On a diluted per share basis, ~~income from continuing operations increased $0.07,~~earnings decreased by $0.02 reflecting the change in net income ~~from continuing operations~~attributable to common shareholders and a ~~1.1%~~0.7% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through our equity compensation ~~plan and our dividend reinvestment~~ plan.

Income from discontinued operations decreased by $242 in comparison to the same period in 2012 primarily as a result of the sales of certain of our Florida operations completed in the first and second quarters of 2013.

~~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)~~

Net income attributable to common shareholders increased by $12,958 or 25.6%, in comparison to the same period in 2012 primarily as a result of the factors described above. On a diluted per share basis, earnings increased $0.07 reflecting the change in net income attributable to common shareholders and a 1.1% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through our equity compensation plan and dividend reinvestment plan.

Impact of Recent Accounting Pronouncements

We describe the impact of recent accounting pronouncements in Note 15,Recent Accounting Pronouncements, of the consolidated financial ~~statements.~~statements in this report.

~~Item 3.~~ ~~Quantitative and Qualitative Disclosures About Market Risk~~

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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, ~~2012.~~2013. Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013 for additional information.

Item 4. Controls and Procedures

~~Item 4.~~

~~Controls and Procedures~~

(a)

~~(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 ~~SEC’s~~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~~Other Information

~~Item 1.~~

~~Legal Proceedings~~

Item 1. Legal Proceedings

There are various legal proceedings in which we are involved. Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings, other than as set forth below, to which we or any of our subsidiaries is a party or to which any of our properties is the subject that we believe are material or are expected to have a material adverse effect on our financial position, results of operations or cash flows. Dollar amounts disclosed is this section, Item 1. Legal Proceedings are presented in whole dollars, not thousands of dollars.

The City of Fort Wayne, Indiana (the “City”) authorized the acquisition by eminent domain of the northern portion of the utility system of one of the Company’s

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operating subsidiaries in Indiana (the “Northern Assets”). In January 2008, we reached a settlement with the City to transition the Northern Assets in February 2008 upon receipt of the City’s initial valuation payment of $16,910,500. The settlement agreement specifically stated that the final valuation of the Northern Assets will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation. On February 12, 2008, we turned over the Northern Assets to the City upon receipt of the initial valuation payment. The proceeds received by the Company are in excess of the book value of the assets relinquished. No gain has been recognized due to the contingency over the final valuation of the assets. The net book value of the Northern Assets has been removed from the consolidated balance sheet and the difference between the net book value and the initial payment received has been deferred and is recorded in other accrued liabilities on the Company’s consolidated balance sheet. Once the contingency is resolved and the asset valuation is finalized, through the finalization of the litigation between the Company and the City ~~of Fort Wayne,~~ the amounts deferred will be recognized in the Company’s consolidated income statement. On March 16, 2009, oral argument was held before the Allen County Circuit Court on certain procedural aspects with respect to the valuation evidence that may be presented and whether we are entitled to a jury trial. On October 12, 2010, the Wells County Indiana Circuit Court ruled that the Company is not entitled to a jury trial, and that the Wells County judge should review the City of Fort Wayne Board of Public Works’ assessment based upon a “capricious, arbitrary or an abuse of discretion” standard. The Company appealed the Wells County Indiana Circuit Court’s decision to the Indiana Court of Appeals. On January 13, 2012, the Indiana Court of Appeals reached a decision upholding the Wells County Indiana Circuit Court decision. On February 10, 2012, the Company filed a petition for transfer requesting that the Indiana Supreme Court review the matter. On April 11, 2013, the Indiana Supreme Court ~~of Indiana~~ ruled that the statute at issue gives the Company the right to a full evidentiary hearing before a jury regarding the value of the assets and remanded the case to the trial court for a proceeding consistent with that ruling. The Company continues to evaluate its legal options with respect to this decision. Depending upon the outcome of all of the legal proceedings, including the planned transaction below, which would resolve this litigation, the Company may be required to refund a portion of the initial valuation payment, or may receive additional proceeds.

In addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public convenience and necessity” to acquire certain of the Company’s water utility system assets located in the southwest section of the City and in Allen County (the “Southern Assets”) and, if negotiations with Fort Wayne officials were to fail, to condemn the Southern Assets. The first public hearing on the ordinance was held on January 22, 2013 and a subsequent hearing scheduled for February 5, 2013 was not held due to ongoing settlement discussions between the parties. On July 2, 2013, the Company’s operating subsidiary and the City signed a letter of intent, which among other items, addresses many of the terms by which the City will purchase the Company’s Southern Assets, which will resolve the litigation between the Company and the City with respect to the Northern Assets, and will establish the terms by which the Company will treat wastewater sent to it by the City.

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The letter of intent states that the City agrees to pay the Company $50,100,000 for the Northern Assets and Southern Assets in addition to the $16,910,500 paid to the Company by the City in 2008 as an initial valuation payment for the Northern Assets (for a total cost of $67,010,500). The letter of intent is conditioned on the Company’s Board of Directors and City Council approving the final terms of the possible transaction, and the Company and the City entering into several definitive agreements that cover the subject matter of the letter of intent. On February 27, 2014, the Company’s Board of Directors authorized management to enter into agreements with the City on terms and conditions that are consistent with the July 2, 2013 letter of intent, for among other items, the sale of the Company’s Northern Assets and Southern Assets to the City. Further, the completion of the transaction is subject to regulatory requirements and approval. If this transaction is consummated, the Company will expand its sewer customer based inby accepting new wastewater from the City. The completion of the transaction is not expected to close until the ~~third~~fourth quarter of 2014. The Company continues to evaluate its legal and operational options on an ongoing basis.

An appeal of a jury verdict for one of the Company’s subsidiaries, Aqua Utilities Florida, Inc., by a husband and wife who lived in a house abutting a percolation pond at a wastewater treatment plant owned by the Company’s subsidiary in Pasco County, Florida was voluntarily dismissed by the plaintiffs in 2011. The lawsuit was originally filed in August 2006 in the circuit court for the Sixth Judicial Circuit in and for Pasco County, Florida and has been amended several times by the plaintiffs. The lawsuit alleged our subsidiary was negligent in the design, operation and maintenance of the plant, resulting in bodily injury to the plaintiffs and various damages to their property. Subsequent amendments to the complaint included additional counts alleging trespass, nuisance, and strict liability. A trial of this matter during January 2011 resulted in a judicial dismissal of the count for strict liability and jury verdicts in favor of the Company on the remaining counts. On June 16, 2011, the plaintiffs agreed to dismiss their appeals and to release all claims against our subsidiary and the Company, which resulted in the conclusion of the original plaintiffs’ litigation against our subsidiary. In the third quarter of 2008, thirty-six additional plaintiffs, associated with approximately eight other homes in the area, filed a second lawsuit with the same court and represented by the same attorneys making similar allegations against our subsidiary with respect to the operation of the facility. The court has severed the litigation so that the plaintiffs will be grouped by the houses in which they lived and a separate trial will be held for each of the households. Some of these plaintiffs testified in the trial of the original lawsuit in which all allegations were resolved in the Company’s favor. The claims from the first of these households were expected to go to trial in May 2013. However, the parties have entered into a confidential comprehensive settlement agreement that has resulted in the court enforcing the settlement agreement and concluding the matter with prejudice. The settlement is covered by the Company’s insurance coverage. At this time, the Company’s reserves are adequate and the Company believes that the estimated amount of any potential loss would not be material to the Company’s consolidated results of operations or consolidated financial condition.

One of the Company’s subsidiaries, South Haven Sewer Works, acquired in 2008, has been operating under a Consent Decree with the ~~EPA~~United States Environmental Protection Agency (“EPA”) and the United States Department of Justice (“Department of Justice”) entered into in 2003 while under ownership of a previous owner. Although substantial improvements to the system have been made to significantly reduce the number of sanitary sewer overflows at the sewer system since the Company’s acquisition of the subsidiary, the EPA and Department of Justice proposed revisions to the Consent Decree to address purported sanitary sewer overflow violations since the date of the original Consent Decree. On April 15, 2013, the Company’s subsidiary, ~~and~~ the EPA, and the Department of Justice submitted a proposed modification of the Consent Decree for approval by the Northern District of Indiana USU.S. District Court. The Court entered the modification on April 25, 2013. The modification includes the provision of operational compliance and implementation of a Capacity, Management, Operations, and Maintenance program for one year and aan agreed civil penalty in the amount of ~~$254,250.~~$254,250, which was paid by the Company in May 2013. The Company had withheld payment of a certain amount of shares payable to the sellers as a contingent indemnification offset related to the proceedings. Pursuant to further agreement with the sellers, the Company retained a portion of those shares in an amount covering the stipulated penalty amounts and anticipated attendant costs, and released a certain number of shares to the sellers. The Company intends to release a final designated amount of shares to the seller that were withheld to cover contingent increases in the absence of such contingent increases.

~~Item 1A.~~

~~Risk Factors~~

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, ~~2012 (“Form 10-K”)~~2013 under “Part 1, Item 1A – Risk Factors.”

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

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

The following table summarizes ~~Aqua America’s~~the Company’s purchases of its common stock for the quarter ended ~~September 30, 2013:~~March 31, 2014:

   Issuer Purchases of Equity Securities
         Total    Maximum
         Number of    Number of
         Shares    Shares
         Purchased    that May
         as Part of    Yet be
   Total       Publicly    Purchased
   Number    Average    Announced    Under the
   of Shares    Price Paid    Plans or    Plan or
Period
   Purchased (1)    per Share    Programs    Programs (2)
July 1 – 31, 2013
   10,706       $ 25.37       —         685,348
August 1 – 31, 2013
   25,106       $ 25.69       —         685,348
September 1 – 30, 2013
   —         $ —         —         685,348








Total
   35,812       $ 25.60       —         685,348


	Issuer Purchases of Equity Securities
				Total	Maximum
				Number of	Number of
				Shares	Shares
				Purchased	that May
				as Part of	Yet be
	Total			Publicly	Purchased
	Number	Average		Announced	Under the
	of Shares	Price Paid		Plans or	Plan or
Period	Purchased (1)	per Share		Programs	Programs (2)

January 1-31, 2014	7,409	$	23.45	-	685,348
February 1-28, 2014	72,552	$	24.78	-	685,348
March 1-31, 2014	-	$	-	-	685,348
Total	79,961	$	24.65	-	685,348

~~(1)~~

(1)

These amounts consist of ~~6,985~~the following: (a) shares we ~~purchased~~acquired from ~~shareholders for the fractional shares that would otherwise have been issued in connection~~employees associated with the ~~September 1, 2013~~withholding of shares to pay certain withholding taxes upon the vesting of performance share and restricted stock ~~split,~~units; and (b) shares we ~~purchased~~acquired from employees who elected to pay the exercise price of their stock options (and then hold shares of the stock) upon exercise by delivering to us ~~(and, thus, selling)~~ shares of ~~Aqua America~~our common stock in accordance with the terms of our equity compensation plans that were previously approved by our shareholders and disclosed in our proxy statements. ~~This feature~~These features of our equity compensation ~~plan is~~plans are available to all employees who receive stock-based compensation under the plans. We ~~purchased~~acquired these shares at their fair market value, as determined by reference to the closing price of our common stock on the day of vesting of the restricted stock awards or on the day prior to the option exercise.

~~(2)~~

(2)

On October 4, 2013, our Board of Directors approved a resolution authorizing the purchase of up to 685,348 shares. This authorization renewed the number of shares that had remained, when affected for stock splits, from an existing buy-back authorization from 1997. The program has no fixed expiration date.

~~Item 6.~~ ~~Exhibits~~

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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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SIGN~~SIGNATURES~~ATURES

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.

May 8, 2014


~~November 8, 2013~~
				Aqua America, Inc.
					Registrant



	/s/Nicholas DeBenedictis
		Nicholas DeBenedictis
			~~Nicholas DeBenedictis~~
			Chairman, President and
			Chief Executive Officer



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

~~EXHIBIT INDEX~~

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EXHIBIT INDEX


Exhibit No.		Description
10.47	Form of Performance Share Unit Grant Agreement for Executive Officers and Senior Officers
~~31.1~~ 10.48	Form of Performance Share Unit Grant Agreement for Managers
10.49	Form of Restricted Stock Unit Grant Agreement for Executive Officers and Senior Officers
10.50	Form of Restricted Stock Unit Grant Agreement for Managers
10.51	Form of Performance Share Unit Grant Agreement for Chief Executive Officer
10.52	Form of Restricted Stock Unit Grant Agreement for Chief Executive Officer
31.1	Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934.
31.2
~~31.2~~		Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934.
32.1
~~32.1~~		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.
32.2
~~32.2~~		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.
101.INS
~~101.INS~~		XBRL Instance Document
101.SCH
~~101.SCH~~		XBRL Taxonomy Extension Schema Document
101.CAL
~~101.CAL~~		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
~~101.DEF~~		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
~~101.LAB~~		XBRL Taxonomy Extension Label Linkbase Document
101.PRES
~~101.PRES~~		XBRL Taxonomy Extension Presentation Linkbase Document

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