GROWING CUSTOMERS
DEVELOPING EMPLOYEES
2012 ANNUAL REPORT
2012
Customers: 968,357
Employees: 1,619
Revenue: $757.8
Net Income: $196.6
Market Capitalization: $3,563.1
20 YEARS OF GROWTH
1993
Customers: 247,195
Employees: 849
Revenue: $101.2
Net Income: $13.8
Market Capitalization: $210.1
In millions of dollars
OPERATING INFORMATION
Serving nearly 3 million people in
Pennsylvania, Ohio, Texas, Illinois,
North Carolina, New Jersey, Florida,
Indiana, Virginia and Georgia.
FINANCIAL HIGHLIGHTS
(in thousands of dollars, except per share amounts)
Operating revenues
Net income
Diluted net income per common share
Annualized dividend rate per common share (12/31)
Aqua America stockholders’ equity
Total assets
Operating cash flows from continuing operations
Capital additions (a)
Number of utility customers served (b)
2012
$757,760
196,563
1.40
0.70
1,385,704
4,858,517
377,485
347,985
968,357
2011
$687,291
143,069
1.03
0.66
1,251,313
4,348,420
352,041
325,808
950,281
% change
10
37
36
6
11
12
7
7
2
(a) Excludes net payments for acquisitions of utility systems and other: $121,248 in 2012 and $8,515 in 2011.
(b) 2011 excludes 15,855 customers associated with the Aqua Maine, Inc. utility systems disposed of on January 1, 2012.
DIVIDEND HIGHLIGHTS
(cid:116)(cid:1)
Increased cash dividend by 6.1 percent to $0.70 per share on an annualized basis as of December 1, 2012
(cid:116)(cid:1) 22 cash dividend increases in the last 21 years
(cid:116)(cid:1) Paid dividends for 68 consecutive years
TO OUR SHAREHOLDERS
2012 was our strongest financial year ever
giving us a new base for future results and
marking the 20th record year for earnings out of
the last 21. Net income was up 37 percent for the
year, revenues were up 10 percent to $758 million
from $687 million the prior year, and we improved
the O&M to revenue ratio by 150 basis points.
Net income was positively impacted by the
implementation of the repair tax accounting
change for our Pennsylvania subsidiary. We
decided to make this cash-positive tax accounting
change because we believe this tax policy will
allow Aqua Pennsylvania to continue its
infrastructure improvement program without
increasing customer rates in 2013 and still provide
the company with the opportunity to continue its
strong financial performance.
Aqua America’s Board of Directors increased the
quarterly cash dividend to $0.175 from $0.165 per
share effective for the December 1, 2012 quarterly
dividend. This represents a 6 percent increase to
the quarterly dividend. This is the company’s 22nd
dividend increase in 21 years.
2012 marked the 20th year of our successful
growth-through-acquisition strategy completing
18 acquisitions in 2012, including three munici-
pal systems. These deals were complemented by
the addition of 4,281 customers through organic
growth for a total customer growth of 2 percent.
As we continue to grow our customer base, we
have strategically rationalized our portfolio to
focus our time and resources in those states where
we feel we can earn a fair return. In 2012, we
sold American Water all of our systems in New
York and purchased all of their systems in Ohio.
We also sold our Maine operations to Connecti-
cut Water. These decisions have put us in a strong
financial position to further grow the company
in the coming years.
Dividends Per Share (annualized as of 12/31)
Operating Revenues (in millions)
2012
2011
2010
2009
2008
$0.70
$0.66
$0.62
$0.58
$0.54
2012
2011
2010
2009
2008
$757.8
$687.3
$660.2
$609.9
$573.1
Aqua continues to put much-needed capital
toward infrastructure improvements to serve
its customers, investing $348 million in its 2012
capital program. The company is on track to
invest more than $300 million again in 2013 on
pipe replacement projects to improve distribu-
tion networks and to upgrade treatment facilities,
enhancing water quality and service reliability for
our customers.
The company is also growing its non-regulated
operations, exemplified by a joint venture with
Penn Virginia Resource Partners, L.P. to form Aqua
— PVR Water Services, LLC to construct and oper-
ate a private pipeline system to supply raw water
to natural gas producers drilling in Pennsylvania’s
Marcellus Shale. The initial 18-mile steel pipe-
line was placed in service in April 2012 in North-
Central Pennsylvania. Construction of a second
18-mile stretch began in June 2012 and went into
service in December. To date, the pipeline has
pumped more than 120 million gallons of water
to gas producers, eliminating the need for more
than 24,000 water truck trips over rural Pennsylva-
nia roads.
Aqua America once again lowered its cost of
fixed-rate long-term debt in 2012, which is now
down to 5.06 percent, and Standard & Poor’s reit-
erated its A+ credit rating for Aqua Pennsylvania,
Inc., Aqua America’s largest subsidiary. Of the 229
electric, gas and water utilities rated by Standard
& Poor’s, only one has a higher rating than Aqua
Pennsylvania.
The company received rate awards and infra-
structure surcharges in 2012 that are expected to
increase annualized revenues by approximately
$52.9 million. These increases were granted as a
return on and recovery of our capital investments
and recovery of our costs to operate the systems.
Additionally, Aqua America currently has $9.2
million of rate cases pending before state regula-
tory bodies. The timing and extent to which rate
increases might be granted by the applicable
regulatory agencies will vary by state. In 2012,
Aqua’s New Jersey subsidiary received approval
for a Distribution System Improvement Charge,
which increases the number of our states with this
practice to five.
Aqua America’s experienced management and
dedicated employees continuously strive to grow
the company, invest in aging infrastructure, and
reward our loyal investors who make all of this
possible. I consider it an honor to be the CEO of
Aqua America and thank you, the shareholder, for
your continued support.
Nicholas DeBenedictis
Net Income Per Share
2012
2011
2010
2009
2008
$1.40
$1.03
$0.90
$0.77
$0.73
Operations and Maintenance
Expense to Revenue Ratio
2012
2011
2010
2009
2008
35.9%
37.4%
38.0%
39.3%
40.4%
GROWING CUSTOMERS
Aqua America’s 20-year growth history began in December 1992 when its sole
utility company, Aqua Pennsylvania, then called Philadelphia Suburban Water
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ent company’s newly introduced growth-through-acquisition program. Aqua Penn-
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acquisitions and other growth ventures, which have nearly tripled the company’s
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Consumers Water Company, which doubled Aqua America’s customer base at that
time and provided the company with utility operations in northern, central and
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territories. Acquisition growth was complemented by organic growth, which added
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As the company grew, Aqua America’s subsidiaries maintained their commitment
to provide customers with quality water and reliable service. This required some-
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maintain compliance with drinking water standards throughout a dynamic regu-
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areas allowed Aqua America to determine in what areas it could achieve the great-
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recovering the investments made to provide quality water and service reliability.
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(cid:15)(cid:23)(cid:19)(cid:5)(cid:3)(cid:19)(cid:13)(cid:10)(cid:3)(cid:24)(cid:10)(cid:22)(cid:7)(cid:15)(cid:13)(cid:18)Q(cid:5)(cid:13)(cid:18)(cid:24)(cid:3)(cid:4)(cid:23)(cid:7)’(cid:10)(cid:6)(cid:19)(cid:19)(cid:13)(cid:14)(cid:19)(cid:10)(cid:11)(cid:3)(cid:12)(cid:12)(cid:13)(cid:11)(cid:14)(cid:13)(cid:15)(cid:10)(cid:23)(cid:7)(cid:10)(cid:18)(cid:13)(cid:11)(cid:13)(cid:7)(cid:14)(cid:10)(cid:8)(cid:13)(cid:6)(cid:18)(cid:19)(cid:10)[(cid:6)(cid:19)(cid:10)(cid:5)(cid:6)(cid:18)(cid:14)(cid:10)(cid:3)(cid:24)(cid:10)(cid:12)(cid:6)(cid:18)’(cid:13)(cid:18)(cid:10)
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(cid:15)(cid:23)(cid:19)(cid:5)(cid:3)(cid:19)(cid:6)(cid:12)(cid:19)(cid:9)(cid:10)(cid:6)(cid:19)(cid:10)(cid:5)(cid:6)(cid:18)(cid:14)(cid:10)(cid:3)(cid:24)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:11)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:28)(cid:19)(cid:10)(cid:19)(cid:14)(cid:18)(cid:6)(cid:14)(cid:13)’(cid:23)(cid:11)(cid:10)~(cid:5)(cid:18)(cid:22)(cid:7)(cid:23)(cid:7)’(cid:127)(cid:10)(cid:19)(cid:14)(cid:18)(cid:6)(cid:14)(cid:13)’(cid:8)(cid:10)(cid:20)(cid:6)(cid:19)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:19)(cid:6)(cid:12)(cid:13)(cid:10)(cid:3)(cid:24)(cid:10)
!;(cid:10)(cid:19)(cid:4)(cid:6)(cid:12)(cid:12)(cid:10)(cid:20)(cid:6)(cid:14)(cid:13)(cid:18)(cid:10)(cid:19)(cid:8)(cid:19)(cid:14)(cid:13)(cid:4)(cid:19)(cid:10)(cid:23)(cid:7)(cid:10)^(cid:13)(cid:7)(cid:18)(cid:23)(cid:11)(cid:3)(cid:10)(cid:2)(cid:3)(cid:22)(cid:7)(cid:14)(cid:8)(cid:9)(cid:10)(cid:128)(cid:23)(cid:18)’(cid:23)(cid:7)(cid:23)(cid:6)(cid:10)(cid:14)(cid:3)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:2)(cid:3)(cid:22)(cid:7)(cid:14)(cid:8)(cid:10)(cid:3)(cid:24)(cid:10)^(cid:13)(cid:7)(cid:18)(cid:23)(cid:11)(cid:3)(cid:29)
B(cid:25)(cid:13)(cid:18)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:7)(cid:13)#(cid:14)(cid:10)(cid:17)(cid:25)(cid:13)(cid:10)(cid:8)(cid:13)(cid:6)(cid:18)(cid:19)(cid:9)(cid:10)(cid:30)(cid:21)(cid:22)(cid:6)(cid:10)(cid:30)(cid:4)(cid:13)(cid:18)(cid:23)(cid:11)(cid:6)(cid:10)(cid:20)(cid:3)(cid:22)(cid:12)(cid:15)(cid:10)(cid:19)(cid:13)(cid:12)(cid:12)(cid:10)(cid:23)(cid:14)(cid:19)(cid:10)(cid:3)(cid:5)(cid:13)(cid:18)(cid:6)(cid:14)(cid:23)(cid:3)(cid:7)(cid:19)(cid:10)(cid:23)(cid:7)(cid:10)H(cid:23)(cid:19)(cid:19)(cid:3)(cid:22)(cid:18)(cid:23)(cid:9)(cid:10)X(cid:13)(cid:20)(cid:10)
{(cid:3)(cid:18)%(cid:9)(cid:10)H(cid:6)(cid:23)(cid:7)(cid:13)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10))(cid:3)(cid:22)(cid:14)(cid:16)(cid:10)(cid:2)(cid:6)(cid:18)(cid:3)(cid:12)(cid:23)(cid:7)(cid:6)(cid:9)(cid:10)(cid:31)(cid:22)(cid:14)(cid:10)(cid:6)(cid:15)(cid:15)(cid:10)(cid:14)(cid:3)(cid:10)(cid:23)(cid:14)(cid:19)(cid:10)(cid:3)(cid:5)(cid:13)(cid:18)(cid:6)(cid:14)(cid:23)(cid:3)(cid:7)(cid:19)(cid:10)(cid:23)(cid:7)(cid:10)B(cid:16)(cid:23)(cid:3)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)((cid:13)#(cid:6)(cid:19)(cid:9)(cid:10)(cid:20)(cid:16)(cid:13)(cid:18)(cid:13)(cid:10)
(cid:23)(cid:14)(cid:10)(cid:6)(cid:12)(cid:18)(cid:13)(cid:6)(cid:15)(cid:8)(cid:10)(cid:16)(cid:6)(cid:15)(cid:10)(cid:6)(cid:10)(cid:11)(cid:18)(cid:23)(cid:14)(cid:23)(cid:11)(cid:6)(cid:12)(cid:10)(cid:4)(cid:6)(cid:19)(cid:19)(cid:10)(cid:3)(cid:24)(cid:10)(cid:11)(cid:22)(cid:19)(cid:14)(cid:3)(cid:4)(cid:13)(cid:18)(cid:19)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:11)(cid:3)(cid:22)(cid:12)(cid:15)(cid:10)(cid:11)(cid:6)(cid:5)(cid:23)(cid:14)(cid:6)(cid:12)(cid:23)&(cid:13)(cid:10)(cid:3)(cid:7)(cid:10)(cid:13)(cid:11)(cid:3)(cid:7)(cid:3)(cid:4)(cid:23)(cid:13)(cid:19)(cid:10)
(cid:3)(cid:24)(cid:10)(cid:19)(cid:11)(cid:6)(cid:12)(cid:13)(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:31)(cid:13)(cid:7)(cid:13)(cid:17)(cid:14)(cid:10)(cid:3)(cid:24)(cid:10)(cid:23)(cid:14)(cid:19)(cid:10)(cid:11)(cid:22)(cid:19)(cid:14)(cid:3)(cid:4)(cid:13)(cid:18)(cid:19)(cid:29)(cid:10)B(cid:25)(cid:13)(cid:18)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)>"(cid:10)(cid:8)(cid:13)(cid:6)(cid:18)(cid:19)(cid:10)(cid:19)(cid:23)(cid:7)(cid:11)(cid:13)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:19)(cid:14)(cid:6)(cid:18)(cid:14)(cid:10)(cid:3)(cid:24)(cid:10)
its growth-through acquisition strategy and subsequent pruning program, Aqua
(cid:30)(cid:4)(cid:13)(cid:18)(cid:23)(cid:11)(cid:6)(cid:10)(cid:16)(cid:6)(cid:19)(cid:10)(cid:7)(cid:13)(cid:6)(cid:18)(cid:12)(cid:8)(cid:10)(cid:14)(cid:18)(cid:23)(cid:5)(cid:12)(cid:13)(cid:15)(cid:10)(cid:23)(cid:14)(cid:19)(cid:10)(cid:11)(cid:22)(cid:19)(cid:14)(cid:3)(cid:4)(cid:13)(cid:18)(cid:10)(cid:31)(cid:6)(cid:19)(cid:13)(cid:10)(cid:24)(cid:18)(cid:3)(cid:4)(cid:10)(cid:6)(cid:5)(cid:5)(cid:18)(cid:3)#(cid:23)(cid:4)(cid:6)(cid:14)(cid:13)(cid:12)(cid:8)(cid:10)>;/(cid:9)"""(cid:10)
customers to 968,000.
(cid:30)(cid:19)(cid:10)(cid:23)(cid:14)(cid:10)(cid:11)(cid:3)(cid:7)(cid:14)(cid:23)(cid:7)(cid:22)(cid:13)(cid:19)(cid:10)(cid:23)(cid:14)(cid:19)(cid:10)(cid:19)(cid:22)(cid:11)(cid:11)(cid:13)(cid:19)(cid:19)(cid:24)(cid:22)(cid:12)(cid:10)’(cid:18)(cid:3)(cid:20)(cid:14)(cid:16)Q(cid:14)(cid:16)(cid:18)(cid:3)(cid:22)’(cid:16)Q(cid:6)(cid:11)(cid:21)(cid:22)(cid:23)(cid:19)(cid:23)(cid:14)(cid:23)(cid:3)(cid:7)(cid:10)(cid:5)(cid:18)(cid:3)’(cid:18)(cid:6)(cid:4)(cid:9)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:11)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:10)
(cid:16)(cid:6)(cid:19)(cid:10)(cid:14)(cid:6)%(cid:13)(cid:7)(cid:10)(cid:6)(cid:10)(cid:18)(cid:13)(cid:19)(cid:5)(cid:3)(cid:7)(cid:19)(cid:23)(cid:31)(cid:12)(cid:13)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:6)(cid:11)(cid:14)(cid:23)(cid:25)(cid:13)(cid:10)(cid:18)(cid:3)(cid:12)(cid:13)(cid:10)(cid:23)(cid:7)(cid:10)(cid:20)(cid:16)(cid:6)(cid:14)(cid:10)(cid:19)(cid:3)(cid:4)(cid:13)(cid:10)(cid:6)(cid:18)(cid:13)(cid:10)(cid:11)(cid:6)(cid:12)(cid:12)(cid:23)(cid:7)’(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:7)(cid:13)#(cid:14)(cid:10)(cid:13)(cid:7)(cid:13)(cid:18)’(cid:8)(cid:10)
(cid:31)(cid:3)(cid:3)(cid:4)(cid:10)(cid:23)(cid:7)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:27)(cid:7)(cid:23)(cid:14)(cid:13)(cid:15)(cid:10))(cid:14)(cid:6)(cid:14)(cid:13)(cid:19)(cid:10)@(cid:10)(cid:15)(cid:18)(cid:23)(cid:12)(cid:12)(cid:23)(cid:7)’(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)(cid:7)(cid:6)(cid:14)(cid:22)(cid:18)(cid:6)(cid:12)(cid:10)’(cid:6)(cid:19)(cid:29)(cid:10)((cid:16)(cid:13)(cid:10)(cid:19)(cid:16)(cid:6)(cid:12)(cid:13)(cid:10)’(cid:6)(cid:19)(cid:10)(cid:23)(cid:7)(cid:15)(cid:22)(cid:19)(cid:14)(cid:18)(cid:8)(cid:10)
(cid:16)(cid:6)(cid:19)(cid:10)(cid:5)(cid:18)(cid:3)(cid:25)(cid:23)(cid:15)(cid:13)(cid:15)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:11)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:28)(cid:19)(cid:10)(cid:7)(cid:3)(cid:7)Q(cid:18)(cid:13)’(cid:22)(cid:12)(cid:6)(cid:14)(cid:13)(cid:15)(cid:10)(cid:19)(cid:22)(cid:31)(cid:19)(cid:23)(cid:15)(cid:23)(cid:6)(cid:18)(cid:8)(cid:9)(cid:10)(cid:30)(cid:21)(cid:22)(cid:6)(cid:10)U(cid:7)(cid:24)(cid:18)(cid:6)(cid:19)(cid:14)(cid:18)(cid:22)(cid:11)(cid:14)(cid:22)(cid:18)(cid:13)(cid:9)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)
(cid:3)(cid:5)(cid:5)(cid:3)(cid:18)(cid:14)(cid:22)(cid:7)(cid:23)(cid:14)(cid:8)(cid:10)(cid:14)(cid:3)(cid:10)(cid:5)(cid:18)(cid:3)(cid:25)(cid:23)(cid:15)(cid:13)(cid:10)(cid:18)(cid:6)(cid:20)(cid:10)(cid:20)(cid:6)(cid:14)(cid:13)(cid:18)(cid:10)(cid:14)(cid:3)(cid:10)(cid:15)(cid:18)(cid:23)(cid:12)(cid:12)(cid:13)(cid:18)(cid:19)(cid:10)(cid:31)(cid:8)(cid:10)(cid:31)(cid:22)(cid:23)(cid:12)(cid:15)(cid:23)(cid:7)’(cid:10)(cid:5)(cid:23)(cid:5)(cid:13)(cid:12)(cid:23)(cid:7)(cid:13)(cid:19)(cid:10)(cid:24)(cid:18)(cid:3)(cid:4)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:19)(cid:3)(cid:22)(cid:18)(cid:11)(cid:13)(cid:10)
(cid:20)(cid:6)(cid:14)(cid:13)(cid:18)(cid:10)(cid:15)(cid:23)(cid:18)(cid:13)(cid:11)(cid:14)(cid:12)(cid:8)(cid:10)(cid:14)(cid:3)(cid:10)(cid:14)(cid:16)(cid:13)(cid:23)(cid:18)(cid:10)(cid:23)(cid:4)(cid:5)(cid:3)(cid:22)(cid:7)(cid:15)(cid:4)(cid:13)(cid:7)(cid:14)(cid:19)(cid:9)(cid:10)(cid:13)(cid:12)(cid:23)(cid:4)(cid:23)(cid:7)(cid:6)(cid:14)(cid:23)(cid:7)’(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:7)(cid:13)(cid:13)(cid:15)(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)(cid:14)(cid:16)(cid:3)(cid:22)(cid:19)(cid:6)(cid:7)(cid:15)(cid:19)(cid:10)(cid:3)(cid:24)(cid:10)
>_Q(cid:14)(cid:3)(cid:7)(cid:10)(cid:20)(cid:6)(cid:14)(cid:13)(cid:18)(cid:10)(cid:14)(cid:18)(cid:22)(cid:11)%(cid:19)(cid:10)(cid:3)(cid:7)(cid:10)(cid:18)(cid:22)(cid:18)(cid:6)(cid:12)(cid:10)(cid:18)(cid:3)(cid:6)(cid:15)(cid:19)(cid:9)(cid:10)(cid:4)(cid:6)(cid:7)(cid:8)(cid:10)(cid:3)(cid:24)(cid:10)(cid:20)(cid:16)(cid:23)(cid:11)(cid:16)(cid:10)(cid:20)(cid:13)(cid:18)(cid:13)(cid:10)(cid:7)(cid:3)(cid:14)(cid:10)(cid:13)(cid:7)’(cid:23)(cid:7)(cid:13)(cid:13)(cid:18)(cid:13)(cid:15)(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)(cid:19)(cid:22)(cid:11)(cid:16)(cid:10)
(cid:20)(cid:13)(cid:23)’(cid:16)(cid:14)(cid:29)(cid:10)((cid:3)(cid:10)(cid:15)(cid:6)(cid:14)(cid:13)(cid:9)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:5)(cid:23)(cid:5)(cid:13)(cid:12)(cid:23)(cid:7)(cid:13)(cid:10)(cid:16)(cid:6)(cid:19)(cid:10)(cid:5)(cid:22)(cid:4)(cid:5)(cid:13)(cid:15)(cid:10)!>"(cid:10)(cid:4)(cid:23)(cid:12)(cid:12)(cid:23)(cid:3)(cid:7)(cid:10)’(cid:6)(cid:12)(cid:12)(cid:3)(cid:7)(cid:19)(cid:10)(cid:3)(cid:24)(cid:10)(cid:20)(cid:6)(cid:14)(cid:13)(cid:18)(cid:10)(cid:14)(cid:3)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)’(cid:6)(cid:19)(cid:10)
(cid:5)(cid:18)(cid:3)(cid:15)(cid:22)(cid:11)(cid:13)(cid:18)(cid:19)(cid:9)(cid:10)(cid:13)(cid:12)(cid:23)(cid:4)(cid:23)(cid:7)(cid:6)(cid:14)(cid:23)(cid:7)’(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:7)(cid:13)(cid:13)(cid:15)(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)>;(cid:9)"""(cid:10)(cid:20)(cid:6)(cid:14)(cid:13)(cid:18)(cid:10)(cid:14)(cid:18)(cid:22)(cid:11)%(cid:10)(cid:14)(cid:18)(cid:23)(cid:5)(cid:19)(cid:10)(cid:3)(cid:25)(cid:13)(cid:18)(cid:10)(cid:18)(cid:22)(cid:18)(cid:6)(cid:12)(cid:10)L(cid:13)(cid:7)(cid:7)(cid:19)(cid:8)(cid:12)(cid:25)(cid:6)-
nia roads.
((cid:16)(cid:13)(cid:10)(cid:11)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:28)(cid:19)(cid:10)’(cid:18)(cid:3)(cid:20)(cid:14)(cid:16)(cid:10)(cid:16)(cid:6)(cid:19)(cid:10)(cid:16)(cid:6)(cid:15)(cid:10)(cid:6)(cid:10)(cid:5)(cid:3)(cid:19)(cid:23)(cid:14)(cid:23)(cid:25)(cid:13)(cid:10)(cid:23)(cid:4)(cid:5)(cid:6)(cid:11)(cid:14)(cid:10)(cid:3)(cid:7)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:15)(cid:13)(cid:25)(cid:13)(cid:12)(cid:3)(cid:5)(cid:4)(cid:13)(cid:7)(cid:14)(cid:10)(cid:3)(cid:24)(cid:10)(cid:23)(cid:14)(cid:19)(cid:10)
(cid:13)(cid:4)(cid:5)(cid:12)(cid:3)(cid:8)(cid:13)(cid:13)(cid:19)(cid:10)(cid:20)(cid:23)(cid:14)(cid:16)(cid:10)(cid:11)(cid:3)(cid:7)(cid:14)(cid:23)(cid:7)(cid:22)(cid:23)(cid:7)’(cid:10)(cid:3)(cid:5)(cid:5)(cid:3)(cid:18)(cid:14)(cid:22)(cid:7)(cid:23)(cid:14)(cid:23)(cid:13)(cid:19)(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)(cid:11)(cid:6)(cid:18)(cid:13)(cid:13)(cid:18)(cid:10)’(cid:18)(cid:3)(cid:20)(cid:14)(cid:16)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:6)(cid:15)(cid:25)(cid:6)(cid:7)(cid:11)(cid:13)(cid:4)(cid:13)(cid:7)(cid:14)(cid:29)(cid:10)(cid:30)(cid:10)
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that the time he spent in his position might sound static, but attributed his
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one-state regional water utility to a multistate water and wastewater
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Aqua America plans to continue its legacy growth-through-acquisition strategy,
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businesses like serving the natural gas industry and public-private partnerships.
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DEVELOPING EMPLOYEES
Tom Roberts
President
Aqua North Carolina
"When I started in the Engineering
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certainly not North Carolina. Without
the growth that has occurred, this
would have never been a possibility."
Tom Schwing
Manager, Environmental Compliance,
Safety & Security
Aqua Ohio
"As an operations manager at American
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(cid:6)(cid:18)(cid:13)(cid:6)(cid:10)(cid:3)(cid:24)(cid:10)+(cid:9)"""(cid:10)(cid:11)(cid:22)(cid:19)(cid:14)(cid:3)(cid:4)(cid:13)(cid:18)(cid:19)(cid:29)(cid:10)(cid:30)(cid:21)(cid:22)(cid:6)(cid:28)(cid:19)(cid:10)
(cid:13)#(cid:5)(cid:6)(cid:7)(cid:15)(cid:13)(cid:15)(cid:10)B(cid:16)(cid:23)(cid:3)(cid:10)(cid:3)(cid:5)(cid:13)(cid:18)(cid:6)(cid:14)(cid:23)(cid:3)(cid:7)(cid:19)(cid:10)(cid:11)(cid:18)(cid:13)(cid:6)(cid:14)(cid:13)(cid:15)(cid:10)
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At American, each area manager was
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Aqua’s approach has made me a
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environmental compliance issues and
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Bob Kopas
Regional Controller, Midwest & Southern Divisions
"I came to Aqua with the Consumers merger in 1999 as
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responsibility. The chance to work with multiple
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which I’ve been able to apply in my job. Without the
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certainly not be as broad."
Linda Slatcher
Internal Auditor
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Aqua purchased the water assets. Aqua’s
growth allowed me to work in three areas
during my 20 years here. I joined the internal
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was being implemented, which provided a
tremendous learning opportunity. I’m now
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(cid:13)#(cid:5)(cid:6)(cid:7)(cid:15)(cid:13)(cid:15)(cid:10)’(cid:18)(cid:13)(cid:6)(cid:14)(cid:12)(cid:8)(cid:10)(cid:19)(cid:23)(cid:7)(cid:11)(cid:13)(cid:10)(cid:132)(cid:3)(cid:23)(cid:7)(cid:23)(cid:7)’(cid:10)(cid:30)(cid:21)(cid:22)(cid:6)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)U(cid:10)
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the company."
Scott Ballenger
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Aqua Ohio
"Prior to joining Aqua, I managed day-to-day
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Water. Having joined Aqua Ohio and being
promoted to area manager, I now run every
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(cid:17)(cid:13)(cid:12)(cid:15)(cid:10)(cid:19)(cid:13)(cid:18)(cid:25)(cid:23)(cid:11)(cid:13)(cid:19)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:19)(cid:6)(cid:24)(cid:13)(cid:14)(cid:8)(cid:29)(cid:10)((cid:16)(cid:13)(cid:10)(cid:7)(cid:22)(cid:4)(cid:31)(cid:13)(cid:18)(cid:10)(cid:3)(cid:24)(cid:10)
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(cid:18)(cid:13)(cid:19)(cid:5)(cid:3)(cid:7)(cid:19)(cid:23)(cid:31)(cid:12)(cid:13)(cid:10)(cid:16)(cid:6)(cid:19)(cid:10)(cid:23)(cid:7)(cid:11)(cid:18)(cid:13)(cid:6)(cid:19)(cid:13)(cid:15)(cid:10)(cid:31)(cid:8)(cid:10)(cid:4)(cid:3)(cid:18)(cid:13)(cid:10)(cid:14)(cid:16)(cid:6)(cid:7)(cid:10)_"(cid:10)
and 60 percent respectively. The company’s
growth gave me the opportunity to apply the
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(cid:6)(cid:18)(cid:13)(cid:6)(cid:19)(cid:10)(cid:3)(cid:24)(cid:10)(cid:18)(cid:13)(cid:19)(cid:5)(cid:3)(cid:7)(cid:19)(cid:23)(cid:31)(cid:23)(cid:12)(cid:23)(cid:14)(cid:8)(cid:10)(cid:20)(cid:16)(cid:23)(cid:12)(cid:13)(cid:10)(cid:11)(cid:3)(cid:7)(cid:14)(cid:23)(cid:7)(cid:22)(cid:23)(cid:7)’(cid:10)
to learn new things."
Nola Farris
Field Supervisor
Aqua Texas
"When Aqua purchased the Aqua-
Source companies, I was a customer
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customer service department was
(cid:4)(cid:3)(cid:25)(cid:13)(cid:15)(cid:10)(cid:14)(cid:3)(cid:10)(cid:6)(cid:7)(cid:3)(cid:14)(cid:16)(cid:13)(cid:18)(cid:10)(cid:5)(cid:6)(cid:18)(cid:14)(cid:10)(cid:3)(cid:24)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:19)(cid:14)(cid:6)(cid:14)(cid:13)(cid:29)(cid:10)
I was given the opportunity to apply
(cid:24)(cid:3)(cid:18)(cid:10)(cid:6)(cid:10)(cid:17)(cid:13)(cid:12)(cid:15)(cid:10)(cid:19)(cid:22)(cid:5)(cid:13)(cid:18)(cid:25)(cid:23)(cid:19)(cid:3)(cid:18)(cid:10)(cid:5)(cid:3)(cid:19)(cid:23)(cid:14)(cid:23)(cid:3)(cid:7)(cid:29)(cid:10)
‘(cid:3)(cid:18)(cid:14)(cid:22)(cid:7)(cid:6)(cid:14)(cid:13)(cid:12)(cid:8)(cid:9)(cid:10)U(cid:10)’(cid:3)(cid:14)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)(cid:132)(cid:3)(cid:31)(cid:29)(cid:10)(cid:30)(cid:21)(cid:22)(cid:6)(cid:10)(cid:16)(cid:6)(cid:19)(cid:10)
been very supportive and since that
time I have obtained my Class C
Water and Class C Wastewater
operator’s licenses."
Dave Marozzi
Plant Superintendent
Aqua Pennsylvania
(cid:131)U(cid:10)(cid:16)(cid:6)(cid:15)(cid:10)(cid:20)(cid:3)(cid:18)%(cid:13)(cid:15)(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)(cid:14)(cid:16)(cid:13)(cid:10)K(cid:18)(cid:23)(cid:19)(cid:14)(cid:3)(cid:12)(cid:10)
K(cid:3)(cid:18)(cid:3)(cid:22)’(cid:16)(cid:10)(cid:26)(cid:6)(cid:14)(cid:13)(cid:18)(cid:10)(cid:30)(cid:22)(cid:14)(cid:16)(cid:3)(cid:18)(cid:23)(cid:14)(cid:8)(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)
19 years as a union employee
when I learned it was being
(cid:19)(cid:3)(cid:12)(cid:15)(cid:10)(cid:14)(cid:3)(cid:10)(cid:30)(cid:21)(cid:22)(cid:6)(cid:29)(cid:10)U(cid:10)(cid:24)(cid:13)(cid:6)(cid:18)(cid:13)(cid:15)(cid:10)(cid:20)(cid:16)(cid:6)(cid:14)(cid:10)(cid:6)(cid:10)
(cid:19)(cid:6)(cid:12)(cid:13)(cid:10)(cid:20)(cid:3)(cid:22)(cid:12)(cid:15)(cid:10)(cid:4)(cid:13)(cid:6)(cid:7)(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)(cid:4)(cid:8)(cid:10)(cid:132)(cid:3)(cid:31)(cid:10)(cid:6)(cid:19)(cid:10)
(cid:6)(cid:10)(cid:24)(cid:3)(cid:18)(cid:13)(cid:4)(cid:6)(cid:7)(cid:29)(cid:10)(cid:30)(cid:19)(cid:10)(cid:23)(cid:14)(cid:10)(cid:14)(cid:22)(cid:18)(cid:7)(cid:13)(cid:15)(cid:10)(cid:3)(cid:22)(cid:14)(cid:9)(cid:10)
I’ve had the opportunity to
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take additional courses that
(cid:30)(cid:21)(cid:22)(cid:6)(cid:10)(cid:5)(cid:6)(cid:23)(cid:15)(cid:10)(cid:24)(cid:3)(cid:18)(cid:9)(cid:10)(cid:6)(cid:12)(cid:12)(cid:10)(cid:3)(cid:24)(cid:10)(cid:20)(cid:16)(cid:23)(cid:11)(cid:16)(cid:10)
(cid:21)(cid:22)(cid:6)(cid:12)(cid:23)(cid:17)(cid:13)(cid:15)(cid:10)(cid:4)(cid:13)(cid:10)(cid:24)(cid:3)(cid:18)(cid:10)(cid:4)(cid:8)(cid:10)(cid:5)(cid:18)(cid:3)(cid:4)(cid:3)(cid:14)(cid:23)(cid:3)(cid:7)(cid:10)
to plant superintendent."
GROWING CUSTOMERS
DEVELOPING EMPLOYEES
2012 FINANCIAL DATA
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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)
FORWARD-LOOKING STATEMENTS
This report by Aqua America, Inc. (“Aqua America,” “we” or “us”) contains, in addition to historical
information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve risks, uncertainties and other factors, that may be outside
our control and that may cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by these forward-looking
statements. In some cases, you can identify forward-looking statements where statements are preceded by,
followed by or include the words “believes,” “expects,” “anticipates,” “plans,” “future,” “potential,” “in the
event” or the negative of such terms or similar expressions. Forward-looking statements in this report,
include, but are not limited to, statements regarding:
(cid:2) recovery of capital expenditures and expenses in rates;
(cid:2) projected capital expenditures and related financing requirements;
(cid:2) the availability and cost of capital financing;
(cid:2) dividend payment projections;
(cid:2) future financing plans;
(cid:2) future pension contributions;
(cid:2) the impact of changes in income tax laws regarding tax-basis depreciation on capital additions, and
repair tax deductions;
(cid:2) our determination of what qualifies as a capital cost versus a repair expense tax deduction;
(cid:2) opportunities for future acquisitions, the success of pending acquisitions and the impact of future
acquisitions;
(cid:2) acquisition-related costs and synergies;
(cid:2) the sale of water and wastewater divisions;
(cid:2) the capacity of our water supplies, water facilities and wastewater facilities;
(cid:2) the impact of geographic diversity on our exposure to unusual weather;
(cid:2) the impact of conservation awareness of customers and more efficient plumbing fixtures and
appliances on water usage;
(cid:2) the availability and cost of key production necessities, including power, chemicals and purchased water
or wastewater services;
(cid:2) the availability of qualified personnel;
(cid:2) the return performance of our defined benefit pension plan assets;
(cid:2) general economic conditions;
(cid:2) the impact of federal and/or state tax policies and the regulatory treatment of the effects of those
policies; and
(cid:2) the impact of accounting pronouncements and income taxation policies.
Because forward-looking statements involve risks and uncertainties, there are important factors that could
cause actual results to differ materially from those expressed or implied by these forward-looking statements,
including but not limited to:
(cid:2) changes in general economic, business, credit and financial market conditions;
(cid:2) changes in government laws regulations and policies, including those dealing with taxation, the
environment, health and water quality, and public utility regulation;
(cid:2) our determination of what qualifies for a repair expense tax deduction
(cid:2) the decisions of governmental and regulatory bodies, including decisions on rate increase requests;
(cid:2) our ability to file rate cases on a timely basis to minimize regulatory lag;
(cid:2) changes in environmental conditions, including those that result in water use restrictions;
(cid:2) abnormal weather conditions, including the effects of climate change;
(cid:2) changes in, or unanticipated, capital requirements;
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)
(cid:2) changes in our credit rating or the market price of our common stock;
(cid:2) our ability to integrate businesses, technologies or services which we may acquire;
(cid:2) our ability to manage the expansion of our business;
(cid:2) the extent to which we are able to develop and market new and improved services;
(cid:2) the effect of the loss of major customers;
(cid:2) our ability to retain the services of key personnel and to hire qualified personnel as we expand;
(cid:2) increasing difficulties in obtaining insurance and increased cost of insurance;
(cid:2) cost overruns relating to improvements or the expansion of our operations;
(cid:2) changes in accounting pronouncements;
(cid:2) civil disturbance or terroristic threats or acts; and
(cid:2) litigation and claims.
Given these uncertainties, you should not place undue reliance on these forward-looking statements. You
should read this report with the understanding that our actual future results, performance and achievements
may be materially different from what we expect. These forward-looking statements represent our estimates
and assumptions only as of the date of this report. Except for our ongoing obligations to disclose material
information under the federal securities laws, we are not obligated to update these forward-looking
statements, even though our situation may change in the future. We qualify all of our forward-looking
statements by these cautionary statements. As you read this report, you should pay particular attention to the
“Risk Factors” included in our Annual Report on Form 10-K.
OVERVIEW
The Company
Aqua America, Inc. is the holding company for regulated utilities providing water or wastewater services to
what we estimate to be almost 3.0 million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New
Jersey, Florida, Indiana, Virginia, and Georgia. Our largest operating subsidiary, Aqua Pennsylvania, Inc.
(“Aqua Pennsylvania”), accounted for approximately 55% of our operating revenues and a larger percentage
of our net income for 2012, and, as of December 31, 2012, provided water or wastewater services to
approximately one-half of the total number of people we serve located in the suburban areas in counties
north and west of the City of Philadelphia and in 25 other counties in Pennsylvania. Our other subsidiaries
provide similar services in nine other states. In addition, we provide water and wastewater service through
operating and maintenance contracts with municipal authorities and other parties close to our utility
companies’ service territories, 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 firms in the natural gas and oil drilling industry.
In January 2012, we sold our regulated water operations in Maine, which served approximately 16,000
customers, to Connecticut Water Services, Inc. In May 2012, we acquired all of American Water Works
Company, Inc.’s (“American Water”) regulated water and wastewater operations in Ohio, which served
approximately 59,000 customers, and simultaneously sold our water operations in New York to American
Water Works Company, Inc., which served approximately 51,000 customers. These transactions concluded
our regulated operations in Maine and New York. In September 2012, we began to market for sale our water
and wastewater operations in Florida, which serve approximately 38,000 customers, and our single wastewater
treatment facility in Georgia. In December 2012, we entered into a definitive agreement to sell 80 of our
water and wastewater systems in Florida to the Florida Governmental Utility Authority. These 80 water and
wastewater systems represent approximately 56% of our total customers served in Florida. This transaction is
expected to close in the first half of 2013. In addition, we are holding discussions with interested parties for
the sale of the remainder of our Florida water and wastewater operations. The operating results, cash flows,
and financial position of the Company’s Maine, New York, Florida, and Georgia subsidiaries have been
presented in the Company’s consolidated financial statements as discontinued operations. During the second
quarter of 2011, we acquired all of American Water Works Company, Inc.’s regulated water and wastewater
2
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 in Texas, which served approximately 5,300 customers, and sold our regulated water and
wastewater operations in Missouri to American Water Works Company, Inc., which served approximately
3,900 customers and concluded our regulated utility operations in Missouri.
Aqua America, which prior to its name change in 2004 was known as Philadelphia Suburban Corporation,
was formed in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania, formerly known as
Philadelphia Suburban Water Company. In the early 1990s, we embarked on a growth through acquisition
strategy focused on water and wastewater operations. Our most significant transactions to date have been the
merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater
operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition
American Water Works Company, Inc.’s regulated water and wastewater operations in Ohio in 2012. Since
the early 1990s, our business strategy has been primarily directed toward the regulated water and wastewater
utility industry and has extended our regulated operations from southeastern Pennsylvania to include our
current operations in nine other states.
Beginning in 2010, and continuing into 2013, we pursued a portfolio rationalization strategy to focus our
operations in areas where we have critical mass and economic growth potential, and to divest operations
where limited customer growth opportunities exist, or where we are unable to achieve favorable operating
results or a return on equity that we consider acceptable. In 2012, we sold our utility operations in Maine and
New York, in 2011, we sold our utility operations in Missouri and in 2010 we sold our utility operations in
South Carolina. In connection with the sale of our New York and Missouri utility operations, we acquired
additional utility systems (and customers) in Ohio and Texas, two of the larger states in Aqua America’s
portfolio. Initiated in 2012, and concluding in 2013, we began to market for sale our Florida utility operations
and our wastewater treatment facility in Georgia, and these sales should conclude in 2013.
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 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.
Industry Mission
The mission of the investor-owned water utility industry is to provide quality and reliable water service at
reasonable rates to customers, while earning a fair return for shareholders. A number of challenges face the
industry, including:
(cid:2) strict environmental, health and safety standards;
(cid:2) aging utility infrastructure and the need for substantial capital investment;
(cid:2) economic regulation by state, and/or, in some cases, local government;
(cid:2) declining consumption per customer as a result of conservation; and
(cid:2) the impact of weather and sporadic drought conditions on water sales demand.
Economic Regulation
Most of our water and wastewater utility operations are subject to regulation by their respective state
regulatory commissions, which have broad administrative power and authority to regulate rates and charges,
determine franchise areas and conditions of service, approve acquisitions and authorize the issuance of
securities. The regulatory commissions also generally establish uniform systems of accounts and approve the
terms of contracts with affiliates and customers, business combinations with other utility systems, loans and
other financings, and the franchise areas that we serve. The policies of the regulatory commissions often
differ from state to state, and may change over time. A small number of our operations are subject to rate
regulation by county or city government. The profitability of our utility operations is influenced to a great
extent by the timeliness and adequacy of rate allowances in the various states in which we operate. A
consideration in evaluating which states to focus our growth and investment strategy is whether a state
provides for consolidated rates, infrastructure rehabilitation surcharge mechanisms, and other regulatory
policies, that promote infrastructure investment and efficiency in processing rate cases.
3
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)
RRate Case Management Capability – We strive to achieve the industry’s mission by effective planning and
efficient use of our resources. We maintain a rate case management capability to pursue timely and adequate
returns on the capital investments that we make in improving or replacing water mains, treatment plants,
information technology systems, and other infrastructure. This capital investment represents our assets used
and useful in providing utility service, and is commonly referred to as rate base. Timely, adequate rate relief is
important to our continued profitability and in providing a fair return to our shareholders, and thus providing
access to capital markets to help fund these investments. Accordingly, the objective of our rate case
management strategy is to provide that the rates of our utility operations reflect, to the extent practicable, the
timely recovery of increases in costs of operations (primarily labor and employee benefits, electricity,
chemicals, maintenance expenses, insurance and claims costs, and costs to comply with environmental
regulations), capital, and taxes. In pursuing our rate case strategy, we consider the amount of utility plant
additions and replacements made since the previous rate decision, the changes in the cost of capital, changes
in our capital structure and changes in operating and other costs. Based on these assessments, our utility
operations periodically file rate increase requests with their respective state regulatory commissions or local
regulatory authorities. In general, as a regulated enterprise, our water and wastewater rates are established to
provide full recovery of utility operating costs, taxes, interest on debt used to finance capital investments and
a return on equity used to finance capital investments. Our ability to recover our expenses in a timely manner
and earn a return on equity employed in the business determines the profitability of the Company.
Our water and wastewater operations are composed of 66 rate divisions, each of which requires a separate
rate filing for the evaluation of the cost of service and recovery of investments in connection with the
establishment of tariff rates for that rate division. When feasible and beneficial to our utility customers, we
will seek approval from the applicable state regulatory commission to consolidate rate divisions to achieve a
more even distribution of costs over a larger customer base. Eight of the states in which we operate permit
us to file a revenue requirement using some form of consolidated rates for some or all of the rate divisions in
that state. As of December 31, 2012, we have two active rate proceedings in two of our ten states proposing
an aggregate annualized rate increase of $9,188.
Revenue Surcharges – Five states in which we operate water utilities, and three states in which we operate
wastewater utilities, permit us to add a surcharge to water or wastewater bills to offset the additional
depreciation and capital costs associated with certain capital expenditures related to replacing and
rehabilitating infrastructure systems. In all other states, water and wastewater utilities absorb all of the
depreciation and capital costs of these projects between base rate increases without the benefit of additional
revenues. The gap between the time that a capital project is completed and the recovery of its costs in rates is
known as regulatory lag. The infrastructure rehabilitation surcharge mechanism is intended to substantially
reduce regulatory lag, which often acts as a disincentive to water and wastewater utilities to rehabilitate their
infrastructure. In addition, certain states permit our subsidiaries to use a surcharge or credit on their bills to
reflect certain allowable changes in costs, such as changes in state tax rates, other taxes and purchased water
costs, until such time as these changes in costs are fully incorporated in base rates.
Effects of Inflation – Recovery of the effects of inflation through higher water and wastewater rates is
dependent upon receiving adequate and timely rate increases. However, rate increases are not retroactive and
often lag increases in costs caused by inflation. On occasion, our regulated utility companies may enter into
rate settlement agreements that provide certain stay-out provisions which require us to wait for a period of
time to file the next base rate increase request. These stay-out provisions may result in regulatory lag whereby
inflationary increases in expenses may not yet be reflected in rates, or a gap may exist between when a capital
project is completed and the start of its recovery in rates. Even during periods of moderate inflation, as has
been experienced in 2012, 2011, and 2010, the effects of inflation can have a negative impact on our
operating results.
4
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)
Growth-Through-Acquisition Strategy
Part of our strategy to meet the industry challenges is to actively explore opportunities to expand our utility
operations through acquisitions of water and wastewater utilities either in areas adjacent to our existing
service areas or in new service areas, and to explore acquiring non-regulated businesses that are
complementary to our regulated water and wastewater operations. To complement our growth strategy, we
routinely evaluate the operating performance of our individual utility systems, and in instances where limited
economic growth opportunities exist or where we are unable to achieve favorable operating results or a return
on equity that we consider acceptable, we will seek to sell the utility system and reinvest the proceeds in other
utility systems. Consistent with this strategy, we are focusing our acquisitions and resources in states where
we have critical mass of operations in an effort to achieve economies of scale and increased efficiency. Our
growth-through-acquisition strategy allows us to operate more efficiently by sharing operating expenses over
more utility customers and provides new locations for possible future growth. The ability to successfully
execute this strategy and meet the industry challenges is largely due to our financial position and our qualified
and trained workforce, which we strive to retain by treating employees fairly and providing our employees
with development and growth opportunities.
In May 2012, we completed our acquisition of American Water’s water and wastewater operations in Ohio
serving approximately 59,000 customers. In addition to our Ohio acquisition, during 2012, we completed 16
acquisitions and other growth ventures, which along with the organic growth in our existing system represent
11,070 new customers. In June 2011, we completed our acquisition of approximately 51 water and five
wastewater systems in Texas serving approximately 5,300 customers. In addition to our Texas acquisition,
during 2011, we completed eight acquisitions and other growth ventures, which along with the organic
growth in our existing systems represent 3,962 new customers. During 2010, we completed 23 acquisitions
and other growth ventures, which along with the organic growth in our existing systems, represent 9,931 new
customers.
In addition to acquisitions, from time to time, we sell utility systems or relinquish ownership in systems
through condemnation. In 2010, 2011, and 2012, consistent with our strategy to evaluate our individual
utility systems, we divested our operations in four states: South Carolina in December 2010, Missouri in May
2011, Maine in January 2012, and New York in May 2012. In related transactions, with respect to the sale of
our Missouri operations, and with respect to the sale of our New York operations, we acquired additional
utility systems (and additional customers) in Texas and in Ohio, which resulted in a net increase in customers
of approximately 10,000. In addition to the dispositions mentioned above, pursuant to our plan to evaluate
and dispose of underperforming utility systems, we sold the following utility systems: in 2012 we sold two
utility systems representing 1,139 customers and in 2011 we sold three utility systems representing 2,179
customers.
We believe that utility acquisitions, organic growth, and expansion of our non-regulated business will
continue to be the primary sources of customer growth for us. With approximately 53,000 community water
systems in the U.S., 83% of which serve less than 3,300 customers, the water industry is the most fragmented
of the major utility industries (telephone, natural gas, electric, water and wastewater). In the states where we
operate, we believe there are approximately 19,000 community water systems of widely-varying size, with the
majority of the population being served by government-owned water systems.
Although not as fragmented as the water industry, the wastewater industry in the U.S. also presents
opportunities for consolidation. According to the U.S. Environmental Protection Agency’s (“EPA”) most
recent survey of wastewater treatment facilities (which includes both government-owned and privately-owned
facilities) in 2008, there are approximately 15,000 such facilities in the nation serving approximately 74% of
the U.S. population. The remaining population represents individual homeowners with their own treatment
facilities; for example, community on-lot disposal systems and septic tank systems. The vast majority of
wastewater facilities are government-owned rather than privately-owned. The EPA survey also indicated that
there are approximately 7,400 wastewater facilities in operation or planned in the 10 states where we operate.
5
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)
Because of the fragmented nature of the water and wastewater utility industries, we believe that there are
many potential water and wastewater system acquisition candidates throughout the United States. We believe
the factors driving the consolidation of these systems are:
(cid:2) the benefits of economies of scale;
(cid:2) the increasing cost and complexity of environmental regulations;
(cid:2) the need for substantial capital investment;
(cid:2) the need for technological and managerial expertise;
(cid:2) limited access to cost-effective financing; and
(cid:2) the monetizing of public assets to support the financial condition of municipalities.
We are actively exploring opportunities to expand our water and wastewater utility operations through
regulated acquisitions or otherwise, such as the management of publicly-owned facilities in a public-private
partnership. We intend to continue to pursue acquisitions of government-owned and privately-owned water
and wastewater systems of all sizes that provide services in areas near our existing service territories or in new
service areas. It is our intention to focus on growth opportunities in states where we have critical mass,
which allows us to improve economies of scale through spreading our fixed costs over more customers – this
cost efficiency should enable us to lessen the size of future rate increases. We continue to explore
opportunities for the acquisition of non-regulated water and wastewater service businesses that are located
near our existing markets, to grow our existing revenue base. We are also seeking other potential business
opportunities, including growth opportunities provided by the natural gas and oil drilling industry with a
current focus on serving the raw water needs of drillers.
Sendout
“Sendout” represents the quantity of treated water delivered to our distribution systems. We use sendout as
an indicator of customer demand. Weather conditions tend to impact water consumption, particularly in our
northern service territories during the late spring and summer months when discretionary and recreational
use of water is at its highest. Consequently, a higher proportion of annual operating revenues are realized in
the second and third quarters. In general during this period, an extended period of hot and dry weather
increases water consumption, while above-average rainfall and cool weather decreases water consumption.
Conservation efforts, construction codes that require the use of low-flow plumbing fixtures, as well as
mandated water use restrictions in response to drought conditions can reduce water consumption. We
believe an increase in conservation awareness by our customers, including the increased use of more efficient
plumbing fixtures and appliances, may result in a long-term structural trend of declining water usage per
customer. These gradual long-term changes are normally taken into account by the regulatory commissions
in setting rates, whereas significant short-term changes in water usage, resulting from drought warnings, water
use restrictions, or extreme weather conditions, may not be fully reflected in the rates we charge between rate
proceedings.
On occasion, drought warnings and water use restrictions are issued by governmental authorities for portions
of our service territories in response to extended periods of dry weather conditions, regardless of our ability
to meet unrestricted customer water demands. The timing and duration of the warnings and restrictions can
have an impact on our water revenues and net income. In general, water consumption in the summer
months is affected by drought warnings and restrictions to a higher degree because discretionary and
recreational use of water is highest during the summer months, particularly in our northern service territories.
At other times of the year, warnings and restrictions generally have less of an effect on water consumption.
The geographic diversity of our utility customer base reduces the effect on Aqua America of our exposure to
extreme or unusual weather conditions in any one area of our service territory. During the year ended
December 31, 2012, our operating revenues were derived principally from the following states: 55% in
Pennsylvania, 10% in Ohio, 9% in Texas, 7%, in Illinois, and 6% in North Carolina.
6
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)
Performance Measures Considered by Management
We consider the following financial measures (and the period to period changes in these financial measures)
to be the fundamental basis by which we evaluate our operating results: earnings per share, operating
revenues, income from continuing operations, net income attributable to common shareholders and the
dividend rate on common stock. In addition, we consider other key measures in evaluating our utility
business performance within our Regulated segment: our number of utility customers, the ratio of operations
and maintenance expense compared to operating revenues (this percentage is termed “operating expense
ratio” or “efficiency ratio”); return on revenues (income from continuing operations divided by operating
revenues); return on equity (net income attributable to common shareholders divided by Aqua America
stockholders’ equity); and the ratio of capital expenditures to depreciation expense. We also review the
measure of earnings before interest, taxes, and depreciation (“EBITD”) and the measure of earnings before
income taxes as compared to our operating budget. We review these measurements regularly and compare
them to historical periods, to our operating budget as approved by our Board of Directors, and to other
publicly-traded water utilities.
Our operating expense ratio is one measure that we use to evaluate our operating efficiency and management
effectiveness of our regulated operations. Our operating expense ratio is affected by a number of factors,
including the following:
(cid:2) RRegulatory lag – Our rate filings are designed to provide for the recovery of increases in costs of
operations (primarily labor and employee benefits, electricity, chemicals, maintenance expenses,
insurance and claim costs, and costs to comply with environmental regulations), capital, and taxes.
The revenue portion of the efficiency ratio can be impacted by the timeliness of recovery of, and the
return on capital investments. The efficiency ratio is further influenced by regulatory lag (increases in
operations and maintenance expenses not yet recovered in rates or a gap between the time that a
capital project is completed and the start of its cost recovery in rates), or decreases in operating
revenues without a commensurate decrease in operations and maintenance expense, such as changes in
customer water consumption as impacted by adverse weather conditions, conservation trends, or as a
result of utility rates incorporating the effects of income tax benefits derived from deducting repair
expenses for tax purposes that are capitalized for book purposes in Aqua Pennsylvania and forgoing
operating revenue increases. During periods of inflation, our operations and maintenance expenses
may increase, impacting the efficiency ratio, as a result of regulatory lag since our rate cases may not be
filed timely nor are they retroactive.
(cid:2) Acquisitions – In general, acquisitions of smaller undercapitalized utility systems in certain areas may
initially increase our operating expense ratio if the operating revenues generated by these operations are
accompanied by a higher ratio of operations and maintenance expenses as compared to other
operational areas of the company that are more densely populated and have integrated operations. In
these cases, the acquired operations are characterized as having relatively higher operating costs to
fixed capital costs, in contrast to the majority of the Aqua America operations, which generally consist
of larger, interconnected systems, with higher fixed capital costs (utility plant investment) and lower
operating costs per customer. We operate subsidiary companies that provide 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 firms in the natural gas and oil drilling industry.
The cost-structure of these businesses differs from our utility companies in that, although they generate
free cash flow, these businesses have a much higher ratio of operations and maintenance expenses to
operating revenues and a lower capital investment and, consequently, a lower ratio of fixed capital costs
versus operating revenues in contrast to our regulated operations. As a result, the ratio of operating
income compared to operating revenues is not comparable between the businesses. The non-regulated
wastewater and septage service business is not a component of our Regulated segment.
We continue to evaluate initiatives to help control operating costs and improve efficiencies.
7
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)
Consolidated Selected Financial and Operating Statistics
Our selected five-year consolidated financial and operating statistics follow:
Years ended December 31,
Utility customers:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Total utility customers
Operating revenues:
Residential water
Commercial water
Industrial water
Other water
Wastewater
Other utility
Regulated segment total
Other
Consolidated
Operations and maintenance expense
Income from continuing operations
Net income attributable to common shareholders
Capital expenditures
Operating Statistics
Selected operating results as a
percentage of operating revenues:
Operations and maintenance
Depreciation and amortization
Taxes other than income taxes
Interest expense, net
Income from continuing operations
Return on Aqua America stockholders' equity
Ratio of capital expenditures to depreciation expense
Effective tax rate
2012 (a)
2011 (b)
2010
2009 (c)
2008 (d)
778,350
39,079
1,374
16,730
95,044
930,577
723,649
35,078
1,213
15,762
84,978
860,680
719,812
34,649
1,226
15,376
86,108
857,171
712,619
34,261
1,222
16,242
84,041
848,385
$
$
$
$
$
$
447,338 $
117,992
25,015
70,776
68,225
10,538
739,884
17,876
757,760 $
271,843 $
184,087 $
196,563 $
347,985 $
408,904 $
105,837
21,576
64,970
62,780
10,712
674,779
12,512
687,291 $
256,743 $
141,683 $
143,069 $
325,808 $
391,922 $
99,632
20,716
63,222
62,156
10,973
648,621
11,565
660,186 $
250,989 $
116,379 $
123,975 $
308,134 $
356,265 $
89,520
18,723
64,039
58,577
11,139
598,263
11,634
609,897 $
239,905 $
98,440 $
104,353 $
266,190 $
35.9%
15.4%
6.3%
10.3%
24.3%
14.2%
3.1
26.6%
37.4%
15.8%
6.0%
11.3%
20.6%
11.4%
3.2
32.8%
38.0%
16.9%
6.1%
11.1%
17.6%
10.6%
3.1
39.2%
39.3%
17.6%
6.1%
10.9%
16.1%
9.4%
2.8
39.3%
707,456
33,684
1,247
15,549
82,370
840,306
342,436
85,485
19,141
51,968
50,241
11,994
561,265
11,810
573,075
231,666
95,729
97,918
252,498
40.4%
15.2%
6.1%
11.5%
16.7%
9.3%
3.1
39.6%
(a) 2012 utility customers were impacted by the addition of 65,577 utility customers associated with utility systems
acquired. See Results of Operations – Income Taxes for a discussion of the effective tax rate change for 2012.
(b) Net income attributable to common shareholders includes the gain of $3,035 ($5,058 pre-tax) realized on the sale of
utility systems. The gain is reported in the 2011 consolidated statement of income as a reduction to operations and
maintenance expense.
(c) Net income attributable to common shareholders includes the gain of $605 ($1,009 pre-tax) realized on the sale of a
utility system. The gain is reported in the 2009 consolidated statement of income as a reduction to operations and
maintenance expense.
(d) 2008 utility customers were impacted by the loss of 22,519 utility customers associated with the utility systems
disposed of. Net income includes the gain of $2,427 ($4,118 pre-tax) realized on the sale of a utility system. The
gain is reported in the 2008 consolidated statement of income as a reduction to operations and maintenance
expense.
8
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
Our income from continuing operations has grown at an annual compound rate of approximately 14.9% and
our net income has grown at an annual compound rate of approximately 15.6% during the five-year period
ended December 31, 2012. During the past five years, operating revenues grew at a compound rate of 6.6%
and total expenses, exclusive of income taxes, grew at a compound rate of 4.9%.
Operating Segments
We have identified twelve operating segments and we have one reportable segment based on the following:
(cid:2) Ten segments are composed of our water and wastewater regulated utility operations in the ten states
where we provide these services. These operating segments are aggregated into one reportable
segment since each of these operating segments has the following similarities: economic characteristics,
nature of services, production processes, customers, water distribution and/or wastewater collection
methods, and the nature of the regulatory environment. Our single reportable segment is named the
Regulated segment. Two of our operating segments have been classified as discontinued operations,
and are excluded from the Regulated segment disclosure of our results of continuing operations.
(cid:2) Two segments are not quantitatively significant to be reportable and are composed of the businesses
that provide 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 firms in the
natural gas and oil drilling industry. These segments are included as a component of “other,” in
addition to corporate costs that have not been allocated to the Regulated segment and intersegment
eliminations. Corporate costs include certain general and administrative expenses, and interest
expense.
9
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)
Unless specifically noted, the following discussion and analysis provides information on our consolidated
results of continuing operations. The following table provides the Regulated segment and consolidated
information for the years ended December 31, 2012, 2011, and 2010:
2012
Other and
2011
Other and
Regulated Eliminations Consolidated
Regulated Eliminations Consolidated
Operating revenues
$
740,030
$ 17,730
$
757,760
$
674,927
$
12,364
$ 687,291
Operations and maintenance expense
259,847
11,996
271,843
243,137
13,606
256,743
Taxes other than income taxes
45,450
1,954
47,404
39,677
1,772
41,449
Earnings (losses) before interest, taxes, depreciation and
amortization
$
434,733
$
3,780
438,513
$
392,113
$
(3,014)
389,099
108,300
280,799
70,654
(649)
-
69,111
141,683
1,386
$ 143,069
Depreciation and amortization
Operating income
Interest expense, net of AFUDC
Gain on sale of other assets
Equity earnings in joint venture
Provision for income taxes
Income from continuing operations
Income from discontinued operations, net of income taxes
of $8,017 and $12,893, respectively
Net income
116,996
321,517
73,615
(1,090)
(1,976)
66,881
184,087
12,476
$
196,563
Operating revenues
Operations and maintenance expense
Taxes other than income taxes
2010
Other and
Regulated Eliminations Consolidated
$
648,768
$ 11,418
$
660,186
238,093
12,896
250,989
38,652
1,495
40,147
Earnings (losses) before interest, taxes, depreciation and
amortization
$
372,023
$ (2,973)
369,050
Depreciation and amortization
Operating income
Interest expense, net of AFUDC
Gain on sale of other assets
Provision for income taxes
Income from continuing operations
Income from discontinued operations net of income taxes
of $5,154
Net income
111,716
257,334
68,562
(2,547)
74,940
116,379
7,596
$
123,975
10
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)
Consolidated Results
OOperating Revenues – The growth in revenues over the past three years is a result of increases in water and
wastewater rates and in our customer base. Rate increases implemented during the past three years have
provided additional operating revenues of approximately $39,987 in 2012, $37,988 in 2011, and $32,503 in
2010. Negatively impacting our revenue growth in 2012 was a slight decline in water consumption as
compared to the prior year and in 2011 was a decrease in customer water consumption largely due to
unfavorable weather conditions in many of our service territories during the third quarter of 2011, as well as
increases in water conservation awareness by our customers. The number of customers increased at an
annual compound rate of 0.5% over the past three years due to acquisitions and organic growth, offset by
dispositions. If adjusted for the utility system dispositions over the past three years, the annual compound
customer growth rate would have been 2.9%. Acquisitions in our Regulated segment have provided
additional water and wastewater revenues of approximately $28,296 in 2012, $3,960 in 2011, and $2,579 in
2010.
On June 7, 2012, the Pennsylvania Public Utility Commission (“PAPUC”) granted Aqua Pennsylvania a water
rate increase designed to increase water rates by $16,700 on an annual basis. The rates in effect at the time of
the filing included $27,449 in Distribution System Improvement Charges (“DSIC”) or 7.5% above prior base
rates. Consequently, the total base rates increased by $44,149 since the last base rate increase, and the DSIC
was reset to zero. In addition, the rate case settlement provides for the flow-through accounting treatment of
certain income tax benefits if Aqua Pennsylvania changes 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
which resulted in the net recognition of 2012 income tax benefits of $33,565 which reduced income tax
expense and flowed-through to net income in the fourth quarter of 2012. In addition, the income tax
benefits of $111,397 for qualifying capital expenditures made prior to 2012 have been deferred as of
December 31, 2012 and, based on the settlement agreement, a ten year amortization of the income tax
benefits is expected to reduce income tax expense beginning in 2013. Also, as a result of the repair change,
the fourth quarter 2012 DSIC of 2.82% for Aqua Pennsylvania’s water customers was reset to zero beginning
January 1, 2013, and Aqua Pennsylvania will not file a water base rate case in 2013.
On June 17, 2010, the PAPUC granted Aqua Pennsylvania a water rate increase designed to increase total
operating revenues by $23,600, on an annualized basis. The rates in effect at the time of the filing included
$24,256 in DSIC or 7.5% above prior base rates. Consequently, the total base rates increased by $47,856
since the last base rate increase, and the DSIC was reset to zero.
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 is subject to refund based on the
outcome of the rate case. As of December 31, 2012, the Company had billed revenue of $4,758, which is
subject to refund based on the outcome of the TCEQ’s final ruling. Based on the Company’s review of the
present circumstances, a reserve of $1,665 has been established for the billings to date.
In October 2010, the Company’s operating subsidiary in Texas began to bill interim rates for one of its
divisions in accordance with authorization from the Texas Commission on Environmental Quality
(“TCEQ”). The additional revenue billed and collected prior to the TCEQ’s final ruling is subject to refund
based on the outcome of the rate case. The rate case concluded with the issuance of an order on May 20,
2012, and no refunds of revenue previously billed and collected were required.
Our operating subsidiaries, excluding the Pennsylvania and Texas water awards discussed above, received rate
increases representing estimated annualized revenues of $11,774 in 2012 resulting from eight rate decisions,
$6,311 in 2011 resulting from twelve rate decisions, and $13,834 in 2010 resulting from eleven rate decisions.
Revenues from these increases realized in the year of grant were approximately $7,605 in 2012, $3,312 in
2011, and $4,515 in 2010. As of December 31, 2012, our operating subsidiaries currently have filed two rate
requests, which are being reviewed by the state regulatory commissions, proposing an aggregate increase of
$9,188 in annual revenues. During 2013, we intend to file ten additional rate requests proposing an aggregate
11
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)
of approximately $13,147 of increased annual revenues; the timing and extent to which our rate increase
requests may be granted will vary by state.
Currently, Pennsylvania, Ohio, Illinois, and Indiana allow for the use of infrastructure rehabilitation
surcharges, and in June 2012 regulators approved a rulemaking to implement an infrastructure rehabilitation
surcharge for regulated water utilities in New Jersey; as a result, our New Jersey subsidiary is in the process of
implementing an infrastructure rehabilitation surcharge for 2013. In Pennsylvania, this mechanism is referred
to as a DSIC. The rate increases under these surcharge mechanisms typically adjust periodically based on
additional qualified capital expenditures completed or anticipated in a future period. Infrastructure
rehabilitation surcharges are capped as a percentage of base rates, generally at 5% to 12.75% of base rates,
and are reset to zero when new base rates that reflect the costs of those additions become effective or when a
utility’s earnings exceed a regulatory benchmark. Infrastructure rehabilitation surcharges provided revenues
of $15,911 in 2012, $15,937 in 2011, and $14,044 in 2010.
In 2012, Aqua Pennsylvania decided to adopt the repair tax accounting change on Aqua America’s 2012
federal income tax return to be filed in September 2013. The change, which was contemplated under our
subsidiary’s June 2012 rate order, allows a tax deduction for certain qualifying utility asset improvements that
was formerly capitalized and depreciated for book and tax purposes. As a result of Aqua Pennsylvania’s
implementing this tax accounting change, the DSIC will be suspended for 2013 for Aqua Pennsylvania due to
the anticipated earnings level to be achieved. This tax accounting change and its flow-through treatment
under the Pennsylvania rate order will offset the impact of the 2013 DSIC suspension through a reduction in
income tax expense.
Our Regulated segment also includes certain non-regulated operating revenues of $10,538 in 2012, $10,712 in
2011, and $10,973 in 2010. These operating revenues are associated with contract operations that are
integrated into the regulated utility business and operations. These amounts vary over time according to the
level of activity associated with the utility contract operations.
In addition to the Regulated segment operating revenues, we had other non-regulated revenues that were
primarily associated with non-regulated wastewater, sludge hauling, septage and grease services, backflow
prevention services, operating and maintenance contracts, certain other non-regulated water and wastewater
services, and non-utility raw water supply services for firms in the natural gas and oil drilling industry of
$17,876 in 2012, $12,512 in 2011, and $11,565 in 2010.
OOperations and Maintenance Expenses – Operations and maintenance expenses totaled $271,843 in 2012,
$256,743 in 2011, and $250,989 in 2010. Most elements of operating costs are subject to the effects of
inflation and changes in the number of customers served. Several elements are subject to the effects of
changes in water consumption, weather and the degree of water treatment required due to variations in the
quality of the raw water. The principal elements of operating costs are labor and employee benefits,
electricity, chemicals, maintenance expenses and insurance and claims costs. Electricity and chemical
expenses vary in relationship to water consumption, raw water quality, and price changes. Maintenance
expenses are sensitive to extremely cold weather, which can cause water mains to rupture, resulting in
additional costs to repair the affected main.
Operation and maintenance expenses increased in 2012 as compared to 2011 by $15,100 or 5.9%, primarily
due to increases in operating costs associated with acquired utility systems and other growth ventures of
$13,080, the effect of the gains on the sales of our utility system recognized during 2011 of $5,058, an
increase in insurance expense of $2,677, an increase in post-retirement benefits expenses of $2,217, an
increase in stock-based compensation of $1,684, and normal increases in other operating costs. Offsetting
these increases were decreases in water production costs of $5,732, and the effect of the recognition of a
regulatory asset resulting from a completed rate case which reduced operations and maintenance expense by
$3,356. The decrease in water production costs results primarily from a decrease in the contractual rate of
one of our purchased water contracts, and the non-renewal of another purchased water contract.
Operations and maintenance expenses increased in 2011 as compared to 2010 by $5,754 or 2.3%, primarily
due to increased water production costs of $3,313, increases in operating costs associated with acquired utility
systems and other growth ventures of $2,893, an increase in post-retirement benefits expenses of $1,975,
12
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)
increases in fuel costs for our service vehicles of $1,016, and normal increases in other operating costs.
Offsetting these increases were the gains on the sales of our utility systems recognized during 2011 of $5,058,
the effect of the write-off in 2010 of previously deferred regulatory expenses of $2,210, decreased insurance
expense of $1,893, and reduced expenses of $1,462 associated with the disposition of utility systems. The
increase in water production costs is primarily due to an increase in the cost of purchased water. In the
consolidated statement of income for 2011, the gain on sale of utility system is reported as a component of
operations and maintenance expense.
DDepreciation and Amortization Expenses – Depreciation expense was $111,767 in 2012, $103,412 in
2011, and $100,606 in 2010, and has increased principally as a result of the significant capital expenditures
made to expand and improve our utility facilities, and our acquisitions of new utility systems.
Amortization expense was $5,229 in 2012, $4,888 in 2011, and $11,110 in 2010, and increased in 2012
primarily due to the amortization of costs associated with, and other costs being recovered in, various rate
filings. The decrease in 2011 is primarily due to the amortization recognized in 2010 of $6,739 resulting from
the completion of the recovery through a surcharge of our costs associated with our rate filing in Texas and
the amortization of the costs associated with, and other costs being recovered in, various rate filings.
Expenses associated with filing rate cases are deferred and amortized over periods that generally range from
one to three years.
Taxes Other than Income Taxes – Taxes other than income taxes totaled $47,404 in 2012, $41,449 in
2011, and $40,147 in 2010. The increase in 2012 is primarily due to an increase in property taxes of $4,932,
gross receipts, excise and franchise taxes of $652, and payroll taxes of $526 resulting primarily from our Ohio
acquisition, offset by a decrease in capital stock taxes of $363 for Aqua Pennsylvania. The increase in 2011 is
primarily due to an increase in other taxes of $942 largely due to an increase in taxes assessed resulting from
the pumping of ground water in Texas.
Interest Expense, net – Net interest expense was $77,757 in 2012, $77,804 in 2011, and $73,393 in 2010.
Interest income of $372 in 2012, $757 in 2011, and $1,288 in 2010 was netted against interest expense. Net
interest expense decreased in 2012 primarily due to a decline in short-term interest rates and the refinancing
of existing debt at lower interest rates. Net interest expense increased in 2011 primarily due to the full-year
impact of $141,385 in tax exempt bonds issued in November 2010 by Aqua Pennsylvania. Interest income
decreased in 2012 and 2011 due to lower investment rates and lower balances on the proceeds from the
issuance of tax-exempt bonds held by trustees pending the draw-down for projects financed with the
issuances. The interest income earned on the proceeds from the issuance of tax-exempt bonds is capitalized
through our allowance for funds used during construction, a reduction to net interest expense. The weighted
average cost of long-term debt was 4.81% at December 31, 2012, 5.17% at December 31, 2011, and 5.13% at
December 31, 2010.
Allowance for Funds Used During Construction – The allowance for funds used during construction
(AFUDC) was $4,142 in 2012, $7,150 in 2011, and $4,831 in 2010, and has varied over the years as a result of
changes in the average balance of utility plant construction work in progress (CWIP), to which AFUDC is
applied, changes in the AFUDC rate which is based predominantly on short-term interest rates, and changes
in the average balance of the proceeds held from tax-exempt bond issuances that are restricted to funding
certain capital projects. The decrease in 2012 is due to a decrease in the average balance of proceeds held
from tax-exempt bond issuances that are restricted to funding certain capital projects. The increase in 2011 is
due to an increase in the average balance of proceeds held from tax-exempt bond issuances that are restricted
to funding certain capital projects.
Gain on Sale of Other Assets – Gain on sale of other assets totaled $1,090 in 2012, $649 in 2011, and
$2,547 in 2010, and consisted of gains on properties and marketable securities sales. Gain on sale of
properties totaled $630 in 2012, $291 in 2011, and $440 in 2010. Gain on sale of marketable securities totaled
$460 in 2012, $358 in 2011, and $2,107 in 2010.
Equity Earnings in Joint Venture – Equity earnings in joint venture of $1,976 reflect our earnings in
serving the raw water needs of firms in the natural gas and oil exploration industry.
13
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)
IIncome Taxes – Our effective income tax rate was 26.6% in 2012, 32.8% in 2011, and 39.2% in 2010. The
decrease in the effective tax rate for 2012 was primarily due to the change in the Company’s repair tax
accounting method for repair expenditures at Aqua Pennsylvania which resulted in a $33,565 net reduction to
2012 income tax expense recognized in the fourth quarter of 2012. The decrease in the effective tax rate for
2011 was primarily due to the recognition in 2011 of the net state income tax benefit of $14,800 associated
with 100% bonus depreciation for qualifying capital additions.
Summary – Operating income was $321,517 in 2012, $280,799 in 2011, and $257,334 in 2010, income from
continuing operations was $184,087 in 2012, $141,683 in 2011, and $116,379 in 2010, income from
discontinued operations was $12,476 in 2012, $1,386 in 2011, and $7,596 in 2010, and net income attributable
to common shareholders was $196,563 in 2012, $143,069 in 2011, and $123,975 in 2010.
Diluted income from continuing operations per share was $1.32 in 2012, $1.02 in 2011, and $0.85 in 2010,
diluted income from discontinued operations per share was $0.09 in 2012, $0.01 in 2011, and $0.06 in 2010,
and diluted net income per share was $1.40 in 2012, $1.03 in 2011, and $0.90 in 2010.
The changes in the per share income from continuing operations in 2012 and 2011 over the previous years
were due to the aforementioned changes and impacted by a 0.9% increase in the average number of common
shares outstanding during 2012 and a 1.0% increase in the average number of common shares outstanding
during 2011. The increase in the number of shares outstanding in 2012 and 2011 is primarily a result of the
additional shares sold or issued through our dividend reinvestment plan and equity compensation plan.
Income from discontinued operations for 2012 increased by $11,090 or $0.08 per diluted share, in
comparison to 2011 primarily as a result of the recognition in 2012 of the gain on sale of our Maine operating
subsidiary, of $17,699 ($10,821 after-tax), the effect of the income tax expense recognized in 2011 of $7,253
for the additional deferred tax liability that arose from the difference between the stock and tax basis of the
Company’s investment in its New York and Maine operating subsidiaries, a reduction in interest expense, net
of tax, of $1,120 as a result of debt assumed in 2012 by the acquirer(s) in the sale of our New York and Maine
operating subsidiaries, offset by charges incurred from the disposal of our New York subsidiary of $2,090,
and an asset impairment recognized in 2012, net of tax, of $852. Income from discontinued operations for
2011 decreased by $6,210 or $0.04 per diluted share, in comparison to 2010 primarily as a result of the
income tax expense recognized in 2011 of $7,253 for the additional deferred tax liabilities that arise from the
difference between the stock and tax basis of the Company’s investment in its discontinued operations, and
an estimated loss on disposition recognized in 2011 of $1,254 primarily due to the cessation of depreciation
for our New York operations.
Although we have experienced increased income in the recent past, continued adequate rate increases
reflecting increased operating costs and new capital investments are important to the future realization of
improved profitability.
14
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)
FFourth Quarter Results – The following table provides our fourth quarter results:
Operating revenues
Operations and maintenance
Depreciation
Amortization
Taxes other than income taxes
Operating income
Interest expense, net
Allowance for funds used
during construction
Gain on sale of other assets
Equity earnings in joint venture
Income before income taxes
Provision for income taxes
Income from continuing operations
Income from discontinued operations,
net of income taxes of $259 and $1,326
Net income
Three Months Ended
December 31,
2012
2011
$
187,481
$
166,793
72,179
29,031
1,456
12,704
115,370
72,111
19,373
(658)
(264)
(1,045)
54,705
(10,429)
65,134
1,421
66,555
$
$
66,502
25,767
847
10,018
103,134
63,659
19,344
(1,461)
(174)
-
45,950
14,444
31,506
2,499
34,005
The increase in operating revenues was a result of additional revenues of $15,866 from an increase in water
and wastewater rates implemented in various operating subsidiaries, and additional wastewater and water
revenues of $9,718 associated with a larger customer base due to acquisitions, offset by a decrease in
customer water consumption largely due to unfavorable weather conditions primarily in our Pennsylvania
service territories during the fourth quarter of 2012, as well as an increase in water conservation awareness by
our customers. The higher operations and maintenance expense is due primarily to $4,185 of additional
operating costs associated with acquisitions, the effect of the gain on sale in the fourth quarter of 2011 of our
utility system in North Carolina of $1,112, an increase in insurance expense of $825, and normal increases in
other operating expenses, offset by a decrease in water production costs of $1,574. Depreciation expense
increased primarily due to the utility plant placed in service since December 31, 2011. Amortization expense
increased primarily due to the amortization of costs associated with, and other costs being recovered in,
various rate filings. The increase in other taxes is primarily due to increases in property taxes of $1,735, gross
receipts, excise and franchise taxes of $713, and payroll taxes of $271, primarily due to our acquisition in
Ohio. Allowance for funds used during construction decreased by $803 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. Gain on sale of other assets decreased by $90 principally due to the timing of sales of land and
other property. Equity earnings in joint venture of $1,045 reflect our earnings in serving the raw water needs
of firms in the natural gas and oil exploration industry. The provision for income taxes was reduced in the
fourth quarter of 2012 by the 2012 net tax benefits recognized of $33,565 resulting from our change in tax
method of accounting associated with the repair change, offset partially by the recognition in 2011 of the net
state income tax benefit of $3,607 associated with 100% bonus depreciation for qualifying capital additions.
The impact of the repair tax accounting method change reduced the fourth quarter income tax expense, as
the change was made in December 2012, and the amount recognized represents the full year 2012 impact.
15
AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)
Income from discontinued operations decreased by $1,078 primarily due to the sale of our Maine and New
York subsidiaries in the first half of 2012.
FINANCIAL CONDITION
Consolidated Cash Flow and Capital Expenditures
Net operating cash flows from continuing operations, dividends paid on common stock, capital expenditures
used in continuing operations, including allowances for funds used during construction, and expenditures for
acquiring water and wastewater systems for our continuing operations for the five years ended December 31,
2012 were as follows:
Net Operating
Cash Flows
Common
Dividends
Capital
Expenditures
2008
2009
2010
2011
2012
$
$
206,742
244,318
244,717
352,041
377,485
1,425,303
$
$
68,504
74,729
80,907
87,133
93,423
404,696
$
$
252,498
266,190
308,134
325,808
347,985
1,500,615
Acquisitions
$
$
14,659
3,373
8,625
8,515
121,248
156,420
Included in capital expenditures for the five-year period are: expenditures for the modernization and
replacement of existing treatment plants, new water mains and customer service lines, rehabilitation of
existing water mains and hydrants, and water meters. During this five-year period, we received $25,849 of
customer advances and contributions in aid of construction to finance new water mains and related facilities
that are not included in the capital expenditures presented in the above table. In addition, during this period,
we have made sinking fund contributions and repaid debt in the amount of $353,097, and have refunded
$25,763 of customers’ advances for construction. Common dividends increased during the past five years as
a result of annual increases in the common dividends declared and paid and increases in the number of shares
outstanding during the period.
Our planned 2013 capital program, exclusive of the costs of new mains financed by advances and
contributions in aid of construction, is estimated to continue at similar levels as 2012. The 2013 capital
program is expected to include $170,000 for infrastructure rehabilitation surcharge-qualified projects. Our
planned capital program includes spending for infrastructure rehabilitation that may qualify for infrastructure
rehabilitation surcharge mechanisms, and should these mechanisms be discontinued for any reason, which is
not anticipated, we may re-evaluate the magnitude of this portion of our capital program. Beginning January
1, 2013, Aqua Pennsylvania reset its water DSIC to zero resulting from the change in its tax method of
accounting for repair expense deductions as described below. Although we may not be currently eligible to
use a DSIC with our Aqua Pennsylvania water customers in 2013, we intend to use the income tax savings
derived from the repair change to continue to maintain a similar capital investment program as 2012. Our
planned 2013 capital program in Pennsylvania is estimated to be $239,000, a portion of which is expected to
be eligible as a repair deduction for federal income tax purposes. Our overall 2013 capital program, along
with $45,038 of sinking fund obligations and debt maturities, and $158,648 of other contractual cash
obligations, as reported in the section captioned “Contractual Obligations”, has been or is expected to be
financed through internally-generated funds, our revolving credit facilities, the issuance of equity, and the
issuance of long-term debt.
Future utility construction in the period 2014 through 2017, including recurring programs, such as the
ongoing replacement or rehabilitation of water meters, water mains, water treatment plant upgrades, storage
facility renovations, and additional transmission mains to meet customer demands, exclusive of the costs of
new mains financed by advances and contributions in aid of construction, is estimated to require aggregate
16
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)
expenditures of approximately $1,200,000. We anticipate that less than one-half of these expenditures will
require external financing with debt and the additional issuance of common stock through our dividend
reinvestment and stock purchase plans. We expect to refinance $323,282 of sinking fund obligations and
debt maturities during this period as they become due with new issues of long-term debt, internally-generated
funds, and our revolving credit facilities. The estimates discussed above do not include any amounts for
possible future acquisitions of water systems or the financing necessary to support them.
Our primary sources of liquidity are cash flows from operations (including the allowed deferral of federal
income tax payments), borrowings under various short-term lines of credit and other credit facilities, and
customer advances and contributions in aid of construction. Our cash flow from operations, or internally-
generated funds, is impacted by the timing of rate relief, water consumption, and changes in federal tax laws
with respect to accelerated tax depreciation or deductions for utility construction projects. We fund our
capital and acquisition programs through internally-generated funds, supplemented by short-term borrowings.
Over time, we partially repay or pay-down our short-term borrowings with long-term debt and proceeds from
the issuance of common stock. The ability to finance our future construction programs, as well as our
acquisition activities, depends on our ability to attract the necessary external financing and maintain internally-
generated funds. Rate orders permitting compensatory rates of return on invested capital and timely rate
adjustments will be required by our operating subsidiaries to achieve an adequate level of earnings and cash
flow to enable them to secure the capital they will need to operate and to maintain satisfactory debt coverage
ratios.
In December 2012, we changed our tax method of accounting as permitted under Internal Revenue Service
(“IRS”) regulations for certain qualifying utility system repairs in Aqua Pennsylvania effective with the tax
year ended December 31, 2012 and for prior tax years. The repair tax accounting method was changed to
permit the expensing of certain utility asset improvement costs that were previously being capitalized and
depreciated for book and tax purposes (the “repair change”). The repair change was implemented in
response to a June 2012 rate order issued by the Pennsylvania Public Utility Commission to Aqua
Pennsylvania (“settlement agreement”) which provides for flow-through accounting treatment of certain
income tax benefits resulting from the repair change. As a result of this settlement agreement, the net 2012
income tax benefits of $33,565 reduced income tax expense and increased net income in the fourth quarter of
2012, and the income tax benefits of $111,397 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 is expected to reduce income tax expense beginning in 2013.
The repair change resulted in a significant reduction in our effective income tax rate, a net reduction in
income tax expense of $33,565 recognized in the fourth quarter of 2012 for the tax year 2012 impact, and
reduced the amount of taxes currently payable resulting in a tax refund expected of $14,802 on tax payments
made prior to the repair change. The catch-up adjustment resulted in a $88,476 decrease to current taxes
payable (resulting in a significant decrease in taxes paid); a $190,389 increase to regulatory liabilities which is
expected to be amortized over the next ten years; and an increase to both deferred tax liabilities and
regulatory assets representing the appropriate book/tax basis difference on capital additions.
Our planned 2013 capital program is projected to continue at a similar level compared to 2012, and the repair
tax deduction is anticipated to continue at a similar level in 2013 and beyond. Our 2013 earnings will be
impacted by the following factors in Aqua Pennsylvania: the repair tax deduction in 2013 is expected to
decrease income tax expense by a similar amount as 2012, and the ten year amortization of the catch-up
adjustment is also expected to reduce income tax expense; offset by the effect on operating revenue as a
result of the DSIC being reset to zero beginning January 1, 2013 and remaining at that level in 2013, and the
effect of regulatory lag as we will not be filing a request for a base rate increase until after 2013. In addition,
we are beginning to evaluate the use of a repair change in other states where we operate, although the rate
treatment afforded such change is not expected to have a direct impact on income tax expense.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Tax Relief
Act”) was enacted on December 17, 2010 and provided for an extension of 50% bonus depreciation for
qualifying capital additions through 2012 and a 100% expensing allowance for qualifying capital additions
placed in service after September 8, 2010 through 2011. A substantial portion of our capital expenditures
17
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)
qualified for 50% bonus depreciation or the 100% expensing allowance. As a result of the Tax Relief Act, the
Company’s Federal income tax payments were eliminated for tax year 2011 and our net operating cash flows
were favorably impacted. In addition, we received a Federal income tax refund in the amount of $33,600 in
October 2011 relating to our 2010 tax return. In the first quarter of 2011, one of our state tax jurisdictions
announced that it would recognize the 100% expensing allowance beginning after September 8, 2010 and in
2011. As a result of this guidance and the flow-through treatment afforded by that state’s regulatory
commission, the net state tax benefit reduced our state income tax expense in 2011 by $14,800, reduced our
effective income tax rate, and increased our earnings by $0.107 per share. The American Tax Relief Act of
2012 was enacted on January 2, 2013 and provided for an extension of the 50% bonus depreciation for
qualifying capital additions for tax year 2013.
Acquisitions
During the past five years, we have expended cash of $156,420 and issued 289,775 shares of common stock,
valued at $4,909 at the time of the acquisition, related to the acquisition of utility systems, both water and
wastewater utilities, as well as certain investments in the natural gas and oil drilling industry. As part of the
Company’s growth-through-acquisition strategy, in July 2011, the Company entered into a definitive
agreement with American Water Works Company, Inc. to purchase all of the stock of the subsidiary that held
American Water’s regulated water and wastewater operations in Ohio. American Water’s Ohio operations
served approximately 59,000 customers. On May 1, 2012, the Company completed its acquisition of
American Water’s water and wastewater operations in Ohio. The total purchase price at closing consisted of
$102,154 in cash plus certain assumed liabilities, including debt of $14,281, as adjusted pursuant to the
purchase agreement based on book value at closing. The transaction has been accounted for as a business
combination. The Ohio acquisition was financed primarily from the proceeds from the January 1, 2012 sale
of our Maine subsidiary, the May 1, 2012 sale of our New York subsidiary, and by the issuance of long-term
and/or short-term debt. In addition to our Ohio acquisition, during 2012, we completed 16 acquisitions of
water and wastewater utility systems for $19,094 in cash in six of the states in which we operate.
In June 2011, the Company completed its acquisition of approximately 51 water and five wastewater systems
in Texas serving approximately 5,300 customers. The total purchase price consisted of $6,245 in cash. The
Company’s acquisitions in Ohio and Texas were accretive to the Company’s results of operations, however,
the pro forma effect of the businesses acquired are not material to the Company’s results of operations. In
addition to our Texas acquisition, during 2011, we completed eight acquisitions of water and wastewater
utility systems for $2,270 in cash in three of the states in which we operate. During 2010, we completed 23
acquisitions of water and wastewater utility systems in six of the states in which we operate. The 2010
acquisitions were completed for $8,625 in cash. During 2009, we completed 18 acquisitions of water and
wastewater systems in five of the states in which we operate, including expanding our operations into one
new state. The 2009 acquisitions were completed for $3,373 in cash and the issuance of 164,052 shares of
common stock valued at $2,909 at the time of the acquisition. During 2008, we completed nine acquisitions
of water and wastewater systems in four of the states in which we operate. The 2008 acquisitions were
completed for $14,659 in cash and the issuance of 125,723 shares of common stock valued at $2,000 at the
time of the acquisition.
We included the operating results of these acquisitions in our consolidated financial statements beginning on
the respective acquisition dates.
We continue to hold acquisition discussions with several water and wastewater systems. Our typical
acquisitions are expected to be financed with short-term debt with subsequent repayment from the proceeds
of long-term debt, retained earnings, or equity issuances.
In September 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 raw
water to certain natural gas well drilling operations in the Marcellus Shale in north-central Pennsylvania. The
initial 18-mile pipeline commenced operations in the second quarter of 2012. The initial pipeline system is
being expanded for an additional 38 miles with a permitted intake on the Susquehanna River, which will
extend the pipeline to additional drillers. The total cost of the pipeline is estimated to cost $114,000. This
18
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)
project marks an expansion of our growth venture in serving the raw water needs of firms in the natural gas
and oil exploration industry. The joint venture has entered into water sale agreements with natural gas drilling
companies and negotiations continue with other area drilling companies. As of December 31, 2012, our
capital contributions since inception totaled $38,943. This investment has been or is expected to be financed
through the issuance of long-term debt. Our 49% investment in this joint venture is as an unconsolidated
affiliate and is accounted for under the equity method of accounting. Our investment is carried at cost,
including capital contributions or distributions and our equity in earnings since the commencement of the
system’s operations. Since natural gas drilling requires a large quantity of raw water in order to extract gas, we
are continuing to hold exploratory discussions with other natural gas drilling companies about their needs for
raw water supply.
Dispositions
We routinely review and evaluate areas of our business and operating divisions and, over time, may sell
certain utility systems or portions of systems. In 2010, 2011, and 2012, in accordance with our strategy to
focus our resources on states where we have critical mass to improve our economies of scale and expect
future economic growth, we sold or signed agreements to exit or sell water and wastewater systems in five
states: South Carolina, Missouri, Maine, New York, and Florida. With respect to the sale of our systems in
Missouri and the sale of our systems in New York, we acquired additional utility systems in Texas and in
Ohio.
In December 2012, the Company entered into a definitive agreement to sell 80 of its water and wastewater
systems in Florida to the Florida Governmental Utility Authority for cash at closing of $49,200, which is
subject to certain adjustments. These 80 water and wastewater systems represent approximately 56% of our
customers served in Florida. This transaction is expected to close in the first half of 2013. In addition, we
are holding discussions with interested parties for the sale of the remainder of our Florida water and
wastewater operations.
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, we completed the sale for net proceeds of $36,870,
and recognized a gain on sale of $17,699 ($10,821 after-tax). The sale of our Maine operations concluded our
regulated operations in Maine. The proceeds were used to finance a portion of our acquisition of American
Water’s Ohio subsidiary, pay-down a portion of our short-term debt, and other general corporate purposes.
In July 2011, the Company entered into a definitive agreement with American Water 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. The Company’s New York operations served
approximately 51,000 customers. The sale of our New York operations concluded our regulated operations
in New York. The proceeds were used to finance a portion of our acquisition of American Water’s Ohio
subsidiary, pay-down a portion of our short-term debt, and other general corporate purposes.
In June 2011, we sold a water and wastewater utility system for net proceeds of $4,106. The sale resulted in
the recognition of a gain on the sale, net of expenses, of $2,692, and is reported in the consolidated statement
of income as a reduction to operations and maintenance expense. The utility system represented
approximately 0.03% of Aqua America’s total assets. In May 2011, we sold our regulated water and
wastewater operations in Missouri for net proceeds of $3,225, resulting in a small gain on sale. The sale of
our utility operations in Missouri represented approximately 0.07% of Aqua America’s total assets. In January
2011, we sold a water and wastewater utility system for net proceeds of $3,118. The sale resulted in the
recognition of a gain on the sale, net of expenses, of $2,452. The utility system represented approximately
0.01% of Aqua America’s total assets. The gain is reported in the consolidated statement of income as a
reduction to operations and maintenance expense.
In December 2010, we sold a wastewater utility system for net proceeds of $120. The utility system
represented less than 0.01% of Aqua America’s total assets.
19
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)
In June 2009, we sold a water and wastewater utility system for net proceeds of $1,601, which was in excess
of the book value for these assets. The proceeds were used to pay-down short-term debt and the sale
resulted in the recognition in 2009 of a gain on the sale of these assets, net of expenses of $1,009. The gain is
reported in the 2009 consolidated statement of income as a reduction to operations and maintenance
expense. These utility systems represented approximately 0.02% of Aqua America’s total assets.
In August 2008, we sold a water and wastewater utility system for net proceeds of $10,500, which consisted
of $1,900 in cash and the issuance of a note receivable of $8,600 that bears interest at 7.25% and provides for
semi-annual principal and interest payments, which was paid off in 2011. The sale resulted in the recognition
of a gain on the sale of these assets, net of expenses, of $4,118. The gain is reported in the consolidated
statement of income as a reduction to operations and maintenance expense. These utility systems
represented approximately 0.20% of Aqua America’s total assets.
The City of Fort Wayne, Indiana (the “City”) has authorized the acquisition by eminent domain of the
northern portion of the utility water and wastewater systems of one of the operating subsidiaries in Indiana.
In January 2008, we reached a settlement with the City to transition the northern portion of the system in
February 2008 upon receipt of the City’s initial valuation payment of $16,911. The settlement agreement
specifically stated that the final valuation of the northern portion of our system 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 portion of our system to the City upon receipt of the initial valuation payment..
The proceeds received are in excess of the book value of the assets relinquished. No gain has been
recognized due to the contingency over the final valuation of the assets. 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 our consolidated income statement. On
March 16, 2009, oral argument was held on certain procedural aspects with respect to the valuation evidence
that may be presented and whether we are entitled to a jury trial. On October 12, 2010, the Wells County
Indiana Circuit Court ruled that we are not entitled to a jury trial, and that the Wells County judge should
review the City of Fort Wayne Board of Public Works’ assessment based upon a “capricious, arbitrary or an
abuse of discretion” standard. We disagreed with the Court’s decision and, as such, requested that the Wells
County Indiana Circuit Court certify those issues for an interim appeal. The Wells County Indiana Circuit
Court granted that request, and on March 7, 2011, the Indiana Court of Appeals granted the Company’s
request to review the decision of those issues on appeal. On July 6, 2011, we filed our appeal with the
Indiana Court of Appeals. On January 13, 2012, the Indiana Court of Appeals reached a decision denying the
Company’s appeal. On February 10, 2012, we filed a petition for transfer requesting that the Indiana
Supreme Court review the matter. That petition is currently pending. We are evaluating our legal options
with respect to this decision. Depending upon the outcome of all of the legal proceedings, we may be
required to refund a portion of the initial valuation payment, or may receive additional proceeds. The
northern portion of the utility system relinquished represents approximately 0.40% of our total assets. In
addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a
“public convenience and necessity” to acquire certain of the Company’s utility system assets located in the
southwest section of the City and, if negotiations with Fort Wayne officials were to fail, to condemn certain
of the Company’s utility system 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. The Company will continue to evaluate all of its legal options.
Despite these transactions, our primary strategy continues to be to acquire additional water and wastewater
systems, to maintain our existing systems where there is a strategic business benefit, and to actively oppose
unilateral efforts by municipal governments to acquire any of our operations.
The Company is routinely involved in other legal matters, including both asserted and unasserted legal claims,
during the ordinary course of business. See Note 9 – Commitments and Contingencies for a discussion of
the Company’s legal matters. It is not always possible for management to make a meaningful estimate of the
potential loss or range of loss associated with such litigation. Also, unanticipated changes in circumstances
and/or revisions to the assessed probability of the outcomes of legal matters could result in expenses being
incurred in future periods as well as an increase in actual cash required to resolve the legal matter.
20
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)
Sources of Capital
Since net operating cash flow plus advances and contributions in aid of construction have not been sufficient
to fully fund cash requirements, we issued approximately $635,068 of long-term debt and obtained other
short-term borrowings during the past five years. At December 31, 2012, we have a $150,000 long-term
revolving credit facility that expires in March 2017, of which $19,356 was designated for letter of credit usage,
$30,644 was available for borrowing and $100,000 of borrowings was outstanding at December 31, 2012. In
addition, we have short-term lines of credit of $160,500, of which $80,117 was available. These short-term
lines of credit 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/or reduce our dividend, and our ability to pursue acquisitions that we may rely on for future
growth could be impaired.
Our 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.
We are obligated to comply with covenants under some of our loan and debt agreements. These covenants
contain a number of restrictive financial covenants, which among other things limit, subject to certain
exceptions, the Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and
require a minimum level of earnings coverage over interest expense. During 2012, we were in compliance
with our debt covenants under our credit facilities. Failure to comply with our debt covenants could result in
an event of default, which could result in us being required to repay or finance our borrowings before their
due date, possibly limiting our future borrowings, and increasing our borrowing costs.
In February 2012, we renewed our universal shelf registration, which expired in December 2011, through a
filing with the Securities and Exchange Commission (“SEC”) which allows for the potential future offer and
sale by us, from time to time, in one or more public offerings, of an indeterminate amount of our common
stock, preferred stock, debt securities, and other securities specified therein at indeterminate prices. The
Company’s Board of Directors has authorized the Company to issue up to $500,000 of our common stock,
preferred stock, debt securities, and other securities specified therein under this universal shelf registration
statement. No issues have been completed to date under this shelf registration statement.
In addition, we have a shelf registration statement filed with the SEC to permit the offering from time to time
of shares of common stock and shares of preferred stock in connection with acquisitions. During 2012,
2011, and 2010, we did not issue any shares under the acquisition shelf registration. During 2009, we issued
164,052 shares of common stock totaling $2,909 to acquire a water system. During 2008, we issued 125,723
shares of common stock totaling $2,000 to acquire a wastewater system. The balance remaining available for
use under the acquisition shelf registration as of December 31, 2012 is 1,904,487 shares. We will determine
the form and terms of any securities issued under these shelf registrations at the time of issuance.
We offer a Dividend Reinvestment and Direct Stock Purchase Plan (the “Plan”) that provides a convenient
and economical way to purchase shares of Aqua America, Inc. Under the direct stock purchase portion of
the Plan, shares are sold throughout the year. The dividend reinvestment portion of the Plan offers a 5%
discount on the purchase of shares of common stock with reinvested dividends. As of the December 2012
dividend payment, holders of 13.6% of the common shares outstanding participated in the dividend
reinvestment portion of the Plan. The shares issued under the Plan are either original issue shares or shares
purchased by the Company’s transfer agent in the open-market. During the past five years, we have sold
21
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)
3,109,425 original issue shares of common stock for net proceeds of $58,963 through the dividend
reinvestment portion of the Plan, and we used the proceeds to invest in our operating subsidiaries, to repay
short-term debt, and for general corporate purposes.
The Board of Directors has authorized us to purchase our common stock, from time to time, in the open
market or through privately negotiated transactions. We have not purchased any shares under this
authorization since 2000. As of December 31, 2012, 548,278 shares remain available for repurchase.
Funding for future stock purchases, if any, is not expected to have a material impact on our financial position.
Off-Balance Sheet Financing Arrangements
We do not engage in any off-balance sheet financing arrangements. We do not have any interest in entities
referred to as variable interest entities, which includes special purpose entities and other structured finance
entities.
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2012:
Payments Due By Period
Total
Less than
1 year
1 - 3
years
3 - 5
years
More than
5 years
$
1,588,992 $
45,038
144,906 $
178,376 $ 1,220,672
1,192,744
24,112
75,028
3,195
140,895
4,360
131,252
1,782
845,569
14,775
90,592
11,996
25,177
20,593
32,826
32,076
32,076
-
-
-
18,829
38,052
18,829
17,524
$
2,985,397 $ 203,686 $
-
5,859
321,197 $
-
1,992
-
12,677
333,995 $ 2,126,519
Long-term debt (a)
Interest on fixed-rate,
long-term debt (b)
Operating leases (c)
Unconditional purchase
obligations (d)
Other purchase
obligations (e)
Pension and other postretirement
benefit plans' obligations (f)
Other obligations (g)
Total
(a) Represents sinking fund obligations and debt maturities.
(b) Represents interest payable on fixed rate, long-term debt. Amounts reported may differ from actual due to future
refinancing of debt.
(c) Represents operating leases that are noncancelable, before expiration, for the lease of motor vehicles, buildings, land
and other equipment.
(d) Represents our commitment to purchase minimum quantities of water as stipulated in agreements with other water
purveyors. We use purchased water to supplement our water supply, particularly during periods of peak customer
demand. Our actual purchases may exceed the minimum required levels.
(e) Represents an approximation of the open purchase orders for goods and services purchased in the ordinary course
of business.
(f) Represents contributions contractually obligated to be made to pension and other post-retirement benefit plans.
(g) Represents expenditures estimated to be required under legal and binding contractual obligations.
In addition to these obligations, we pay refunds on customers’ advances for construction over a specific
period of time based on operating revenues related to developer-installed water mains or as new customers
are connected to and take service from such mains. After all refunds are paid, any remaining balance is
22
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)
transferred to contributions in aid of construction. The refund amounts are not included in the above table
because the refund amounts and timing are dependent upon several variables, including new customer
connections, customer consumption levels and future rate increases, which cannot be accurately estimated.
Portions of these refund amounts are payable annually through 2027 and amounts not paid by the contract
expiration dates become non-refundable.
We will fund these contractual obligations with cash flows from operations and liquidity sources held by or
available to us.
Market Risk
We are subject to market risks in the normal course of business, including changes in interest rates and equity
prices. The exposure to changes in interest rates is a result of financings through the issuance of fixed rate,
long-term debt. Such exposure is typically related to financings between utility rate increases, because
generally our rate increases provide a revenue level to allow recovery of our current cost of capital. Interest
rate risk is managed through the use of a combination of long-term debt, which is at fixed interest rates and
short-term debt, which is at floating interest rates. As of December 31, 2012, the debt maturities by period
and the weighted average interest rate for long-term debt are as follows:
2013
2014
2015
2016
2017
Thereafter
Total
Fair
Value
Long-term debt:
Fixed rate
Variable rate
Total
Weighted
interest rate*
$ 45,038 $ 86,419 $ 58,487 $ 35,607 $ 42,769 $ 1,220,672 $ 1,488,992 $ 1,602,997
100,000
100,000
$ 45,038 $ 86,419 $ 58,487 $ 35,607 $ 142,769 $ 1,220,672 $ 1,588,992 $ 1,702,997
100,000
-
-
-
-
-
5.37%
5.17%
5.21%
4.85%
2.33%
5.08%
4.81%
*Weighted average interest rate of 2017 long-term debt maturity is as follows: fixed rate debt
of 5.08% and variable rate debt of 1.15%.
From time to time, we make investments in marketable equity securities. As a result, we are exposed to the
risk of changes in equity prices for the “available for sale” marketable equity securities. As of December 31,
2012, our carrying value of certain investments, which reflects market value was $494.
Capitalization
The following table summarizes our capitalization during the past five years:
December 31,
2012
2011
2010
2009
2008
Long-term debt*
Aqua America stockholders' equity
53.4%
46.6%
100.0%
54.8%
45.2%
100.0%
57.0%
43.0%
100.0%
56.6%
43.4%
100.0%
54.3%
45.7%
100.0%
*Includes current portion, as well as our borrowings under a variable rate revolving
credit agreement of $100,000 at December 31, 2012 and $38,212 at December 31,
2011.
Over the past five years, the changes in the capitalization ratios primarily resulted from the issuance of
common stock, the issuance of debt to finance our acquisitions and capital program, growth in net income,
23
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)
and the declaration of dividends. It is our goal to maintain an equity ratio adequate to support the current
Standard and Poor’s corporate credit rating of “A+” and the senior secured debt rating of “AA-” for Aqua
Pennsylvania, our largest operating subsidiary.
Dividends on Common Stock
We have paid common dividends consecutively for 68 years. Effective August 2, 2012, our Board of
Directors authorized an increase of 6.1% in the December 1, 2012 quarterly dividend over the dividend we
paid in the previous quarter. As a result of this authorization, beginning with the dividend payment in
December 2012, the annualized dividend rate increased to $0.70 per share from $0.66 per share. This is the
22nd dividend increase in the past 21 years and the 14th consecutive year that we have increased our dividend
in excess of five percent. We presently intend to pay quarterly cash dividends in the future, on March 1, June
1, September 1 and December 1, subject to our earnings and financial condition, restrictions set forth in our
debt instruments, regulatory requirements and such other factors as our Board of Directors may deem
relevant. During the past five years, our common dividends paid have averaged 60.8% of net income
attributable to common shareholders.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial condition and results of operations are impacted by the methods, assumptions, and estimates
used in the application of critical accounting policies. The following accounting policies are particularly
important to our financial condition or results of operations, and require estimates or other judgments of
matters of uncertainty. Changes in the estimates or other judgments included within these accounting
policies could result in a significant change to the financial statements. We believe our most critical
accounting policies include revenue recognition, the use of regulatory assets and liabilities, the valuation of
our long-lived assets, which consist primarily of utility plant in service, regulatory assets, and goodwill, our
accounting for post-retirement benefits, and our accounting for income taxes. We have discussed the
selection and development of our critical accounting policies and estimates with the Audit Committee of the
Board of Directors.
RRevenue Recognition (cid:2) Our utility revenues recognized in an accounting period include amounts billed to
customers on a cycle basis and unbilled amounts based on estimated usage from the last billing to the end of
the accounting period. The estimated usage is based on our judgment and assumptions; our actual results
could differ from these estimates, which would result in operating revenues being adjusted in the period that
the revision to our estimates is determined.
In some operating divisions, we commence the billing of our utility customers, under new rates, upon
authorization from the respective regulatory commission and before the final commission rate order is issued.
The revenue recognized reflects an estimate based on our judgment of the final outcome of the commission’s
ruling. We monitor the applicable facts and circumstances regularly, and revise the estimate as required. The
revenue billed and collected prior to the final ruling is subject to refund based on the commission’s final
ruling.
Regulatory Assets and Liabilities (cid:2) We defer costs and credits on the balance sheet as regulatory assets
and liabilities when it is probable that these costs and credits will be recognized in the rate-making process in
a period different from when the costs and credits were incurred. These deferred amounts, both assets and
liabilities, are then recognized in the income statement in the same period that they are reflected in our rates
charged for water or wastewater service. In the event that our assessment as to the probability of the
inclusion in the rate-making process is incorrect, the associated regulatory asset or liability would be adjusted
to reflect the change in our assessment or change in regulatory approval.
Valuation of Long-Lived Assets, Goodwill and Intangible Assets (cid:2) We review our long-lived assets for
impairment, including utility plant in service. We also review regulatory assets for the continued application
of the FASB’s accounting guidance for regulated operations. Our review determines whether there have been
changes in circumstances or events that have occurred that require adjustments to the carrying value of these
assets. Adjustments to the carrying value of these assets would be made in instances where their inclusion in
the rate-making process is unlikely.
24
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)
We test the goodwill attributable to each of our reporting units for impairment at least annually on July 31, or
more often, if certain circumstances indicate a possible impairment may exist. We evaluate goodwill for
impairment by assessing qualitative economic factors, using discounted cash flow methodologies, transaction
values for other comparable companies, and other valuation techniques for all of our reporting units with
goodwill balances. The evaluation requires significant management judgment and estimates that are based on
budgets, general strategic business plans, historical trends and other data and relevant factors. If changes in
circumstances or events occur, or estimates and assumptions that were used in our impairment test change,
we may be required to record an impairment charge for goodwill. Based on our comparison of the estimated
fair value of each reporting unit to their respective carrying amounts, the impairment test performed in 2012
concluded that the estimated fair value of each reporting unit, which has goodwill recorded, was substantially
in excess of the reporting unit’s respective carrying amounts, indicating that none of our goodwill was
impaired.
AAccounting for Post-retirement Benefits (cid:2) We maintain qualified defined benefit pension plans and plans
that provide for certain post-retirement benefits other than pensions. Accounting for pensions and other
post-retirement benefits requires an extensive use of assumptions about the discount rate, expected return on
plan assets, the rate of future compensation increases received by our employees, mortality, turnover and
medical costs. Each assumption is reviewed annually with assistance from our actuarial consultant, who
provides guidance in establishing the assumptions. The assumptions are selected to represent the average
expected experience over time and may differ in any one year from actual experience due to changes in capital
markets and the overall economy. These differences will impact the amount of pension and other post-
retirement benefit expense that we recognize.
Our discount rate assumption was determined by selecting a hypothetical portfolio of high quality corporate
bonds appropriate to provide for the projected benefit payments of the plan. The selected bond portfolio
was derived from a universe of Aa-graded corporate bonds, all of which were noncallable (or callable with
make-whole provisions), and have at least $50,000 in outstanding value. The discount rate was then
developed as the single rate that equates the market value of the bonds purchased to the discounted value of
the plan’s benefit payments. Our pension expense and liability (benefit obligations) increases as the discount
rate is reduced. A 25 basis-point reduction in this assumption would have increased 2012 pension expense by
$887 and the pension liabilities by $8,956. The present values of Aqua America’s future pension and other
post-retirement obligations were determined using discount rates of 4.17% at December 31, 2012 and 5.00%
at December 31, 2011. Our expense under these plans is determined using the discount rate as of the
beginning of the year, which was 5.00% for 2012, and will be 4.17% for 2013. In 2012, our pension benefits
were re-measured as of May 1, 2012 to reflect the pension benefits assumed in our Ohio acquisition. The
expense for 2012 was determined using a 5.00% discount rate for the period January 1, 2012 – April 30, 2012
and 4.70% for the period May 1, 2012 – December 31, 2012.
Our expected return on assets is determined by evaluating the asset class return expectations with our
advisors as well as actual, long-term, historical results of our asset returns. The Company’s market-related
value of plan assets is equal to the fair value of the plan assets as of the last day of its fiscal year, and is a
determinant for the expected return on assets, which is a component of net pension expense. Our pension
expense increases as the expected return on assets decreases. A 25-basis-point reduction in this assumption
would have increased 2012 pension expense by $449. For 2012, we used a 7.75% expected return on assets
assumption and will lower this assumption to 7.50% for the calculation of pension expense for 2013. The
expected return on assets is based on a targeted allocation of 50% to 75% equities and 25% to 50% fixed
income. We believe that our actual long-term asset allocation on average will approximate the targeted
allocation. Our targeted allocation is driven by the investment strategy to earn a reasonable rate of return
while maintaining risk at acceptable levels through the diversification of investments across and within
various asset categories.
Funding requirements for qualified defined benefit pension plans are determined by government regulations
and not by accounting pronouncements. In accordance with funding rules and our funding policy, during
2013 our pension contribution is expected to approximate $15,954. Future years’ contributions will be subject
to economic conditions, plan participant data and the funding rules in effect at such time as the funding
25
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)
calculations are performed, though we expect future changes in the amount of contributions and expense
recognized to be generally included in customer rates. During 2013, our funding of other post-retirement
benefit plans are expected to approximate $2,875.
AAccounting for Income Taxes (cid:2) We estimate the amount of income tax payable or refundable for the
current year and the deferred income tax liabilities and assets that results from estimating temporary
differences resulting from the treatment of certain items, such as depreciation, for tax and financial statement
reporting. Generally, these differences result in the recognition of a deferred tax asset or liability on our
consolidated balance sheet and require us to make judgments regarding the probability of the ultimate tax
impact of the various transactions we enter into. Based on these judgments, we may record tax reserves or
adjustments to valuation allowances on deferred tax assets to reflect the expected realization of future tax
benefits. Our determination of what qualifies as a capital cost versus a repair expense tax deduction as it
relates to our repair tax accounting method change beginning in 2012 is subject to subsequent adjustment and
may result from IRS audit determinations or preparation of our final income tax return, and could impact the
tax benefits that have already been recognized. Actual income taxes could vary from these estimates and
changes in these estimates can increase income tax expense in the period that these changes in estimates
occur.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
We describe the impact of recent accounting pronouncements in Note 1 – Summary of Significant
Accounting Policies, of the consolidated financial statements.
26
AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Report On Internal Control Over Financial Reporting
Management of Aqua America, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America. The Company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In assessing the effectiveness of internal control over financial reporting, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. As a
result of management’s assessment and based on the criteria in the framework, management has concluded that, as of
December 31, 2012, the Company’s internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included
herein.
Nicholas DeBenedictis
Chairman, President and Chief Executive Officer
David P. Smeltzer
Executive Vice President and Chief Financial Officer
February 28, 2013
27
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Aqua America, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of net income, of
comprehensive income, of capitalization, of equity and of cash flows present fairly, in all material respects, the financial
position of Aqua America, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The
Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these
financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we consider necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2013
28
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands of dollars, except per share amounts)
Years ended December 31, 2012, 2011 and 2010
Operating revenues
Operating costs and expenses:
Operations and maintenance
Depreciation
Amortization
Taxes other than income taxes
Operating income
Other expense (income):
Interest expense, net
Allowance for funds used during construction
Gain on sale of other assets
Equity earnings in joint venture
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Discontinued operations:
Income from discontinued operations before income taxes
Provision for income taxes
Income from discontinued operations
Net income attributable to common shareholders
Income from continuing operations per share:
Basic
Diluted
Income from discontinued operations per share:
Basic
Diluted
Net income per common share:
Basic
Diluted
Average common shares outstanding during the period:
Basic
Diluted
2012
2011
2010
$
757,760
$
687,291
$
660,186
271,843
111,767
5,229
47,404
436,243
256,743
103,412
4,888
41,449
406,492
250,989
100,606
11,110
40,147
402,852
321,517
280,799
257,334
77,757
(4,142)
(1,090)
(1,976)
250,968
66,881
184,087
20,493
8,017
12,476
196,563
1.32
1.32
0.09
0.09
1.41
1.40
$
$
$
$
$
$
$
77,804
(7,150)
(649)
-
210,794
69,111
141,683
14,279
12,893
1,386
143,069
1.03
1.02
0.01
0.01
1.04
1.03
$
$
$
$
$
$
$
73,393
(4,831)
(2,547)
-
191,319
74,940
116,379
12,750
5,154
7,596
123,975
0.85
0.85
0.06
0.06
0.91
0.90
139,361
139,934
138,182
138,689
136,948
137,296
$
$
$
$
$
$
$
Cash dividends declared per common share
$
0.67
$
0.63
$
0.59
See accompanying notes to consolidated financial statements.
29
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
Years ended December 31, 2012, 2011 and 2010
2012
2011
2010
Net income attributable to common shareholders
Other comprehensive income, net of tax:
Unrealized holding gain (loss) on investments (1)
Reclassification adjustment for gain reported in net income (2)
Comprehensive income
$
196,563 $
143,069 $
123,975
198
(339)
196,422 $
$
(10)
(233)
142,826 $
1,588
(1,369)
124,194
(1) amounts are net of tax of $106, $5, and $855 for the twelve months ended December 31, 2012, 2011, and 2010,
respectively
(2) amounts are net of tax of $182, $125, and $738 for the twelve months ended December 31, 2012, 2011, and 2010,
respectively
See accompanying notes to consolidated financial statements.
30
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 2012 and 2011
Assets
2012
2011
Property, plant and equipment, at cost
Less: accumulated depreciation
Net property, plant and equipment
Current assets:
Cash and cash equivalents
Accounts receivable and unbilled revenues, net
Income tax receivable
Deferred income taxes
Inventory, materials and supplies
Prepayments and other current assets
Assets of discontinued operations held for sale
Total current assets
Regulatory assets
Deferred charges and other assets, net
Investment in joint venture
Funds restricted for construction activity
Goodwill
Liabilities and Equity
Aqua America stockholders' equity:
Common stock at $.50 par value, authorized 300,000,000 shares,
issued 140,943,621 and 139,525,580 in 2012 and 2011
Capital in excess of par value
Retained earnings
Treasury stock, at cost, 776,355 and 710,482 shares in 2012 and 2011
Accumulated other comprehensive income
Total Aqua America stockholders' equity
Noncontrolling interest
Total Equity
Long-term debt, excluding current portion
Commitments and contingencies (See Note 9)
Current liabilities:
Current portion of long-term debt
Loans payable
Accounts payable
Accrued interest
Accrued taxes
Other accrued liabilities
Liabilities of discontinued operations held for sale
Total current liabilities
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits
Customers' advances for construction
Regulatory liabilities
Other
Total deferred credits and other liabilities
Contributions in aid of construction
See accompanying notes to consolidated financial statements.
31
$
$
5,050,400
1,114,237
3,936,163
5,521
92,921
16,082
37,818
11,757
10,372
86,423
260,894
521,264
49,852
38,620
23,572
28,152
4,858,517
70,472
718,482
611,303
(14,668)
115
1,385,704
188
1,385,892
1,543,954
-
45,038
80,383
55,506
14,026
28,214
27,360
23,637
274,164
723,367
71,595
241,363
157,978
1,194,303
460,204
4,858,517
$
$
$
$
$
$
4,517,966
987,024
3,530,942
8,204
75,546
-
37,758
11,014
9,775
263,061
405,358
240,032
51,152
5,087
88,905
26,944
4,348,420
69,762
686,106
508,334
(13,145)
256
1,251,313
504
1,251,817
1,395,457
-
80,429
107,771
67,595
14,563
16,694
22,595
137,171
446,818
596,644
66,198
41,344
121,986
826,172
428,156
4,348,420
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 2012 and 2011
Aqua America stockholders' equity:
Common stock, $.50 par value
Capital in excess of par value
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income
Total Aqua America stockholders' equity
Noncontrolling interest
Total Equity
Long-term debt:
Long-term debt of subsidiaries (substantially
secured by utility plant):
Interest Rate Range
0.00% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%
8.00% to 8.99%
9.00% to 9.99%
10.00% to 10.99%
Maturity Date Range
2024 to 2031
2014 to 2035
2024 to 2031
2016 to 2047
2020 to 2043
2014 to 2043
2015 to 2036
2022 to 2027
2021 to 2025
2013 to 2026
2018
Notes payable to bank under revolving credit
agreement, variable rate, due March 2017
Unsecured notes payable:
Notes at 3.57% due 2027
Notes ranging from 4.62% to 4.87%,
due 2013 through 2024
Notes ranging from 5.01% to 5.95%,
due 2014 through 2037
Current portion of long-term debt
Long-term debt, excluding current portion
Total capitalization
See accompanying notes to consolidated financial statements.
2012
2011
$
70,472
718,482
611,303
(14,668)
115
1,385,704
188
69,762
686,106
508,334
(13,145)
256
1,251,313
504
1,385,892
1,251,817
2,884
27,251
17,120
107,477
367,657
320,729
64,903
35,660
19,632
34,547
6,000
1,003,860
100,000
50,000
193,000
242,132
1,588,992
45,038
1,543,954
2,929,846
$
2,733
28,355
12,124
26,593
367,226
407,229
59,883
28,995
24,957
38,447
6,000
1,002,542
38,212
-
193,000
242,132
1,475,886
80,429
1,395,457
2,647,274
$
$
32
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
der
Common
stock
Capital in
excess of
par value
Retained
earnings
Treasury
stock
Accumulated
Other
Comprehensive
Income
Noncontrolling
Interest
Total
Balance at December 31, 2009
68,574
642,786
409,402
(12,138)
Net income
Other comprehensive income,
net of income tax of $118
Dividends
-
-
-
-
-
-
123,975
-
(80,907)
Sale of stock (701,919 shares)
335
11,594
Repurchase of stock (42,443 shares)
Equity Compensation Plan (195,056 shares)
Exercise of stock options (434,696 shares)
Stock-based compensation
Employee stock plan tax benefits
-
97
217
-
-
-
(97)
5,461
4,031
594
-
-
-
-
-
-
-
-
-
601
(770)
-
-
-
-
280
-
219
-
-
-
-
-
-
-
560
12
1,109,464
123,987
-
-
-
-
-
-
-
-
219
(80,907)
12,530
(770)
0
5,678
4,031
594
Balance at December 31, 2010
$
69,223
$
664,369
$
452,470
$
(12,307)
$
499
$
572
$
1,174,826
Net income
Purchase of subsidiary shares from
noncontrolling interest
Other comprehensive loss,
net of income tax of $130
Dividends
-
-
-
-
-
-
-
-
Sale of stock (603,166 shares)
295
11,987
Repurchase of stock (51,431 shares)
Equity Compensation Plan (63,306 shares)
Exercise of stock options (424,490 shares)
Stock-based compensation
Employee stock plan tax benefits
-
32
212
-
-
-
(32)
6,391
3,964
(573)
143,069
-
-
(87,133)
-
-
-
-
(72)
-
-
-
-
-
325
(1,163)
-
-
-
-
-
-
(243)
-
-
-
-
-
-
-
14
143,083
(82)
-
-
-
-
-
-
-
-
(82)
-
(243)
(87,133)
12,607
(1,163)
-
6,603
3,892
(573)
Balance at December 31, 2011
$
69,762
$
686,106
$
508,334
$
(13,145)
$
256
$
504
$
1,251,817
Net income
Purchase of subsidiary shares from
noncontrolling interest
Other comprehensive loss,
net of income tax of $76
Dividends
-
-
-
-
-
-
-
-
Sale of stock (580,874 shares)
285
12,610
Repurchase of stock (77,355 shares)
Equity Compensation Plan (15,212 shares)
-
8
-
(8)
Exercise of stock options (833,437 shares)
417
14,181
196,563
-
-
(93,423)
-
-
-
-
Stock-based compensation
-
5,593
(171)
-
-
-
-
295
(1,818)
-
-
-
-
-
(141)
-
-
-
-
-
-
17
196,580
(333)
-
-
-
-
-
-
-
(333)
-
(141)
(93,423)
13,190
(1,818)
-
14,598
5,422
Balance at December 31, 2012
$
70,472
$
718,482
$
611,303
$
(14,668)
$
115
$
188
$
1,385,892
See accompanying notes to consolidated financial statements.
33
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years ended December 31, 2012, 2011, and 2010
Cash flows from operating activities:
Net income attributable to common shareholders
Income from discontinued operations
Income from continuing operations
Adjustments to reconcile income from continuing operations to
net cash flows from operating activities:
Depreciation and amortization
Deferred income taxes
Provision for doubtful accounts
Share-based compensation
Gain on sale of utility system
Gain on sale of other assets
Net increase in receivables, inventory and prepayments
Net increase (decrease) in payables, accrued interest, accrued
taxes and other accrued liabilities
(Increase) decrease in income tax receivable
Other
Operating cash flows from continuing operations
Operating cash flows (used in) from discontinued operations, net
Net cash flows from operating activities
Cash flows from investing activities:
Property, plant and equipment additions, including allowance for
funds used during construction of $4,142, $7,150, and $4,831
Acquisitions of utility systems and other, net
Release of funds previously restricted for construction activity
Additions to funds restricted for construction activity
Net proceeds from the sale of utility systems and other assets
Proceeds from note receivable
Investment in joint venture
Other
Investing cash flows used in continuing operations
Investing cash flows from (used in) discontinued operations, net
Net cash flows used in investing activities
Cash flows from financing activities:
Customers' advances and contributions in aid of construction
Repayments of customers' advances
Net proceeds (repayments) of short-term debt
Proceeds from long-term debt
Repayments of long-term debt
Change in cash overdraft position
Proceeds from issuing common stock
Proceeds from exercised stock options
Share-based compensation windfall tax benefits
Repurchase of common stock
Dividends paid on common stock
Financing cash flows (used in) from continuing operations
Financing cash flows from discontinuing operations, net
Net cash flows (used in) from financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash paid during the year for:
Interest, net of amounts capitalized
Income taxes
2012
2011
2010
$
$
196,563
12,476
184,087
$
143,069
1,386
141,683
123,975
7,596
116,379
116,996
77,563
4,805
5,550
-
(1,090)
(7,543)
13,641
(16,082)
(442)
377,485
(9,078)
368,407
(347,985)
(121,248)
67,498
(2,165)
3,819
-
(33,856)
(1,512)
(435,449)
70,774
(364,675)
7,033
(6,064)
(27,388)
300,109
(202,203)
(10,929)
13,190
14,598
-
(1,464)
(93,423)
(6,541)
126
(6,415)
(2,683)
8,204
5,521
74,152
9,319
$
$
$
108,300
72,110
4,854
3,852
(5,058)
(649)
(3,864)
421
33,600
(3,208)
352,041
14,806
366,847
(325,808)
(8,515)
46,330
(149)
13,404
5,289
(5,087)
(946)
(275,482)
(9,422)
(284,904)
3,558
(3,686)
18,103
52,513
(96,072)
14,503
12,607
6,603
-
(1,163)
(87,133)
(80,167)
494
(79,673)
2,270
5,934
8,204
71,640
5,431
$
$
$
111,716
70,229
4,156
3,871
-
(2,547)
(4,745)
(18,415)
(33,600)
(2,327)
244,717
18,375
263,092
(308,134)
(8,625)
92,984
(145,157)
4,605
3,713
-
(6,304)
(366,918)
(16,534)
(383,452)
6,568
(7,545)
62,237
272,754
(160,750)
(6,976)
12,530
5,678
386
(770)
(80,907)
103,205
1,220
104,425
(15,935)
21,869
5,934
68,942
49,800
$
$
$
See Note 1 - Summary of Significant Accounting Policies-Customers' Advances for Construction, Note 10 -
Long-term Debt and Loans Payable, and Note 14 - Employee Stock and Incentive Plan for a description
of non-cash activities.
See accompanying notes to consolidated financial statements.
34
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands of dollars, except per share amounts)
Note 1 – Summary of Significant Accounting Policies
NNature of Operations (cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:3)(cid:4)(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:7)(cid:13)(cid:3)(cid:14)(cid:15)(cid:12)(cid:16)(cid:3)(cid:17)(cid:18)(cid:4)(cid:5)(cid:6)(cid:7)(cid:3)(cid:4)(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:7)(cid:19)(cid:3)(cid:20)(cid:10)(cid:3)(cid:21)(cid:22)(cid:9)(cid:3)(cid:18)(cid:23)(cid:20)(cid:8)(cid:24)(cid:7)(cid:15)(cid:25)(cid:19)(cid:26)(cid:3)(cid:11)(cid:27)(cid:3)(cid:21)(cid:22)(cid:9)(cid:3)(cid:22)(cid:20)(cid:28)(cid:29)(cid:11)(cid:15)(cid:30)(cid:3)(cid:12)(cid:20)(cid:8)(cid:24)(cid:7)(cid:15)(cid:25)(cid:3)
for regulated utilities providing water or wastewater services in Pennsylvania, Texas, North Carolina, Ohio,
Illinois, New Jersey, Florida, Indiana, Virginia, and Georgia. Our largest operating subsidiary, Aqua
Pennsylvania, Inc.(“Aqua Pennsylvania”), accounted for approximately 55% of our operating revenues and a
larger percentage of our net income for 2012, and provided water or wastewater services to customers in the
suburban areas north and west of the City of Philadelphia and in 25 other counties in Pennsylvania. The
Company’s other subsidiaries provide similar services in nine other states. In addition, the Company provides
water and wastewater services through operating and maintenance contracts with municipal authorities and
other parties close to our utility companies’ service territories 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 firms in the natural gas and oil drilling industry.
In January 2012, we sold our regulated water operations in Maine, which served approximately 16,000
customers, to Connecticut Water Services, Inc. In May 2012, we acquired all of American Water Works
Company, Inc.’s (“American Water”) water and wastewater operations in Ohio, which serve approximately
59,000 customers, and simultaneously sold our water operations in New York, which served approximately
51,000 customers. These transactions concluded our regulated operations in Maine and New York. In
September 2012, we began to market for sale our water and wastewater operations in Florida, which serve
approximately 38,000 customers, and our wastewater treatment facility in Georgia. In December 2012, the
Company entered into a definitive agreement to sell 80 of its water and wastewater systems in Florida to the
Florida Governmental Utility Authority. These 80 water and wastewater systems represent approximately
56% of our customers served in Florida. This transaction is expected to close in the first half of 2013. In
addition, we are holding discussions with interested parties for the sale of the remainder of our Florida water
and wastewater operations. The operating results, cash flows, and financial position of the Company’s
Maine, New York, Florida, and Georgia subsidiaries have been presented in the Company’s consolidated
financial statements as discontinued operations. During the second quarter of 2011, we acquired all of
American Water’s water and wastewater operations in Texas, which serve approximately 5,300 customers, and
sold our regulated water and wastewater operations in Missouri, which served approximately 3,900 customers
and concluded our regulated utility operations in Missouri. Unless specifically noted, the financial
information presented in the notes to consolidated financial statements reflects the Company’s continuing
operations.
The company has identified twelve operating segments and has one reportable segment named the Regulated
segment. The reportable segment is comprised of ten operating segments for our water and wastewater
regulated utility companies which are organized by the states where we provide these services. These
operating segments are aggregated into one reportable segment since each of the Company’s operating
segments has the following similarities: economic characteristics, nature of services, production processes,
customers, water distribution or wastewater collection methods, and the nature of the regulatory
environment. In addition, two operating segments are not quantitatively significant to be reportable and are
comprised of the businesses that provide 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 firms in the natural gas and oil drilling industry. These segments are included as a component of “other,”
in addition to corporate costs that have not been allocated to the Regulated segment and intersegment
eliminations.
Regulation (cid:2)(cid:3)(cid:31)(cid:20)(cid:27)(cid:21)(cid:3)(cid:20)!(cid:3)(cid:21)(cid:22)(cid:9)(cid:3)(cid:20)(cid:24)(cid:9)(cid:10)(cid:7)(cid:21)(cid:11)(cid:15)(cid:30)(cid:3)(cid:12)(cid:20)(cid:8)(cid:24)(cid:7)(cid:15)(cid:11)(cid:9)(cid:27)(cid:3)(cid:21)(cid:22)(cid:7)(cid:21)(cid:3)(cid:7)(cid:10)(cid:9)(cid:3)(cid:10)(cid:9)(cid:30)(cid:6)(cid:28)(cid:7)(cid:21)(cid:9)(cid:29)(cid:3)(cid:24)(cid:6)"(cid:28)(cid:11)(cid:12)(cid:3)(cid:6)(cid:21)(cid:11)(cid:28)(cid:11)(cid:21)(cid:11)(cid:9)(cid:27)(cid:3)(cid:7)(cid:10)e subject to regulation by
the regulatory commissions of the states in which they operate. The respective regulatory commissions have
jurisdiction with respect to rates, service, accounting procedures, issuance of securities, acquisitions and other
matters. Some of the operating companies that are regulated public utilities are subject to rate regulation by
county or city government. Regulated public utilities follow the Financial Accounting Standards Board’s
(“FASB”) accounting guidance for regulated operations, which provides for the recognition of regulatory
35
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
assets and liabilities as allowed by regulators for costs or credits that are reflected in current rates or are
considered probable of being included in future rates. The regulatory assets or liabilities are then relieved as
the cost or credit is reflected in rates.
UUse of Estimates in Preparation of Consolidated Financial Statements (cid:2)(cid:3)#(cid:22)(cid:9)(cid:3)(cid:24)(cid:10)(cid:9)(cid:24)(cid:7)(cid:10)(cid:7)(cid:21)(cid:11)(cid:20)(cid:15)(cid:3)(cid:20)!(cid:3)
consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
BBasis of Presentation – The consolidated financial statements include the accounts of the Company and its
subsidiaries. All intercompany accounts and transactions have been eliminated. Certain prior period amounts
have been reclassified, including reporting discontinued operations (see Note 3), to conform to the current
period presentation.
Recognition of Revenues (cid:2)(cid:3)&(cid:9)<(cid:9)(cid:15)(cid:6)(cid:9)(cid:27)(cid:3)(cid:11)(cid:15)(cid:12)(cid:28)(cid:6)(cid:29)(cid:9)(cid:3)(cid:7)(cid:8)(cid:20)(cid:6)nts billed to customers on a cycle basis and unbilled
amounts based on estimated usage from the latest billing to the end of the accounting period. Non-regulated
revenues are recognized when services are performed and are primarily associated with septage services, and
operating and maintenance contracts. The Company’s Regulated segment includes non-regulated revenues
that totaled $10,538 in 2012, $10,712 in 2011, and $10,973 in 2010. In addition to the non-regulated revenues
included in the Regulated segment operating revenues, the Company has other non-regulated revenues of
$17,876 in 2012, $12,512 in 2011, and $11,565 in 2010.
Property, Plant and Equipment and Depreciation (cid:2)(cid:3)Property, plant and equipment consist primarily of
utility plant. The cost of additions includes contracted cost, direct labor and fringe benefits, materials,
overheads and, for certain utility plant, allowance for funds used during construction. Water systems
acquired are recorded at estimated original cost of utility plant when first devoted to utility service and the
applicable depreciation is recorded to accumulated depreciation. The difference between the estimated
original cost, less applicable accumulated depreciation, and the purchase price is recorded as an acquisition
adjustment within utility plant as permitted by the applicable regulatory jurisdiction. At December 31, 2012,
utility plant includes a net credit acquisition adjustment of $31,347, which is generally being amortized from 2
to 52 years, except where not permitted or appropriate. Amortization of the acquisition adjustments totaled
$2,858 in 2012, $2,741 in 2011, and $3,060 in 2010.
Utility expenditures for maintenance and repairs, including major maintenance projects and minor renewals
and betterments, are charged to operating expenses when incurred in accordance with the system of accounts
prescribed by the regulatory commissions of the states in which the company operates. The cost of new units
of property and betterments are capitalized. Utility expenditures for water main cleaning and relining of pipes
are deferred and recorded in net property, plant and equipment in accordance with the FASB’s accounting
guidance for regulated operations. As of December 31, 2012, $4,978 of these costs have been incurred since
the last rate proceeding and the Company expects to recover these costs in future rates.
The cost of software upgrades and enhancements are capitalized if they result in added functionality which
enable the software to perform tasks it was previously incapable of performing. Certain information
technology costs associated with major system installations, conversions and improvements, such as software
training, data conversion and business process reengineering costs, are deferred as a regulatory asset if the
Company expects to recover these costs in future rates. If these costs are not deferred, then these costs are
charged to operating expenses when incurred. As of December 31, 2012, $13,089 of these costs have been
deferred, since the last rate proceeding, as a regulatory asset, and the deferral is reported as a component of
net property, plant and equipment.
When units of utility property are replaced, retired or abandoned, the recorded value thereof is credited to the
asset account and such value, together with the net cost of removal, is charged to accumulated depreciation.
To the extent the Company recovers cost of removal or other retirement costs through rates after the
retirement costs are incurred, a regulatory asset is recorded. In some cases, the Company recovers retirement
costs through rates during the life of the associated asset and before the costs are incurred. These amounts
36
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
result in a regulatory liability being reported based on the amounts previously recovered through customer
rates.
The straight-line remaining life method is used to compute depreciation on utility plant. Generally, the
straight-line method is used with respect to transportation and mechanical equipment, office equipment and
laboratory equipment.
Long-lived assets of the Company, which consist primarily of Utility Plant in Service and regulatory assets, are
reviewed for impairment when changes in circumstances or events occur. There has been no change in
circumstances or events that have occurred that require adjustments to the carrying values of these assets.
AAllowance for Funds Used During Construction (cid:2)(cid:3)#(cid:22)(cid:9)(cid:3)(cid:7)(cid:28)(cid:28)(cid:20)=(cid:7)(cid:15)(cid:12)(cid:9)(cid:3)!(cid:20)(cid:10)(cid:3)!(cid:6)(cid:15)(cid:29)(cid:27)(cid:3)(cid:6)(cid:27)(cid:9)(cid:29)(cid:3)(cid:29)(cid:6)(cid:10)(cid:11)(cid:15)(cid:30)(cid:3)(cid:12)(cid:20)(cid:15)(cid:27)(cid:21)(cid:10)(cid:6)(cid:12)(cid:21)(cid:11)(cid:20)(cid:15)(cid:3)
(“AFUDC”) represents the capitalized cost of funds used to finance the construction of utility plant. In
general, AFUDC is applied to construction projects requiring more than one month to complete. No
AFUDC is applied to projects funded by customer advances for construction, contributions in aid of
construction, or certain state-revolving fund loans. AFUDC includes the net cost of borrowed funds and a
rate of return on other funds when used, and is recovered through water rates as the utility plant is
depreciated. The amount of AFUDC related to equity funds in 2012 was $188, 2011 was $318, and was $0
for 2010. No interest was capitalized by our non-regulated businesses.
Cash and Cash Equivalents (cid:2)(cid:3)#(cid:22)(cid:9)(cid:3)(cid:23)(cid:20)(cid:8)(cid:24)(cid:7)(cid:15)(cid:25)(cid:3)(cid:12)(cid:20)(cid:15)(cid:27)(cid:11)(cid:29)(cid:9)(cid:10)(cid:27)(cid:3)(cid:7)(cid:28)(cid:28)(cid:3)(cid:22)(cid:11)(cid:30)(cid:22)(cid:28)(cid:25)(cid:3)(cid:28)(cid:11)(cid:5)(cid:6)(cid:11)(cid:29)(cid:3)(cid:11)(cid:15)<(cid:9)(cid:27)(cid:21)(cid:8)(cid:9)(cid:15)(cid:21)(cid:27)(cid:3)=(cid:11)(cid:21)(cid:22)(cid:3)(cid:7)(cid:15)(cid:3)(cid:20)(cid:10)(cid:11)(cid:30)(cid:11)(cid:15)(cid:7)(cid:28)(cid:3)
maturity of three months or less, which are not restricted for construction activity, to be cash equivalents.
The Company had a book overdraft for certain of its disbursement cash accounts of $11,881 and $22,810 at
December 31, 2012 and 2011, respectively. A book overdraft represents transactions that have not cleared
the bank accounts at the end of the period. The Company transfers cash on an as-needed basis to fund these
items as they clear the bank in subsequent periods. The balance of the book overdraft is reported as accounts
payable and the change in the book overdraft balance is reported as cash flows from financing activities, due
to our ability to fund the overdraft with the Company’s credit facility.
Accounts Receivable (cid:2)(cid:3)(cid:4)(cid:12)(cid:12)(cid:20)(cid:6)(cid:15)(cid:21)(cid:27)(cid:3)(cid:10)(cid:9)(cid:12)(cid:9)(cid:11)<(cid:7)"(cid:28)(cid:9)(cid:3)(cid:7)(cid:10)(cid:9)(cid:3)(cid:10)(cid:9)(cid:12)(cid:20)(cid:10)(cid:29)(cid:9)(cid:29)(cid:3)(cid:7)(cid:21)(cid:3)(cid:21)(cid:22)(cid:9)(cid:3)(cid:11)(cid:15)<(cid:20)(cid:11)(cid:12)(cid:9)(cid:29)(cid:3)(cid:7)(cid:8)(cid:20)(cid:6)(cid:15)(cid:21)(cid:27)(cid:16)(cid:3)(cid:3)#(cid:22)(cid:9)(cid:3)(cid:7)(cid:28)(cid:28)(cid:20)=(cid:7)(cid:15)(cid:12)(cid:9) for
doubtful accounts is the Company’s best estimate of the amount of probable credit losses in our existing
accounts receivable, and is determined based on historical write-off experience and the aging of account
balances. The Company reviews the allowance for doubtful accounts quarterly. Account balances are written
off against the allowance when it is probable the receivable will not be recovered. When utility customers
request extended payment terms, credit is extended based on regulatory guidelines, and collateral is not
required.
Regulatory Assets, Deferred Charges and Other Assets (cid:2)(cid:3)>(cid:9)!(cid:9)(cid:10)(cid:10)(cid:9)(cid:29)(cid:3)(cid:12)(cid:22)(cid:7)(cid:10)(cid:30)(cid:9)(cid:27)(cid:3)(cid:7)(cid:15)(cid:29)(cid:3)(cid:20)(cid:21)(cid:22)(cid:9)(cid:10)(cid:3)(cid:7)(cid:27)(cid:27)(cid:9)(cid:21)(cid:27)(cid:3)(cid:12)(cid:20)(cid:15)(cid:27)(cid:11)(cid:27)(cid:21)(cid:3)(cid:20)!(cid:3)
financing expenses, other costs and marketable securities. Deferred bond issuance expenses are amortized
over the life of the related issues. Call premiums related to the early redemption of long-term debt, along
with the unamortized balance of the related issuance expense, are deferred and amortized over the life of the
long-term debt used to fund the redemption as the Company has received or expects to receive rate recovery
of these costs. Other costs, for which the Company has received or expects to receive prospective rate
recovery, are deferred as a regulatory asset and amortized over the period of rate recovery in accordance with
the FASB’s accounting guidance for regulated operations. See Note – 6 Regulatory Assets and Liabilities for
further information regarding the Company’s regulatory assets.
Marketable securities are considered “available-for-sale” and accordingly, are carried on the balance sheet at
fair market value. Unrecognized gains are included in other comprehensive income.
Investment in Joint Venture – The Company uses the equity method of accounting to account for our 49%
investment in 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 raw water to certain natural gas well drilling
operations in the Marcellus Shale in north-central Pennsylvania, which commenced operations in the second
quarter of 2012. Our initial investment is carried at cost. Subsequently, the carrying amount of our
investment is adjusted to reflect capital contributions or distributions, and our equity in earnings since the
commencement of the system’s operations. Our share of equity earnings in the joint venture is reported in
37
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
the consolidated statements of net income as equity earnings in joint venture. During 2012 we received
distributions of $2,744.
FFunds Restricted for Construction Activity (cid:2)(cid:3)#(cid:22)(cid:9)(cid:3)(cid:24)(cid:10)(cid:20)(cid:12)(cid:9)(cid:9)(cid:29)(cid:27)(cid:3)(cid:10)(cid:9)(cid:12)(cid:9)(cid:11)<(cid:9)(cid:29)(cid:3)!(cid:10)(cid:20)(cid:8)(cid:3)(cid:12)(cid:9)(cid:10)(cid:21)(cid:7)(cid:11)(cid:15)(cid:3)!(cid:11)(cid:15)(cid:7)(cid:15)(cid:12)(cid:11)(cid:15)(cid:30)(cid:27)(cid:3)!(cid:20)(cid:10)(cid:3)
construction and capital improvement of utility facilities are held in escrow until the designated expenditures
are incurred. These amounts are reported as funds restricted for construction activity and are expected to be
released over time as the capital projects are funded.
Goodwill (cid:2)(cid:3)?(cid:20)(cid:20)(cid:29)=(cid:11)(cid:28)(cid:28)(cid:3)(cid:10)(cid:9)(cid:24)(cid:10)(cid:9)(cid:27)(cid:9)(cid:15)(cid:21)(cid:27)(cid:3)(cid:21)(cid:22)(cid:9)(cid:3)(cid:9)@(cid:12)(cid:9)(cid:27)(cid:27)(cid:3)(cid:12)(cid:20)(cid:27)(cid:21)(cid:3)(cid:20)<(cid:9)(cid:10)(cid:3)(cid:21)(cid:22)(cid:9)(cid:3)!(cid:7)(cid:11)(cid:10)(cid:3)<(cid:7)(cid:28)(cid:6)(cid:9)(cid:3)(cid:20)!(cid:3)(cid:15)(cid:9)(cid:21)(cid:3)(cid:21)(cid:7)(cid:15)(cid:30)(cid:11)"(cid:28)(cid:9)(cid:3)(cid:7)(cid:15)(cid:29)(cid:3)(cid:11)(cid:29)(cid:9)(cid:15)(cid:21)(cid:11)!(cid:11)(cid:7)"(cid:28)(cid:9)(cid:3)(cid:11)(cid:15)(cid:21)(cid:7)(cid:15)(cid:30)(cid:11)"(cid:28)(cid:9)(cid:3)
assets acquired through acquisitions. Goodwill is not amortized but is tested for impairment annually, or
more often, if circumstances indicate a possible impairment may exist. The Company tested the goodwill
attributable to each of our reporting units for impairment as of July 31, 2012, in conjunction with the timing
of our annual strategic business plan, and concluded that the estimated fair value of each reporting unit,
which has goodwill recorded, was substantially in excess of the reporting unit’s respective carrying amounts,
indicating that none of the Company’s goodwill was impaired. The following table summarizes the changes
in the Company’s goodwill:
Balance at December 31, 2010
Goodwill acquired during year
Reclassifications to utility plant
acquisition adjustment
Other
Balance at December 31, 2011
Goodwill acquired during year
Reclassifications to utility plant
acquisition adjustment
Other
Balance at December 31, 2012
Regulated
Segment
Other
Consolidated
$
23,797
1,531
$
$
4,121
-
(1,573)
(932)
22,823
1,679
(496)
25
24,031
$
-
-
4,121
-
-
-
4,121
$
$
27,918
1,531
(1,573)
(932)
26,944
1,679
-
(496)
25
28,152
Included within the Company’s assets of discontinued operations held for sale as of December 31, 2011 is
$12,316 of goodwill, and as of December 31, 2012 there was no goodwill associated with the Company’s
assets of discontinued operations held for sale.
The reclassification of goodwill to utility plant acquisition adjustment results from a mechanism approved by
the applicable regulatory 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.
Income Taxes (cid:2)(cid:3)#(cid:22)(cid:9)(cid:3)(cid:23)(cid:20)(cid:8)(cid:24)(cid:7)(cid:15)(cid:25)(cid:3)(cid:7)(cid:12)(cid:12)(cid:20)(cid:6)(cid:15)(cid:21)(cid:27)(cid:3)!(cid:20)(cid:10)(cid:3)(cid:12)(cid:9)(cid:10)(cid:21)(cid:7)(cid:11)(cid:15)(cid:3)(cid:11)(cid:15)(cid:12)(cid:20)(cid:8)(cid:9)(cid:3)(cid:7)(cid:15)(cid:29)(cid:3)(cid:9)@(cid:24)(cid:9)(cid:15)(cid:27)(cid:9)(cid:3)(cid:11)(cid:21)(cid:9)(cid:8)(cid:27)(cid:3)(cid:11)(cid:15)(cid:3)(cid:29)(cid:11)!!(cid:9)(cid:10)(cid:9)(cid:15)(cid:21)(cid:3)(cid:21)(cid:11)(cid:8)(cid:9)(cid:3)(cid:24)(cid:9)(cid:10)(cid:11)(cid:20)(cid:29)(cid:27)(cid:3)!(cid:20)(cid:10)(cid:3)
financial and tax reporting purposes. Deferred income taxes are provided on certain temporary differences
between the tax basis of the assets and liabilities, and the amounts at which they are carried in the
consolidated financial statements. The income tax effect of temporary differences not allowed currently in
rates is recorded as deferred taxes with an offsetting regulatory asset or liability. These deferred income taxes
are based on the enacted tax rates expected to be in effect when such temporary differences are projected to
reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount
more likely than not to be realized. Investment tax credits are deferred and amortized over the estimated
useful lives of the related properties. Judgment is required in evaluating the Company’s Federal and state tax
positions. Despite management’s belief that the Company’s tax return positions are fully supportable, the
Company may establish reserves when it believes that certain tax positions are likely to be challenged and it
38
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
may not fully prevail in these challenges. The Company’s provision for income taxes includes interest,
penalties and if the need arises reserves for uncertain tax positions.
In December 2012, the Company changed its tax method of accounting for certain qualifying utility system
repairs in Aqua Pennsylvania effective with the tax year ended December 31, 2012 and for prior tax years.
The tax accounting method was changed to permit the expensing of certain utility asset improvement costs
that were previously being capitalized and depreciated for book and tax purposes (the “repair change”). The
repair change was implemented in response to a June 2012 rate order issued by the Pennsylvania Public
Utility Commission to Aqua Pennsylvania (“settlement agreement”) which provides for flow-through
accounting treatment of certain income tax benefits resulting from the repair change. The repair change for
2012 results in a significant reduction in the effective income tax rate, a reduction in income tax expense, and
reduces the amount of taxes currently payable. For qualifying capital expenditures made prior to 2012, the
resulting tax benefits have been deferred as of December 31, 2012 and, based on the settlement agreement,
beginning in 2013, a ten year amortization of the income tax benefits is expected to reduce future income tax
expense.
CCustomers’ Advances for Construction and Contributions in Aid of Construction (cid:2)(cid:3)X(cid:7)(cid:21)(cid:9)(cid:10)(cid:3)(cid:8)(cid:7)(cid:11)(cid:15)(cid:27)(cid:13)(cid:3)(cid:20)(cid:21)(cid:22)(cid:9)(cid:10)(cid:3)
utility property or, in some instances, cash advances to reimburse the Company for its costs to construct
water mains or other utility property, are contributed to the Company by customers, real estate developers
and builders in order to extend utility service to their properties. The value of these contributions is recorded
as customers’ advances for construction. Non-cash property, in the form of water mains and wastewater
systems, has been received, generally from developers, as advances or contributions of $27,212, $20,823, and
$16,035 in 2012, 2011, and 2010, respectively. Over time, the amount of non-cash contributed property will
vary based on the timing of the contribution of the non-cash property and the volume of non-cash
contributed property received in connection with development in our service territories. The Company
makes refunds on these advances over a specific period of time based on operating revenues related to the
property, or as new customers are connected to and take service from the main. After all refunds are made,
any remaining balance is transferred to contributions in aid of construction. Contributions in aid of
construction include direct non-refundable contributions and the portion of customers' advances for
construction that become non-refundable.
Contributed property is generally not depreciated for rate-making purposes as certain states’ regulatory
guidelines provide that contributions in aid of construction received must remain on the Company’s
consolidated balance sheet indefinitely. Based on regulatory conventions in other states where the Company
operates, certain of the subsidiaries do depreciate contributed property and amortize contributions in aid of
construction at the composite rate of the related property. Contributions in aid of construction and
customers’ advances for construction are deducted from the Company’s rate base for rate-making purposes,
and therefore, no return is earned on contributed property.
Inventories, Materials and Supplies (cid:2)(cid:3)(cid:14)(cid:15)<(cid:9)(cid:15)(cid:21)(cid:20)(cid:10)(cid:11)(cid:9)(cid:27)(cid:3)(cid:7)(cid:10)(cid:9)(cid:3)(cid:27)(cid:21)(cid:7)(cid:21)(cid:9)(cid:29)(cid:3)(cid:7)(cid:21)(cid:3)(cid:12)(cid:20)(cid:27)(cid:21)(cid:16)(cid:3)(cid:3)(cid:23)(cid:20)(cid:27)(cid:21)(cid:3)(cid:11)(cid:27)(cid:3)(cid:24)(cid:10)(cid:11)(cid:15)(cid:12)(cid:11)(cid:24)(cid:7)(cid:28)(cid:28)(cid:25)(cid:3)(cid:29)(cid:9)(cid:21)(cid:9)(cid:10)(cid:8)(cid:11)(cid:15)(cid:9)(cid:29)(cid:3)(cid:6)(cid:27)(cid:11)(cid:15)(cid:30)(cid:3)
the first-in, first-out method.
Stock-Based Compensation (cid:2)(cid:3)#(cid:22)(cid:9)(cid:3)(cid:23)(cid:20)(cid:8)(cid:24)(cid:7)(cid:15)(cid:25)(cid:3)(cid:10)(cid:9)(cid:12)(cid:20)(cid:10)(cid:29)(cid:27)(cid:3)(cid:12)(cid:20)(cid:8)(cid:24)(cid:9)(cid:15)(cid:27)(cid:7)(cid:21)(cid:11)(cid:20)(cid:15)(cid:3)(cid:9)@(cid:24)(cid:9)(cid:15)(cid:27)(cid:9)(cid:3)(cid:11)(cid:15)(cid:3)(cid:21)(cid:22)(cid:9)(cid:3)!(cid:11)(cid:15)(cid:7)(cid:15)(cid:12)(cid:11)(cid:7)(cid:28)(cid:3)(cid:27)(cid:21)(cid:7)(cid:21)(cid:9)(cid:8)(cid:9)(cid:15)(cid:21)(cid:27)(cid:3)!(cid:20)(cid:10)(cid:3)
stock-based awards based on the grant date fair value of those awards. Stock-based compensation expense
includes an estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the
awards on a straight-line basis, which is generally commensurate with the vesting term.
Fair Value Measurements – The Company follows the FASB’s accounting guidance for fair value
measurements and disclosures, which defines fair value and establishes a framework for using fair value to
measure assets and liabilities. That framework provides a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
(cid:2) Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company
has the ability to access;
39
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
(cid:2) 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
(cid:2) 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 for the years ended December 31, 2012 and
2011.
Recent Accounting Pronouncements (cid:2)(cid:3)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 will adopt the provisions of the updated guidance for its quarterly reporting period beginning
January 1, 2013, and the Company does not expect the adoption of the revised guidance to have an impact on
the Company’s consolidated results of operations or consolidated financial position.
In September 2011, the FASB issued revised accounting guidance for accounting for goodwill, which is
intended to reduce the cost and complexity of the annual goodwill impairment test by permitting an entity the
option of performing a qualitative assessment to determine whether further impairment testing is necessary.
The revised guidance is effective for annual periods beginning after December 15, 2011. In the third quarter
of 2012, the Company adopted the provisions of the revised guidance for its 2012 annual goodwill
impairment test, and the adoption of the revised guidance did not have an impact on the Company’s
consolidated results of operations or consolidated financial position.
In May 2011, the FASB issued updated accounting guidance related to fair value measurements and
disclosures that result in common fair value measurements and disclosures between U.S. Generally Accepted
Accounting Principles and International Financial Reporting Standards. This new guidance amends current
fair value measurement and disclosure guidance to increase transparency around valuation inputs and
investment categorization. This guidance is effective for interim and annual periods beginning on January 1,
2012 and is required to be applied prospectively. The adoption of this guidance in the first quarter of 2012
did not have a significant impact on the Company’s consolidated results of operations or consolidated
financial position.
40
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 2 – Acquisitions
As part of the Company’s growth-through-acquisition strategy, in July 2011, the Company entered into a
definitive agreement with American Water to purchase all of the stock of the subsidiary that holds American
Water’s regulated water and wastewater operations in Ohio. American Water’s Ohio operations served
approximately 59,000 customers. On May 1, 2012, the Company completed its acquisition of American
Water’s water and wastewater operations in Ohio. The total purchase price at closing consisted of $102,154
in cash plus certain assumed liabilities, including debt of $14,281, as adjusted pursuant to the purchase
agreement based on book value at closing. The transaction has been accounted for as a business
combination. In the fourth quarter of 2012, the Company reduced the amount of goodwill recognized from
the acquisition by $10,575 primarily as a result of a tax election allowing the acquisition to be treated as an
asset purchase. The Company has included the results of its acquisition in Ohio in our consolidated financial
statements as part of our Regulated segment since the date of acquisition. The operating revenue and
earnings included in the consolidated financial statements of the Company during the period owned by the
Company was $27,981 and $3,265, respectively. The pro forma impact of the Company’s Ohio acquisition
was not material to our results of operations for the years ended December 31, 2012, 2011, and 2010,
respectively, and to our financial condition as of December 31, 2012 and 2011, respectively. The preliminary
purchase price allocation is as follows:
Property, plant and equipment, net
Current assets
Other long-term assets
Goodwill
Total assets acquired
Current liabilities
Long-term debt, excluding current portion
Other long-term liabilities
Total liabilities assumed
$
May 1,
2012
119,595
6,852
7,525
1,679
135,651
3,409
14,233
15,855
33,497
Net assets acquired
$
102,154
In addition to the Company’s acquisition in Ohio, during 2012, the Company completed 16 acquisitions of
water and wastewater utility systems in various states. The total purchase price consisted of $19,094 in cash.
The operating revenues included in the consolidated financial statements of the Company during the period
owned by the Company were $1,527. The pro forma effect of the businesses acquired is not material to the
Company’s results of operations.
In June 2011, the Company completed its acquisition of approximately fifty-one water and five wastewater
systems in Texas serving approximately 5,300 customers. The total purchase price consisted of $6,245 in
cash. The operating revenues included in the consolidated financial statements of the Company during the
period owned by the Company were $3,245 in 2012 and $1,826 in 2011. The pro forma effect of the
businesses acquired is not material to the Company’s results of operations.
In addition to the Company’s acquisition in Texas, during 2011, the Company completed eight acquisitions of
water and wastewater utility systems in various states. The total purchase price consisted of $2,270 in cash.
The operating revenues included in the consolidated financial statements of the Company during the period
owned by the Company were $644 in 2012 and $226 in 2011. The pro forma effect of the businesses
acquired in 2011 is not material to the Company’s results of operations.
41
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
During 2010, the Company completed 23 acquisitions or other growth ventures in various states. The total
purchase price consisted of $8,625 in cash. The operating revenues included in the consolidated financial
statements of the Company during the period owned by the Company were $2,998 in 2012, $2,709 in 2011
and $778 in 2010. The pro forma effect of the businesses acquired in 2010 is not material to the Company’s
results of operations.
Note 3 – Discontinued Operations and Other Dispositions
DDiscontinued Operations – In September 2012, the Company began to market for sale its water and
wastewater operations in Florida, which serve approximately 38,000 customers, and the Company’s waste
water treatment facility in Georgia. In December 2012, the Company entered into a definitive agreement to
sell 80 of its water and wastewater systems in Florida to the Florida Governmental Utility Authority for cash
at closing of $49,200, which is subject to certain adjustments. These 80 systems represent approximately 56%
of our customers served in Florida. This transaction is expected to close in the first half of 2013. In addition,
we are holding discussions with interested parties for the sale of the remainder of our Florida water and
wastewater operations. The Company has accounted for these operations as business held for sale. The sale
of the Company’s water and wastewater operations in Florida and Georgia will conclude the Company’s
operations in these states.
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 2011, the Company recognized
additional income tax expense of $4,008 for the additional deferred tax liabilities that arise from the difference
between the stock and tax basis of the Company’s investment in its Aqua Maine subsidiary.
In July 2011, the Company entered into a definitive agreement with American Water 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. In 2012, the Company recognized a loss on
sale of $2,736 ($1,874 after-tax), resulting from charges incurred from the sale. In 2011, the Company
recognized additional income tax expense of $3,245 for the additional deferred tax liabilities that arise from
the difference between the stock and tax basis of the Company’s investment in its Aqua New York subsidiary.
The Company’s New York operations served approximately 51,000 customers.
The operating results, cash flows, and financial position of the Company’s subsidiaries named above have
been presented in the Company’s consolidated statements of net income, consolidated statements of cash
flow, and consolidated balance sheets as discontinued operations.
42
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
A summary of discontinued operations presented in the consolidated statements of net income includes the
following:
Operating revenues
Total operating expenses
Operating income
Other (income) expense:
Gain on sale
Loss on sale
Other expenses, net
Income from discontinued operations before income taxes
Provision for income taxes
Income from discontinued operations
$
$
Years Ended
December 31,
2011
2012
31,458 $
24,286
7,172
2010
67,391 $
49,617
17,774
65,886
51,144
14,742
(17,699)
2,981
1,397
20,493
8,017
12,476 $
-
-
3,495
14,279
12,893
1,386 $
-
-
1,992
12,750
5,154
7,596
The assets and liabilities of discontinued operations presented in the consolidated balance sheets include the
following:
Property, plant and equipment, at cost
Less: accumulated depreciation
Net property, plant and equipment
Current assets
Regulatory assets
Goodwill
Other assets
Assets of discontinued operations held for sale
Long-term debt, excluding current portion
Current liabilities
Deferred income taxes and investment tax credits
Contributions in aid of construction
Other liabilities
Liabilities of discontinued operations held for sale
$
December 31,
$
2012
128,463
48,856
79,607
4,656
2,034
-
126
86,423
-
2,074
5,166
15,560
837
23,637
2011
299,689
104,889
194,800
16,341
36,656
12,316
2,948
263,061
40,326
8,235
28,690
25,940
33,980
137,171
Net assets
$
62,786
$
125,890
OOther Dispositions – The following dispositions have not been presented as discontinued operations in the
Company’s consolidated financial statements as the Company does not believe that disclosure of the
following disposed water and wastewater utility systems as discontinued operations is meaningful to the
reader of the financial statements for making investment decisions either individually or in the aggregate. The
43
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
gains disclosed below are reported in the consolidated statements of net income as a reduction to operations
and maintenance expense.
In June 2011, the Company sold a water and wastewater utility system for net proceeds of $4,106. The sale
resulted in the recognition of a gain on the sale, net of expenses, of $2,692, and is reported in the
consolidated statement of income as a reduction to operations and maintenance expense. The utility systems
represented approximately 0.03% of the Company’s total assets.
In May 2011, the Company sold its regulated water and wastewater operations in Missouri for net proceeds of
$3,225. This sale of the Company’s Missouri operations concluded its regulated utility operations in Missouri.
The sale of the Company’s utility operations in Missouri represented approximately 0.07% of the Company’s
total assets.
In January 2011, the Company sold a water and wastewater utility system for net proceeds of $3,118. The
sale resulted in the recognition of a gain on the sale of these assets, net of expenses, of $2,452. The gain is
reported in the consolidated statement of income as a reduction to operations and maintenance expense.
The utility system represented approximately 0.01% of the Company’s total assets.
In December 2010, the Company sold a wastewater utility system for net proceeds of $120. The utility
system represented less than 0.01% of the Company’s total assets.
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. In January
2008, the Company reached a settlement with the City to transition the northern portion of the system in
February 2008 upon receipt of the City’s initial valuation payment of $16,911. The settlement agreement
specifically stated that the final valuation of the northern portion of the Company’s system 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 portion of the system 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 assets relinquished 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 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 denying the Company’s appeal. On February 10, 2012, the
Company filed a petition for transfer requesting that the Indiana Supreme Court review the matter. That
petition is currently pending. The Company continues to evaluate its legal options with respect to this
decision. Depending upon the outcome of all of the legal proceeding the Company may be required to
refund a portion of the initial valuation payment, or may receive additional proceeds. The northern portion
of the utility system relinquished represents approximately 0.40% of the Company’s total assets. In addition,
in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare it a “public
convenience and necessity” to acquire the Company's utility system located in the southwest section of the
City and, if negotiations with Fort Wayne officials were to fail, to condemn the Company's utility system.
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. The Company
will continue to evaluate all of its legal options.
44
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 4 – Property, Plant and Equipment
Utility plant and equipment:
Mains and accessories
Services, hydrants, treatment
plants and reservoirs
Operations structures and water tanks
Miscellaneous pumping and
purification equipment
Meters, data processing, transportation
and operating equipment
Land and other non-depreciable assets
Utility plant and equipment
Utility construction work in progress
Net utility plant acquisition adjustment
Non-utility plant and equipment
Total property, plant and equipment
Note 5 – Accounts Receivable
Billed utility revenue
Unbilled utility revenue
Other
Less allowance for doubtful accounts
Net accounts receivable
December 31,
2012
2011
Approximate Range
of Useful Lives
Weighted Average
Useful Life
$
2,190,078
$
1,984,171
26 to 92 years
75 years
1,275,221
233,743
1,165,983
213,368
5 to 85 years
14 to 70 years
47 years
48 years
594,687
507,035
5 to 145 years
36 years
573,899
95,436
4,963,064
107,944
(31,347)
10,739
5,050,400
$
529,160
81,421
4,481,138
61,232
(33,839)
9,435
4,517,966
$
3 to 78 years
-
-
0 to 52 years
0 to 25 years
23 years
-
-
22 years
5 years
December 31,
2012
2011
$
$
54,294
33,590
9,358
97,242
4,321
92,921
$
$
47,311
29,361
3,359
80,031
4,485
75,546
The Company’s utility customers are located principally in the following states: 47% in Pennsylvania, 16% in
Ohio, 10% in North Carolina, 8% in Texas, and 7% in Illinois. No single customer accounted for more than
one percent of the Company's regulated operating revenues during the years ended December 31, 2012, 2011,
and 2010. The following table summarizes the changes in the Company’s allowance for doubtful accounts:
Balance at January 1,
Amounts charged to expense
Accounts written off
Recoveries of accounts written off
Balance at December 31,
2012
2011
2010
$
$
4,485 $
4,805
(5,939)
970
4,321 $
4,367
4,854
(5,780)
1,044
4,485
$
$
4,790
4,156
(5,489)
910
4,367
45
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 6 – Regulatory Assets and Liabilities
The regulatory assets represent costs that are expected to be fully recovered from customers in future rates
while regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or
amounts recovered from customers in advance of incurring the costs. Except for income taxes, regulatory
assets and regulatory liabilities are excluded from the Company’s rate base and do not earn a return. The
components of regulatory assets and regulatory liabilities are as follows:
December 31,
2012
December 31,
2011
Regulatory
Assets
Regulatory
Liabilities
Regulatory
Assets
Regulatory
Liabilities
Income taxes
Utility plant retirement costs
Post-retirement benefits
Water tank painting
Fair value adjustment of long-term
debt assumed in acquisition
Rate case filing expenses & other
$
$
$
348,359
16,976
139,139
2,836
192,551
19,936
28,795
-
4,739
9,215
521,264
$
-
81
241,363
$
$
$
102,726
21,975
100,640
4,420
1,540
8,731
240,032
$
1,706
15,845
22,961
-
162
670
41,344
Items giving rise to deferred state income taxes, as well as a portion of deferred Federal income taxes related
to certain differences between tax and book depreciation expense, are recognized in the rate setting process
on a cash or flow-through basis and will be recovered as they reverse. Amounts include differences that arise
between certain utility asset improvement costs capitalized for book and deducted as a repair expense for tax
purposes.
The regulatory liability for the repair tax accounting change catch-up represents the tax benefits anticipated to
be realized on the Company’s 2012 tax return, which has not yet flowed-through as a reduction to income tax
expense due to the ten year amortization period which is expected to begin in 2013. This amortization period
was stipulated in a June 2012 rate order issued to Aqua Pennsylvania.
The regulatory asset for utility plant retirement costs, including cost of removal, represents costs already
incurred that are expected to be recovered in future rates over a five year recovery period. The regulatory
liability for utility plant retirement costs represents amounts recovered through rates during the life of the
associated asset and before the costs are incurred.
Post-retirement benefits include pension and other post-retirement benefits. A regulatory asset has been
recorded at December 31, 2012 and 2011 for the costs that would otherwise be charged to stockholders’
equity for the underfunded status of the Company’s pension and other post-retirement benefit plans. The
regulatory asset related to pension costs includes deferred net pension expense in excess of amounts funded
which the Company believes will be recoverable in future years as pension funding is required. The
regulatory asset related to post-retirement benefits other than pensions represents costs that were deferred
between the time that the accrual method of accounting for these benefits was adopted in 1993 and the
recognition of the accrual method in the Company's rates as prescribed in subsequent rate filings.
Amortization of the amount deferred for post-retirement benefits other than pensions began in 1994 and is
currently being recovered in rates.
Expenses associated with water tank painting are deferred and amortized over a period of time as approved in
the regulatory process. Water tank painting costs are generally being amortized over a period ranging from 5
to 17 years.
46
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company recorded a fair value adjustment for fixed rate, long-term debt assumed in acquisitions that
matures in various years ranging from 2022 to 2029. The regulatory asset or liability results from the rate
setting process continuing to recognize the historical interest cost of the assumed debt.
The regulatory asset related to rate case filing expenses represents the costs associated with filing for rate
increases that are deferred and amortized over periods that generally range from one to five years. Other
represents costs incurred by the Company for which it has received or expects to receive rate recovery.
The regulatory asset related to the costs incurred for information technology software projects and water
main cleaning and relining projects are described in Note 1 – Summary of Significant Accounting Policies –
Property, Plant and Equipment and Depreciation.
Note 7 – Income Taxes
The provision for income taxes for the Company’s continuing operations consists of:
Current:
Federal
State
Deferred:
Federal
State
Years Ended December 31,
2012
2011
2010
$
(13,854) $
3,172
(10,682)
$
(936)
(2,063)
(2,999)
67,743
9,820
77,563
76,479
(4,369)
72,110
(7,437)
12,148
4,711
68,644
1,585
70,229
Total tax expense
$
66,881 $
69,111
$
74,940
The statutory Federal tax rate is 35% and for states with a corporate net income tax, the state corporate net
income tax rates range from 5% to 9.99% for all years presented.
47
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The reasons for the differences between amounts computed by applying the statutory Federal income tax rate
to income before income tax expense for the Company’s continuing operations are as follows:
Computed Federal tax expense at statutory rate
Decrease in tax expense related to repair tax accounting change
State income taxes, net of federal tax benefit
Increase in tax expense for depreciation expense
to be recovered in future rates
Stock-based compensation
Deduction for Aqua America common dividends
paid under employee benefit plan
Amortization of deferred investment tax credits
Other, net
Actual income tax expense
Years Ended December 31,
2011
2012
2010
$
87,839 $ 73,778 $ 66,962
-
(28,948)
8,926
8,445
-
(4,180)
361
(386)
551
(355)
210
(67)
(387)
(420)
377
(374)
(333)
(384)
66,881 $ 69,111 $ 74,940
(345)
(340)
2
$
In December 2012, the Company changed its tax method of accounting for certain qualifying utility system
repairs in Aqua Pennsylvania effective with the tax year ended December 31, 2012 and for prior tax years.
The tax accounting method was changed to permit the expensing of certain utility asset improvement costs
that were previously being capitalized and depreciated for book and tax purposes (the “repair change”). The
repair change was implemented in response to a June 2012 rate order issued by the Pennsylvania Public
Utility Commission to Aqua Pennsylvania (“settlement agreement”) which provides for flow-through
accounting treatment of certain income tax benefits resulting from the repair change. As a result of this
settlement agreement, the net 2012 income tax benefits of $33,565 reduced income tax expense and flowed-
through to net income in the fourth quarter of 2012, and the income tax benefits of $111,397 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 is expected
to reduce income tax expense beginning in 2013. The repair change resulted in a significant reduction in the
effective income tax rate, a net reduction in income tax expense of $33,565 in the fourth quarter of 2012 for
the tax year 2012 impact, and reduced the amount of taxes currently payable resulting in a tax refund
expected of $14,802 on tax payments made prior to the repair change. The catch-up adjustment resulted in a
$88,476 decrease to current taxes payable; a $190,389 increase to regulatory liabilities which it expected to be
amortized over the next ten years; an increase to both deferred tax liabilities and regulatory assets
representing the appropriate book/tax basis difference on capital additions.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted on
December 17, 2010 and provided for a 100 percent expensing allowance for qualifying capital additions
placed in service after September 8, 2010 through tax year 2011, and extended 50 percent bonus depreciation
for qualifying capital additions for tax year 2012. In February 2011, one of the Company’s state tax
jurisdictions issued guidance that it would recognize the 100% expensing allowance in the 2011 tax year. As a
result of this guidance and the flow-through treatment afforded by that state’s regulatory commission, the net
state income tax benefit reduced the Company’s 2011 state income tax expense by $14,800 and reduced the
Company’s effective state income tax rate. The American Tax Relief Act of 2012 was enacted on January 1,
2013 and provided for an extension of the 50% bonus depreciation for qualifying capital additions for tax
year 2013.
48
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the components of the net deferred tax liability from continuing operations:
Deferred tax assets:
Customers' advances for construction
Costs expensed for book not deducted
for tax, principally accrued expenses
Utility plant acquisition adjustment
basis differences
Post-retirement benefits
Tax loss carryfoward
Other
Less valuation allowance
Deferred tax liabilities:
Utility plant, principally due to
depreciation and differences in the basis
of fixed assets due to variation in tax
and book accounting
Deferred taxes associated with the gross-up
of revenues necessary to recover, in rates,
the effect of temporary differences
Tax effect of regulatory asset for
post-retirement benefits
Deferred investment tax credit
December 31,
2012
2011
$
26,820
$
17,650
13,124
1,105
12,496
35,955
111,452
2,360
202,207
7,506
194,701
11,614
36,141
47,860
2,183
116,553
8,639
107,914
772,006
580,405
66,361
43,710
35,955
5,928
880,250
36,141
6,544
666,800
Net deferred tax liability
$
685,549
$
558,886
At December 31, 2012 and 2011, the Company recorded Federal net operating losses (“NOL”) of $118,327
and $76,064, respectively. The Company believes the Federal NOLs are more likely than not to be recovered
and require no valuation allowance. The Company’s Federal NOLs do not begin to expire until 2031and
2032, respectively. As of December 31, 2012, the cumulative NOL is $215,585.
In 2012 and 2011, as a result of the Company’s Federal cumulative NOLs the Company ceased recognizing
the windfall tax benefit associated with stock-based compensation, because the deduction did not reduce
income taxes payable. Upon realization of the Company’s Federal NOLs, the Company will recognize a
windfall tax benefit of $2,121.
At December 31, 2012 and 2011, the Company recorded state NOLs of $249,895 and $79,391, respectively, a
portion of which are offset by a valuation allowance because the Company does not believe these NOLs are
more likely than not to be realized. The state NOLs do not begin to expire until 2021. As of December 31,
2012, the cumulative NOL is $375,299.
The Company has analyzed filing positions in its Federal and state jurisdictions where it is required to file
income tax returns, as well as for all open tax years in these jurisdictions. The Company’s determination of
what qualifies as a capital cost versus repair expense as it relates to the repair tax change will likely be
reviewed upon audit by the IRS and could be subject to subsequent adjustment. The Company believes its
49
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
income tax filing positions and deductions will be sustained under both Federal and state audits and it
believes it does not have uncertain tax positions that, in the event of adjustment, will result in a material effect
on its results of operations or financial position. The Company does not have a reserve for uncertain tax
positions. The Company has elected to recognize accrued interest and penalties related to uncertain tax
positions as income tax expense. As of December 31, 2012, the Company’s Federal income tax returns for all
years through 2008 have been closed. Tax years 2009 through 2012 remain open to Federal examination, and
tax years 2010 and 2011 are currently under examination. The statute remains open for the Company’s state
income tax returns for tax years 2009 through 2012 in the various states the Company’s conducts business in.
There is currently an Illinois state income tax audit underway for tax years 2008 and 2009.
Note 8 – Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes:
Property
Capital Stock
Gross receipts, excise and franchise
Payroll
Other
Total taxes other than income
Years Ended December 31,
2012
2011
2010
$
$
21,550
3,196
10,060
6,967
5,631
47,404
$
$
16,618
3,559
9,408
6,441
5,423
41,449
$
$
16,573
3,458
9,450
6,185
4,481
40,147
Note 9 – Commitments and Contingencies
The following disclosures reflect commitments and contingencies for the Company’s continuing operations.
CCommitments – The Company leases motor vehicles, buildings and other equipment under operating leases
that are noncancelable. The future annual minimum lease payments due are as follows:
2013
2014
2015
2016
2017
Thereafter
$
2,568 $
1,925 $
1,191 $
483 $
$131 $
476
50
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company leases parcels of land on which treatment plants and other facilities are situated and adjacent
parcels that are used for watershed protection. The operating leases are noncancelable, expire between 2014
and 2051 and contain certain renewal provisions. Certain leases are subject to an adjustment every five years
based on changes in the Consumer Price Index. Subject to the aforesaid adjustment, during each of the next
five years, an average of $608 of annual lease payments for land is due, and the aggregate of the years
remaining approximates $14,299. The Company leases treatment plants to other parties under lease
agreements that require payments to the Company of:
2013
2014
2015
2016
2017
Thereafter
$
494 $
494 $
496 $
507 $
507 $
3,466
The Company maintains agreements with other water purveyors for the purchase of water to supplement its
water supply, particularly during periods of peak demand. The agreements stipulate purchases of minimum
quantities of water to the year 2026. The estimated annual commitments related to such purchases through
2017 are expected to average $11,553 and the aggregate of the years remaining approximates $32,826.
The Company has entered into purchase obligations, in the ordinary course of business, that include
agreements for water treatment processes at certain of its wells in a small number of its divisions. The 20
year term agreement provides for the use of treatment equipment and media used in the treatment process
and are subject to adjustment based on changes in the Consumer Price Index. The future contractual cash
obligation related to these agreements is: $924 in 2013, $944 in 2014, $964 in 2015, $985 in 2016, $1,006 in
2017 and $12,677 thereafter. In addition, as of December 31, 2012, the estimated capital expenditures
required under legal and binding long-term contracts are approximately $16,600 in 2013 and $3,950 in 2015.
Rent expense under operating leases, purchased water expense, and water treatment expenses under these
agreements were as follows:
Operating lease expense
Purchased water under
long-term agreements
Water treatment expense
Years Ended December 31,
2011
2010
2012
$
3,850
$
3,553
$
3,631
11,796
14,507
13,621
under contractual agreement
897
865
777
CContingencies – 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 December 31, 2012, the aggregate amount of $13,238 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, Aqua America has
51
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
insurance coverage for certain of these loss contingencies, and as of December 31, 2012, estimates that
approximately $1,865 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. The Company is involved in the following condemnation proceedings and legal matters, as
described below:
(cid:2) Refer to Note 3 – Discontinued Operations and Other Dispositions for a discussion of the
Company’s challenge to the valuation of the northern portion of its Fort Wayne, Indiana utility
system that was turned over to the City of Fort Wayne, Indiana in February 2008.
(cid:2)
In 2006, a lawsuit was filed by two occupants of a house abutting a wastewater treatment plant
facility owned by the Company’s subsidiary in Florida. The lawsuit, as amended, alleged the plaintiffs
sustained bodily injury and property damage due to the design, operation and maintenance of the
plant. In January 2011, a trial was held which resulted in the judicial dismissal of the count for strict
liability and jury verdicts in favor of the Company on the remaining counts. In June 2011, the
plaintiffs agreed to dismiss their appeals and to release all claims against the Company’s subsidiary
and the Company, which resulted in the conclusion of the original plaintiffs’ litigation against the
Company’s subsidiary. In the third quarter of 2008, approximately thirty-five additional plaintiffs,
associated with approximately eight other nearby homes, and represented by the same counsel as the
original plaintiffs, filed a separate lawsuit making similar allegations against our Florida 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 are
expected to go to trial in May 2013. The Company continues to assess these matters and any
potential losses, which based on the outcome of the litigation may or may not be covered by the
Company’s insurance coverage. At this time, the Company believes that the estimated amount of
any potential losses would not be material to the Company’s consolidated results of operations or
consolidated financial condition.
(cid:2) One of the Company’s subsidiaries acquired in 2008 had entered into a Consent Decree with the
United States Environmental Protection Agency and received from the United States Department of
Justice a proposed civil penalty related to alleged violations, which is currently estimated to be
approximately $254. The Company’s subsidiary had contested the appropriateness of earlier
calculations of the proposed penalty based on sanitary sewer violations occurring prior to the
acquisition of the subsidiary and the amount of the proposed penalty. A reserve has been accrued
for this loss contingency as it is judged to be probable and the amount is estimable. 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 has retained a portion of those shares in an amount anticipated to cover penalty amounts
and attendant costs, continued to withhold a designated amount of shares to cover contingent
increases, and released a certain number of shares to the sellers.
Although the results of legal proceedings cannot be predicted with certainty, there are no other pending legal
proceedings to which the Company or any of its subsidiaries is a party or to which any of its properties is the
subject that are material or are expected to have a material effect on the Company’s financial position, results
of operations or cash flows.
52
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 10 – Long-term Debt and Loans Payable
LLong-term Debt – The consolidated statements of capitalization provide a summary of long-term debt as of
December 31, 2012 and 2011. The supplemental indentures with respect to certain issues of the First
Mortgage Bonds restrict the ability of Aqua Pennsylvania and certain other operating subsidiaries of the
Company to declare dividends, in cash or property, or repurchase or otherwise acquire the stock of these
companies. As of December 31, 2012, approximately $701,000 of Aqua Pennsylvania’s retained earnings of
approximately $721,000 and approximately $114,000 of the retained earnings of approximately $121,000 of
certain other subsidiaries were free of these restrictions. Certain supplemental indentures also prohibit Aqua
Pennsylvania and certain other subsidiaries of the Company from making loans to, or purchasing the stock
of, the Company.
Sinking fund payments are required by the terms of certain issues of long-term debt. Excluding amounts due
under the Company’s revolving credit agreement, the future sinking fund payments and debt maturities of the
Company’s long-term debt are as follows:
Interest Rate Range
2013
2014
2015
2016
2017
Thereafter
0.00% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%
8.00% to 8.99%
9.00% to 9.99%
10.00% to 10.99%
$
190 $
193 $
193 $
191 $
195 $
2,350
1,133
2,345
21,888
10,499
-
317
269
6,047
-
2,320
1,164
2,420
27,301
51,566
-
379
376
700
-
2,257
1,201
2,508
310
38,504
12,000
409
405
700
-
2,139
1,230
2,581
11,124
16,763
-
442
437
700
-
102,004
1,259
2,682
11,138
14,937
8,903
478
473
700
-
Total
$
45,038 $
86,419 $
58,487 $
35,607 $ 142,769 $
1,922
16,181
11,133
144,941
488,896
430,592
44,000
33,635
17,672
25,700
6,000
1,220,672
In November 2012, Aqua Pennsylvania issued $80,000 of first mortgage bonds, secured by a supplement to
its first mortgage indenture, of which $40,000 is due in 2041, $20,000 is due in 2042, and $20,000 is due in
2047 with interest rates of 3.79%, 3.80%, and 3.85% respectively. The proceeds were used to refinance
higher coupon first mortgage bonds and pay down our revolving credit facility.
In June 2012, the Company issued $50,000 of senior unsecured notes due in 2027 with an interest rate of
3.57%. The proceeds were used to fund the Company’s capital expenditures.
As of December 31, 2012, the trustee for one issue held $23,010 pending construction of the projects to be
financed with the issue of tax-exempt bonds in 2010 which is reported in the consolidated balance sheet as
funds restricted for construction activity.
The weighted average cost of long-term debt at December 31, 2012 and 2011 was 4.81% and 5.17%,
respectively. The weighted average cost of fixed rate long-term debt at December 31, 2012 and 2011 was
5.06% and 5.30%, respectively.
In March 2012, the Company entered into a five-year $150,000 unsecured revolving credit facility with three
banks that expires in March 2017. Included within this facility is a $15,000 sublimit for daily demand loans.
Funds borrowed under this facility are classified as long-term debt and are used to provide working capital.
The Company’s $150,000 unsecured revolving credit facility replaced the Company’s prior $95,000 unsecured
revolving credit facility, which expired in May 2012. As of December 31, 2012, the Company has the
following sublimits and available capacity under the credit facility: $25,000 letter of credit sublimit, $5,644 of
letters of credit available capacity, $0 borrowed under the swing-line commitment, and $100,000 of funds
borrowed under the agreement. Interest under this facility is based at the Company’s option, on the prime
53
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
rate, an adjusted Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. A facility fee is
charged on the total commitment amount of the agreement. Under this facility the average cost of
borrowings was 0.85% and 0.45%, and the average borrowing was $68,609 and $53,473, during 2012 and
2011, respectively.
The Company is obligated to comply with covenants under some of its loan and debt agreements. These
covenants contain a number of restrictive financial covenants, which among other things limit, subject to
certain exceptions, the Company’s ratio of consolidated total indebtedness to consolidated total capitalization,
and require a minimum level of earnings coverage over interest expense. During 2012, the Company was in
compliance with its debt covenants under its credit facilities. Failure to comply with the Company’s debt
covenants could result in an event of default, which could result in the Company being required to repay or
finance its borrowings before their due date, possibly limiting the Company’s future borrowings, and
increasing its borrowing costs.
LLoans Payable – In November 2012, Aqua Pennsylvania renewed its $100,000 364-day unsecured revolving
credit facility with four banks. The funds borrowed under this agreement are classified as loans payable and
used to provide working capital. As of December 31, 2012 and 2011, funds borrowed under the agreement
were $70,902 and $84,030, respectively. Interest under this facility is based, at the borrower’s option, on the
prime rate, an adjusted federal funds rate, an adjusted London Interbank Offered Rate corresponding to the
interest period selected, an adjusted Euro-Rate corresponding to the interest period selected or at rates
offered by the banks. This agreement restricts short-term borrowings of Aqua Pennsylvania. A commitment
fee of 0.10% is charged on the total commitment amount of Aqua Pennsylvania’s revolving credit agreement.
The average cost of borrowing under the facility was 0.94% and 1.01%, and the average borrowing was
$78,525 and $80,235, during 2012 and 2011, respectively. The maximum amount outstanding at the end of
any one month was $89,973 and $92,143 in 2012 and 2011, respectively.
At December 31, 2012 and 2011, the Company had other combined short-term lines of credit of $60,500.
Funds borrowed under these lines are classified as loans payable and are used to provide working capital. As
of December 31, 2012 and 2011, funds borrowed under the short-term lines of credit were $9,481 and
$23,741, respectively. The average borrowing under the lines was $15,583 and $15,795 during 2012 and 2011,
respectively. The maximum amount outstanding at the end of any one month was $22,941 and $26,741 in
2012 and 2011. Interest under the lines is based at the Company’s option, depending on the line, on the
prime rate, an adjusted Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. The
average cost of borrowings under all lines during 2012 and 2011 was 1.83% and 1.96%, respectively.
Interest Income – Interest income of $372, $757, and $1,288 was netted against interest expense on the
consolidated statement of income for the years ended December 31, 2012, 2011, and 2010, respectively. The
total interest cost was $78,129, $78,561, and $74,681 in 2012, 2011, and 2010, including amounts capitalized
of $4,142, $7,150, and $4,831, respectively.
Note 11 – Fair Value of Financial Instruments
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 December 31, 2012 and 2011, the
carrying amount of the Company’s funds restricted for construction activity was $23,572 and $88,905,
respectively, which equates to their estimated fair value. As of December 31, 2012 and 2011, the carrying
amount of the Company’s loans payable was $80,383 and $107,771, 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
December 31, 2012 and 2011, the carrying amounts of the Company's cash and cash equivalents was $5,521
and $8,204, which equates to their fair value.
54
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The carrying amount and estimated fair value of the Company’s long-term debt are as follows:
December 31,
2012
2011
Carrying amount
Estimated fair value
$
1,588,992
1,702,997
$
1,475,886
1,549,343
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 $71,595
and $66,198 at December 31, 2012 and 2011, respectively. 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 2027 and amounts not paid by the contract expiration dates become non-
refundable. The fair value of these amounts would, however, be less than their carrying value due to the non-
interest bearing feature.
Note 12 – Stockholders’ Equity
At December 31, 2012, the Company had 300,000,000 shares of common stock authorized; par value $0.50.
Shares outstanding and treasury shares held were as follows:
2012
December 31,
2011
2010
Shares outstanding
Treasury shares
140,167,266
776,355
138,815,098
710,482
137,775,567
673,472
At December 31, 2012, the Company had 1,738,619 shares of authorized but unissued Series Preferred Stock,
$1.00 par value.
In February 2012, the Company renewed its universal shelf registration, which expired in December 2011,
through a filing with the Securities and Exchange Commission (“SEC”) to allow for the potential future sale
by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our
common stock, preferred stock, debt securities and other securities specified therein at indeterminate prices.
The Company has a shelf registration statement filed with the SEC to permit the offering from time to time
of shares of common stock and shares of preferred stock in connection with acquisitions. The balance
remaining available for use under the acquisition shelf registration as of December 31, 2012 is 1,904,487
shares. The form and terms of any securities issued under these shelf registrations will be determined at the
time of issuance.
The Company has a Dividend Reinvestment and Direct Stock Purchase Plan (“Plan”) that allows reinvested
dividends to be used to purchase shares of common stock at a five percent discount from the current market
value. Under the direct stock purchase program, shares are purchased by investors at market price. The
shares issued under the Plan are either original issue shares or shares purchased by the Company’s transfer
agent in the open-market. During 2012, 2011, and 2010, under the dividend reinvestment portion of the
Plan, 569,392, 588,745, and 670,538 original issue shares of common stock were sold providing the Company
with proceeds of $12,921, $12,304, and $11,966, respectively.
55
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Board of Directors has authorized the Company to purchase its common stock, from time to time, in the
open market or through privately negotiated transactions. The Company has not repurchased any shares
under this authorization since 2000. As of December 31, 2012, 548,278 shares remain available for
repurchase.
The Company’s accumulated other comprehensive income is reported in the stockholders’ equity section of
the consolidated balance sheets, the consolidated statements of equity, and the related components of other
comprehensive income are reported in the consolidated statements of comprehensive income. The Company
reports its unrealized gains or losses on investments as other comprehensive income and accumulated other
comprehensive income. The Company recorded a regulatory asset for its underfunded status of its pension
and post-retirement benefit plans that would otherwise be charged to other comprehensive income, as it
anticipates recovery of its costs through customer rates.
Note 13 – Net Income per Common Share and Equity per Common Share
Basic net income per share is based on the weighted average number of common shares outstanding. Diluted
net income per share is based on the weighted average number of common shares outstanding and potentially
dilutive shares. The dilutive effect of employee stock options is included in the computation of diluted net
income per share. The dilutive effect of stock options is calculated using the treasury stock method and
expected proceeds upon exercise of the stock options. The following table summarizes the shares, in
thousands, used in computing basic and diluted net income per share:
Years ended December 31,
2011
2010
2012
Average common shares outstanding during
the period for basic computation
Effect of dilutive securities:
Employee stock based compensation
Average common shares outstanding during
the period for diluted computation
139,361
138,182
136,948
573
507
348
139,934
138,689
137,296
For the years ended December 31, 2012, 2011, and 2010, employee stock options to purchase 427,452,
926,300, and 2,024,151 shares of common stock, respectively, were excluded from the calculations of diluted
net income per share as the calculated proceeds from the options’ exercise were greater than the average
market price of the Company’s common stock during these periods.
Equity per common share was $9.89 and $9.01 at December 31, 2012 and 2011, respectively. These amounts
were computed by dividing Aqua America stockholders’ equity by the number of shares of common stock
outstanding at the end of each year.
Note 14 – Employee Stock and Incentive Plan
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
5,000,000 shares for issuance under the plan. A maximum of 50% of the shares available for issuance under
the 2009 Plan may be issued as stock awards or share units and the maximum number of shares that may be
subject to grants under the Plan to any one individual in any one year is 200,000. Shares issued under the
2009 Plan may be original issue shares, the issuance of treasury shares, or shares purchased by the Company
in the open-market. Awards under the 2009 Plan are made by a committee of the Board of Directors. At
December 31, 2012, 4,261,530 shares underlying stock option and restricted stock awards were still available
for grant under the 2009 Plan. No further grants may be made under the 2004 plan.
56
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
PPerformance Share Units – During 2012 and 2011, the Company granted performance share units. There
were no grants in 2010. 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 three year vesting period. 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, which consist of the following metrics: 25% of the
PSUs will be earned based on the Company’s total shareholder return (“TSR”) compared to the TSR for the
companies listed in the Standard and Poor’s Midcap Utilities Index (a market-based condition), 25% of the
PSUs will be earned based on the Company’s TSR compared to the TSR for a specific peer group of six other
investor-owned water companies (a market-based condition), and 50% of the PSUs will be earned based on
the Company’s three-year compound annual growth rate (“CAGR”) in earnings per share (“EPS”) compared
to a target EPS CAGR of 5% (a performance-based condition). During the years ended December 31, 2012
and 2011, the Company recorded stock-based compensation related to PSUs as a component of operations
and maintenance expense of $2,552 and $943, and recorded an income tax benefit of $1,040 and $384. The
following table summarizes nonvested PSU transactions for the year ended December 31, 2012:
Nonvested share units at beginning of period
Granted
Performance criteria adjustment
Forfeited
Vested
Share unit awards issued
Nonvested share units at end of period
Number
of
Share Units
Weighted
Average
Fair Value
137,584
127,950
79,635
(13,944)
-
-
331,225
$
$
24.38
23.89
23.52
23.87
-
-
23.52
57
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the
market-based conditions using the Monte Carlo valuation method. The portion of the fair value of the PSUs
associated with performance-based conditions was 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 fair value of each PSU
grant is amortized into compensation expense on a straight-line basis over their respective vesting periods,
which range from 24 to 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. The following table provides the
assumptions used in the pricing model for the grant and the resulting grant date fair value of PSUs:
Expected term (years)
Risk-free interest rate
Expected volatility
Grant date fair value per
performance share unit
Years ended
December 31,
2012
3.0
0.4%
22.1%
2011
3.0
1.2%
29.7%
$
23.89
$
24.38
As of December 31, 2012, $4,210 of unrecognized compensation costs related to PSUs is expected to be
recognized over a weighted average period of approximately 1.9 years. The aggregate intrinsic value of PSUs as
of December 31, 2012 was $8,420. The aggregate intrinsic value of PSUs is based on the number of nonvested
share units and the market value of the Company’s common stock as of the period end date.
58
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
RRestricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the
Company’s common stock and is valued based on the fair market value of the Company’s stock on the date
of grant. 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, subject to the achievement of certain performance conditions.
During the year ended December 31, 2012 and 2011, the Company recorded stock-based compensation
related to awards of RSUs as a component of operations and maintenance expense of $634 and $342, and
recorded an income tax benefit of $262 and $142. 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 summarizes nonvested RSU transactions for the year ended December 31, 2012:
Nonvested stock units at beginning of period
Granted
Vested
Forfeited
Nonvested stock units at end of period
Number
of
Stock Units
Weighted
Average
Fair Value
44,342
37,850
(11,000)
(2,724)
68,468
$
$
22.21
22.49
22.21
22.24
22.36
As of December 31, 2012, $795 of unrecognized compensation costs related to RSUs is expected to be
recognized over a weighted average period of approximately 1.7 years. The intrinsic value of vested RSUs as of
December 31, 2012 was $247. The aggregate intrinsic value of RSUs as of December 31, 2012 was $1,740. The
aggregate intrinsic value of RSUs is based on the number of nonvested stock units and the market value of the
Company’s common stock as of the period end date.
Stock Options – The following table provides compensation costs for stock-based compensation:
Stock-based compensation within
operations and maintenance expense
Income tax benefit
Years ended December 31,
2012
2011
2010
$
$
612
580
1,361
673
$
1,944
726
There were no stock options granted during the year ended December 31, 2012 and 2011. During the second
quarter of 2011, the Company changed its estimation assumptions related to its historical stock option
forfeitures which resulted in a favorable adjustment to compensation expense of $644 and additional income tax
expense of $52.
The Company estimates forfeitures in calculating compensation expense instead of recognizing these forfeitures
and the resulting reduction in compensation expense as they occur. The estimate of forfeitures will be adjusted
over the vesting period to the extent that actual forfeitures differ, or are expected to differ, from such estimates.
The recording of compensation expense for share-based compensation has no impact on net cash flows and
results in the reclassification on the consolidated cash flow statements of related tax benefits from cash flows
from operating activities to cash flows from financing activities to the extent these tax benefits exceed the
associated compensation cost.
Options under the plans were issued at the closing market price of the stock on the day of the grant. Options
are exercisable in installments of 33% annually, starting one year from the date of the grant and expire 10
59
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
years from the date of the grant. The fair value of each option is amortized into compensation expense on a
straight-line basis over their respective 36 month vesting period, net of estimated forfeitures. The fair value
of options was estimated at the grant date using the Black-Scholes option-pricing model, which relies on
assumptions that require management’s judgment. The following table provides the assumptions used in the
pricing model for grants and the resulting grant date fair value of stock options granted in the periods
reported:
Expected term (years)
Risk-free interest rate
Expected volatility
Dividend yield
Grant date fair value per option
Year ended
December 31,
2010
6.0
2.8%
26.7%
3.3%
3.49
$
Historical information was the principal basis for the selection of the expected term and dividend yield. The
expected volatility is based on a weighted average combination of historical and implied volatilities over a
time period that approximates the expected term of the option. The risk-free interest rate was selected based
upon the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.
The following table summarizes stock option transactions for the year ended December 31, 2012:
Options:
Outstanding, beginning of year
Granted
Forfeited
Expired
Exercised
Outstanding, end of year
Exercisable, end of year
Weighted Weighted
Average
Average
Remaining
Exercise
Life (years)
Price
Aggregate
Intrinsic
Value
$
$
$
20.03
-
17.60
24.25
17.51
20.81
21.03
4.2
4.0
$
$
13,243
12,061
Shares
3,376,960
-
(9,015)
(37,226)
(833,437)
2,497,282
2,354,533
60
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The intrinsic value of stock options is the amount by which the market price of the stock on a given date, such
as at the end of the period or on the day of exercise, exceeded the closing market price of stock on the date of
grant. The following table summarizes the aggregate intrinsic value of stock options exercised and the fair value
of stock options which became vested:
Years ended December 31,
2012
2011
2010
Intrinsic value of options exercised
Fair value of options vested
$
5,547
1,318
$
3,071
2,077
$
2,700
2,373
The following table summarizes information about the options outstanding and options exercisable as of
December 31, 2012:
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Life (years)
Weighted
Average
Exercise
Price
0.2
1.2
5.2
5.2
4.2
3.2
4.2
$
$
12.48
16.15
18.18
20.18
23.26
29.46
20.81
Shares
65,437
232,439
1,057,617
339,055
375,282
427,452
2,497,282
Weighted
Average
Exercise
Price
$
$
12.48
16.15
18.35
20.18
23.26
29.46
21.03
Shares
65,437
232,439
914,868
339,055
375,282
427,452
2,354,533
Range of prices:
$10.00 - 12.99
$13.00 - 16.99
$17.00 - 19.99
$20.00 - 22.99
$23.00 - 27.99
$28.00 - 29.99
As of December 31, 2012, there was $30 of total unrecognized compensation cost related to nonvested stock
options granted under the plans. The cost is expected to be recognized over a weighted average period of
approximately 1 month.
RRestricted Stock – Restricted stock awards provide the grantee with the rights of a shareholder, including
the right to receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares
during the restriction period. Restricted stock awards result in compensation expense which is equal to the
fair market value of the stock on the date of the grant and is amortized ratably over the restriction period.
The Company expects forfeitures of restricted stock to be de minimis.
The following table provides compensation costs for stock-based compensation:
Stock-based compensation within
operations and maintenance expense
Income tax benefit
Years ended December 31,
2012
2011
2010
$
1,739
721
$
1,800
740
$
1,927
793
61
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes nonvested restricted stock transactions for the year ended December 31,
2012:
Nonvested shares at beginning of period
Granted
Vested
Forfeited
Nonvested shares at end of period
The following table summarizes the value of restricted stock awards:
Number
of
Shares
Weighted
Average
Fair Value
207,989
17,600
(105,473)
(2,388)
117,728
$
$
18.66
23.09
18.80
17.25
19.23
Years ended December 31,
2011
2012
2010
Intrinsic value of restricted stock awards vested
Fair value of restricted stock awards vested
Weighted average fair value of restricted stock awards granted
$
2,384 $
1,971
23.09
2,020 $
1,650
22.21
1,147
1,270
17.19
As of December 31, 2012, $707 of unrecognized compensation costs related to restricted stock is expected to be
recognized over a weighted average period of approximately 1.0 years. The aggregate intrinsic value of restricted
stock as of December 31, 2012 was $2,993. The aggregate intrinsic value of restricted stock is based on the
number of nonvested shares of restricted stock and the market value of the Company’s common stock as of the
period end date.
Note 15 – Pension Plans and Other Post-retirement Benefits
The Company maintains qualified, defined benefit pension plans that cover a substantial portion of its full-
time employees who were hired prior to April 1, 2003. Retirement benefits under the plans are generally
based on the employee’s total years of service and compensation during the last five years of employment.
The Company’s policy is to fund the plans annually at a level which is deductible for income tax purposes and
which provides assets sufficient to meet its pension obligations over time. To offset certain limitations
imposed by the Internal Revenue Code with respect to payments under qualified plans, the Company has a
non-qualified Supplemental Pension Benefit Plan for Salaried Employees in order to prevent certain
employees from being penalized by these limitations. The Company also has non-qualified Supplemental
Executive Retirement Plans for certain current and retired employees. The net pension costs and obligations
of the qualified and non-qualified plans are included in the tables which follow. Employees hired after April
1, 2003 may participate in a defined contribution plan that provides a Company matching contribution on
amounts contributed by participants and an annual profit-sharing contribution based upon a percentage of
the eligible participants’ compensation.
In addition to providing pension benefits, the Company offers certain Post-retirement Benefits other than
Pensions (“PBOPs”) to employees hired before April 1, 2003 and retiring with a minimum level of service.
These PBOPs include continuation of medical and prescription drug benefits, or a cash contribution toward
such benefits, for eligible retirees and life insurance benefits for certain eligible retirees. The Company funds
its gross PBOP cost through various trust accounts. The benefits of retired officers and certain other retirees
are paid by the Company and not from plan assets due to limitations imposed by the Internal Revenue Code.
62
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid
in the years indicated:
Years:
2013
2014
2015
2016
2017
2018 - 2022
Pension
Benefits
$
Other
Post-retirement
Benefits
$
1,557
1,782
1,940
2,173
2,394
14,142
10,574
11,478
12,420
13,356
14,314
84,914
The changes in the benefit obligation and fair value of plan assets, the funded status of the plans and the
assumptions used in the measurement of the company’s benefit obligation are as follows:
Pension Benefits
2012
2011
Other
Post-retirement Benefits
2011
2012
Change in benefit obligation:
Benefit obligation at January 1,
Service cost
Interest cost
Actuarial loss
Plan participants' contributions
Benefits paid
Plan amendments
Acquisition
Settlements
Benefit obligation at December 31,
Change in plan assets:
Fair value of plan assets at January 1,
Actual return on plan assets
Employer contributions
Benefits paid
Acquisition
Settlements
Fair value of plan assets at December 31,
Funded status of plan:
Net amount recognized at December 31,
$
237,087
4,920
12,728
34,750
-
(9,329)
-
23,652
(731)
303,077
148,912
17,153
15,256
(9,329)
18,823
(731)
190,084
209,459
4,127
12,052
19,000
-
(7,967)
416
-
-
237,087
145,524
(1,871)
13,226
(7,967)
-
-
148,912
50,189
1,309
2,482
5,218
199
(1,160)
(392)
5,188
-
63,033
28,131
2,019
1,905
(941)
2,940
-
34,054
43,956
1,092
2,414
3,701
219
(1,193)
-
-
-
50,189
26,739
562
1,790
(960)
-
-
28,131
$
112,993 $
88,175
$
28,979 $
22,058
63
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company’s pension plans had an accumulated benefit obligation of $267,400 and $210,511 at December
31, 2012 and 2011, respectively. The following table provides the net liability recognized on the consolidated
balance sheets at December 31,:
Pension Benefits
2012
2011
Other
Post-retirement Benefits
2011
2012
Current liability
Noncurrent liability
Net liability recognized
$
$
222
112,771
112,993
$
$
217
87,958
88,175
$
$
-
28,979
28,979
$
$
-
22,058
22,058
At December 31, 2012 and 2011, the Company’s pension plans had benefit obligations in excess of its plan
assets. The following tables provide the projected benefit obligation, the accumulated benefit obligation and
fair market value of the plan assets as of December 31,:
Projected benefit obligation
Fair value of plan assets
Accumulated benefit obligation
Fair value of plan assets
Projected Benefit
Obligation Exceeds
the Fair Value of
Plan Assets
2012
2011
303,077
190,084
$
237,087
148,912
Accumulated Benefit
Obligation Exceeds
the Fair Value of
Plan Assets
2012
2011
267,400
190,084
$
210,511
148,912
$
$
64
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table provides the components of net periodic benefit costs for the years ended December 31,:
Pension Benefits
Other
Post-retirement Benefits
2012
2011
2010
2012
2011
2010
$
4,920
$
4,127
$
4,008
$
1,309
$
1,092
$
1,016
12,728
(13,588)
12,052
(11,731)
11,386
(10,206)
2,482
(1,950)
2,414
(1,689)
2,151
(1,540)
-
277
6,568
-
304
-
253
3,578
-
-
-
245
3,852
-
-
(3,696)
(3,499)
(3,216)
-
(299)
1,024
69
90
(671)
104
(268)
783
137
-
(668)
104
(268)
638
137
-
(470)
Service cost
Interest cost
Expected return on plan assets
Amortization of transition
obligation (asset)
Amortization of prior service cost
Amortization of actuarial loss
Amortization of regulatory asset
Settlement loss
Capitalized costs
Net periodic benefit cost
$
7,513
$
4,780
$
6,069
$
2,054
$
1,905
$
1,768
The Company records the underfunded status of its pension and other post-retirement benefit plans on its
consolidated balance sheets and records a regulatory asset for these costs that would otherwise be charged to
stockholders’ equity, as the Company anticipates recoverability of the costs through customer rates. The
Company’s pension and other post-retirement benefit plans were underfunded at December 31, 2012 and
2011. Changes in the plans’ funded status will affect the assets and liabilities recorded on the balance sheet.
Due to the Company’s regulatory treatment, the recognition of the funded status is recorded as a regulatory
asset pursuant to the FASB’s accounting guidance for regulated operations.
The following table provides the amounts recognized in regulatory assets that have not been recognized as
components of net periodic benefit cost as of December 31,:
Pension Benefits
2012
2011
Post-retirement Benefits
2011
2012
Other
Net actuarial loss
Prior service cost (credit)
Transition obligation (asset)
Total recognized in regulatory assets
$
$
106,980
1,297
-
108,277
$
$
83,008
1,554
-
84,562
$
$
21,315
(977)
-
20,338
$
$
15,937
(923)
74
15,088
The estimated net actuarial loss, prior service cost and transition asset for the Company’s pension plans that
will be amortized in 2013 from the regulatory assets into net periodic benefit cost are $8,064, $229, and $0,
respectively. The estimated net actuarial loss, prior service credit and transition obligation for the Company’s
other post-retirement benefit plans that will be amortized in 2013 from regulatory assets into net periodic
benefit cost are $1,382, $299, and $0, respectively.
Accounting for pensions and other post-retirement benefits requires 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. Each assumption is reviewed annually with
assistance from the Company’s actuarial consultant who provides guidance in establishing the assumptions.
The assumptions are selected to represent the average expected experience over time and may differ in any
one year from actual experience due to changes in capital markets and the overall economy. These
65
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
differences will impact the amount of pension and other post-retirement benefit expense that the Company
recognizes.
The significant assumptions related to the Company’s benefit obligations are as follows:
Weighted Average Assumptions Used
to Determine Benefit Obligations
as of December 31,
Discount rate
Rate of compensation increase
Assumed Health Care Cost Trend
Rates Used to Determine Benefit
Obligations as of December 31,
Health care cost trend rate
Rate to which the cost trend is assumed
to decline (the ultimate trend rate)
Year that the rate reaches the ultimate
trend rate
Pension Benefits
2011
2012
Other Post-
retirement Benefits
2011
2012
4.17%
5.0%
4.0-4.5% 4.0-4.5%
4.17%
4.0%
5.0%
4.0%
n/a
n/a
n/a
n/a
n/a
n/a
8.0%
8.5%
5.0%
5.0%
2019
2019
n/a – Assumption is not applicable to pension benefits.
The significant assumptions related to the Company’s net periodic benefit costs are as follows:
Pension Benefits
Other Post-retirement Benefits
2012
2011
2010
2012
2011
2010
Weighted Average Assumptions Used
to Determine Net Periodic Benefit
Costs for Years Ended December 31,
Discount rate
5.0%
5.75% 5.91%
5.0%
5.75%
5.91%
Expected return on plan assets
7.75%
7.75%
8.0%
5.17-7.75% 5.17-7.75% 5.33-8.0%
Rate of compensation increase
4.0-4.5% 4.0-4.5% 4.0-4.5%
4.0%
4.0%
4.0%
Assumed Health Care Cost Trend
Rates Used to Determine Net Periodic
Benefit Costs for Years Ended December 31,
Health care cost trend rate
n/a
n/a
n/a
8.5%
9.0%
8.0%
Rate to which the cost trend is assumed
to decline (the ultimate trend rate)
n/a
n/a
n/a
5.0%
5.0%
5.0%
Year that the rate reaches the ultimate
trend rate
n/a
n/a
n/a
2019
2019
2016
n/a – Assumption is not applicable to pension benefits.
66
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Assumed health-care trend rates have a significant effect on the expense and liabilities for other post-
retirement benefit plans. The health care trend rate is based on historical rates and expected market
conditions. A one-percentage point change in the assumed health-care cost trend rates would have the
following effects:
Effect on the health-care component of the
accrued other post-retirement benefit
obligation
Effect on aggregate service and interest cost
components of net periodic post-retirement
health-care benefit cost
1-Percentage-
Point
Increase
1-Percentage-
Point
Decrease
$
$
4,009
186
$
$
(3,713)
(185)
The Company’s discount rate assumption was determined by selecting a hypothetical portfolio of high quality
corporate bonds appropriate to provide for the projected benefit payments of the plan. The selected bond
portfolio was derived from a universe of Aa-graded corporate bonds, all of which were noncallable (or
callable with make-whole provisions), and have at least $50,000 in outstanding value. The discount rate was
then developed as the single rate that equates the market value of the bonds purchased to the discounted
value of the plan’s benefit payments. The Company’s pension expense and liability (benefit obligations)
increases as the discount rate is reduced. A 25 basis-point reduction in this assumption would have increased
2012 pension expense by $887 and the pension liabilities by $8,956.
The Company’s expected return on assets is determined by evaluating the asset class return expectations with
its advisors as well as actual, long-term, historical results of our asset returns. The Company’s market related
value of plan assets is equal to the fair value of the plan assets as of the last day of its fiscal year, and is a
determinant for the expected return on assets which is a component of net pension expense. The Company’s
pension expense increases as the expected return on assets decreases. A 25 basis-point reduction in this
assumption would have increased 2012 pension expense by $449. For 2012, the Company used a 7.75%
expected return on assets assumption and will lower this assumption to 7.50% for the calculation of pension
expense for 2013. The Company believes its actual long-term asset allocation on average will approximate
the targeted allocation. The Company’s investment strategy is to earn a reasonable rate of return while
maintaining risk at acceptable levels through the diversification of investments across and within various asset
categories. Investment returns are compared to benchmarks that include the S&P 500 Index, the Barclays
Capital Intermediate Government/Credit Index, and a combination of the two indices. The Pension
Committee meets semi-annually to review plan investments and management monitors investment
performance quarterly through a performance report prepared by an external consulting firm.
The Company’s pension plan asset allocation and the target allocation by asset class are as follows:
Asset Class:
Equity securities
Debt securities
Cash
Total
Percentage of Plan
Assets at December 31,
2012
2011
64%
23%
13%
100%
66%
24%
10%
100%
2013
Target
Allocation
50 to 75%
25 to 50%
0%
100%
67
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The fair value of the Company’s pension plans’ assets at December 31, 2012 by asset class are as follows:
Asset Class:
Equity securities (a)
Common stocks
Mutual funds
Debt securities (b)
U.S. Treasury and government
agency bonds
Corporate and foreign bonds
Mutual funds
Cash (c)
Total pension assets
$
$
Total
Level 1
Level 2
Level 3
121,902
898
$
121,902 $
898
- $
-
12,156
5,975
24,928
24,225
190,084
-
-
24,928
-
$
147,728 $
12,156
5,975
-
24,225
42,356 $
The fair value of the Company’s pension plans’ assets at December 31, 2011 by asset class are as follows:
Asset Class:
Equity securities (a)
Common stocks
Mutual funds
Debt securities (b)
Total
Level 1
Level 2
Level 3
$
95,909
3,507
$
95,909 $
3,507
- $
-
U.S. Treasury and government
agency bonds
Corporate and foreign bonds
Mutual funds
Cash (c)
Total pension assets
14,236
4,898
15,072
15,290
148,912
$
-
-
15,072
-
$
114,488 $
14,236
4,898
-
15,290
34,424 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(a) Investments in common stocks are valued using unadjusted quoted prices obtained from active
markets. Investments in mutual funds, which invest in common stocks, are valued using the net
asset value per unit as obtained from quoted market prices for the mutual funds.
(b) Investments in U.S. Treasury and government agency bonds and corporate and foreign bonds are
valued by a pricing service which utilizes pricing models that incorporate available trade, bid, and
other market information to value the fixed income securities. Investments in mutual funds, which
invest in bonds, are valued using the net asset value per unit as obtained from quoted market prices
in active markets for the mutual fund.
(c) Cash is comprised of money market funds, which are valued utilizing the net asset value per unit
based on the fair value of the underlying assets as determined by the fund’s investment managers.
Equity securities include Aqua America, Inc. common stock in the amounts of $12,596 or 6.6% and $10,610
or 6.4% of total pension plans’ assets as of December 31, 2012 and 2011, respectively.
68
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset
class are as follows:
Asset Class:
Equity securities
Debt securities
Cash
Total
2013
Target
Allocation
50 to 75%
25 to 50%
0%
100%
Percentage of Plan
Assets at December 31,
2012
2011
46%
26%
28%
100%
56%
34%
10%
100%
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2012 by asset
class are as follows:
Asset Class:
Equity securities (a)
Common stocks
Mutual funds
Debt securities (b)
Total
Level 1
Level 2
Level 3
$
9,170
6,465
$
9,170 $
6,465
- $
-
U.S. Treasury and government
agency bonds
Corporate and foreign bonds
Mutual funds
Cash (c)
Total other post-retirement assets
$
4,751
2,735
1,398
9,535
34,054
-
-
1,398
-
17,033 $
4,751
2,735
-
9,535
17,021 $
$
-
-
-
-
-
-
-
69
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2011 by asset
class are as follows:
Asset Class:
Equity securities (a)
Common stocks
Mutual funds
Debt securities (b)
Total
Level 1
Level 2
Level 3
$
9,010
6,524
$
9,010 $
6,524
- $
-
U.S. Treasury and government
agency bonds
Corporate and foreign bonds
Mutual funds
Cash (c)
Total other post-retirement assets
$
4,904
3,042
1,420
3,231
28,131
-
-
1,420
-
$
16,954 $
4,904
3,042
3,231
11,177 $
-
-
-
-
-
-
-
(a) Investments in common stocks are valued using unadjusted quoted prices obtained from active
markets. Investments in mutual funds, which invest in common stocks, are valued using the net
asset value per unit as obtained from quoted market prices for the mutual funds.
(b) Investments in U.S. Treasury and government agency bonds and corporate and foreign bonds are
valued by a pricing service which utilizes pricing models that incorporate available trade, bid, and
other market information to value the fixed income securities. Investments in mutual funds, which
invest in bonds, are valued using the net asset value per unit as obtained from quoted market prices
in active markets for the mutual fund.
(c) Cash is comprised of money market funds, which are valued utilizing the net asset value per unit
based on the fair value of the underlying assets as determined by the fund’s investment managers.
Funding requirements for qualified defined benefit pension plans are determined by government regulations
and not by accounting pronouncements. In accordance with funding rules and the Company’s funding
policy, during 2013 our pension contribution is expected to be approximately $15,954. The Company’s
funding of its PBOP cost during 2013 is expected to approximate $2,875.
The Company has 401(k) savings plans that cover substantially all employees. The Company makes matching
contributions that are initially invested in Aqua America, Inc. common stock based on a percentage of an
employee’s contribution, subject to certain limitations. Participants may diversify their Company matching
account balances into other investments offered under the 401(k) savings plans. The Company’s matching
contribution and annual profit-sharing contribution, recorded as compensation expense, was $2,741, $2,496,
and $2,035, for the years ended December 31, 2012, 2011, and 2010, respectively.
Note 16 – Water and Wastewater Rates
On June 7, 2012, the Pennsylvania Public Utility Commission granted Aqua Pennsylvania a water rate
increase designed to increase total operating revenues by $16,700, on an annualized basis. The rates in effect
at the time of the filing included $27,449 in Distribution System Improvement Charges (“DSIC”) or 7.5%
above prior base rates. Consequently, the total base rates increased by $44,149 since the last base rate
increase and the DSIC was reset to zero. In addition, the rate case settlement provides for flow-through
accounting treatment of certain income tax benefits if the Company changes its tax accounting method to
permit the expensing of certain utility asset improvement costs that were previously being capitalized and
depreciated for tax purposes (the “repair change”). In December 2012, Aqua Pennsylvania implemented the
repair change which resulted in the net recognition of 2012 income tax benefits of $33,565 which reduced
income tax expense as it was flowed-through to net income in the fourth quarter of 2012. In addition, the
income tax benefits of $111,397 for qualifying capital expenditures made prior to 2012 have been deferred as
70
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
of December 31, 2012 and, based on the settlement agreement, a ten year amortization of the income tax
benefits is expected to reduce income tax expense beginning in 2013. As a result of the repair change, the
fourth quarter 2012 DSIC of 2.82% for Aqua Pennsylvania’s water customers was reset to zero beginning
January 1, 2013, and Aqua Pennsylvania will not file a water base rate case in 2013.
In February 2012, two of the Company’s operating subsidiaries in Texas began to bill interim rates in
accordance with authorization from the Texas Commission on Environmental Quality (“TCEQ”). The
additional revenue billed and collected prior to the TCEQ’s final ruling is subject to refund based on the
outcome of the rate case. As of December 31, 2012, the Company had billed revenue of $4,758, which is
subject to refund based on the outcome of the TCEQ’s final ruling. Based on the Company’s review of the
present circumstances, a reserve of $1,665 has been established for the billings to date.
On June 17, 2010, the PAPUC granted Aqua Pennsylvania a water rate increase designed to increase total
operating revenues by $23,600, on an annualized basis. The rates in effect at the time of the filing included
$24,256 in DSIC or 7.5% above prior base rates. Consequently, the total base rates increased by $47,856
since the last base rate increase and the DSIC was reset to zero.
In October 2010, the Company’s operating subsidiary in Texas began to bill interim rates for one of its
divisions in accordance with authorization from the Texas Commission on Environmental Quality. The
additional revenue billed and collected prior to the TCEQ’s final ruling is subject to refund based on the
outcome of the rate case. The rate case concluded with the issuance of an order on May 20, 2012, and no
refunds of revenue previously billed and collected were required.
The Company’s operating subsidiaries, excluding the Pennsylvania water and Texas awards discussed above,
were allowed annual rate increases of $11,774 in 2012, $6,311 in 2011, and $13,834 in 2010, represented by
eight, twelve, and twelve rate decisions, respectively. Revenues from these increases realized in the year of
grant were approximately $7,605, $3,312, and $4,515 in 2012, 2011, and 2010, respectively.
Five states in which the Company operates permit water utilities, and in three states wastewater utilities, to
add a surcharge to their water or wastewater bills to offset the additional depreciation and capital costs related
to infrastructure system replacement and rehabilitation projects completed and placed into service between
base rate filings. Currently, Pennsylvania, Illinois, Ohio, and Indiana allow for the use of infrastructure
rehabilitation surcharges, and in June 2012, regulators have approved a rulemaking to implement an
infrastructure rehabilitation surcharge for regulated water utilities in New Jersey; as a result, the Company’s
operating subsidiary in New Jersey is in the process of implementing an infrastructure rehabilitation surcharge
for 2013. These surcharge mechanisms typically adjust periodically based on additional qualified capital
expenditures completed or anticipated in a future period. The infrastructure rehabilitation surcharge is
capped as a percentage of base rates, generally at 5% to 12.75% of base rates, and is reset to zero when new
base rates that reflect the costs of those additions become effective or when a utility’s earnings exceed a
regulatory benchmark. Infrastructure rehabilitation surcharges provided revenues in 2012, 2011, and 2010 of
$15,911, $15,938, and $14,044, respectively.
71
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 17 – Segment Information
The Company has twelve operating segments and one reportable segment. The Regulated segment, the
Company’s single reportable segment, is comprised of ten operating segments representing our water and
wastewater regulated utility companies which are organized by the states where we provide water and
wastewater services. These operating segments are aggregated into one reportable segment since each of
these operating segments has the following similarities: economic characteristics, nature of services,
production processes, customers, water distribution or wastewater collection methods, and the nature of the
regulatory environment. Two of our operating segments have been classified as discontinued operations, and
are excluded from the Regulated segment disclosure of our continuing operations.
Two operating segments are included within the other category below. These segments are not quantitatively
significant and are comprised of the Company’s businesses that provide 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 firms in the natural gas and oil drilling industry. In addition to these
segments, other is comprised of other business activities not included in the reportable segment, including
corporate costs that have not been allocated to the Regulated segment and intersegment eliminations.
Corporate costs include certain general and administrative expenses, and interest expense.
The following table presents information about the Company’s reportable segment:
2012
Other and
2011
Other and
Regulated
Eliminations
Consolidated
Regulated
Eliminations
Consolidated
Operating revenues
$ 740,030
$
17,730
$
757,760
Operations and maintenance expense
Depreciation
Operating income (loss)
Interest expense, net of AFUDC
Income tax
259,847
113,139
316,602
67,433
66,821
Income (loss) from continuing operations
182,769
Capital expenditures
346,676
11,996
(1,372)
4,915
6,182
60
1,318
1,309
271,843
111,767
321,517
73,615
66,881
184,087
347,985
Total assets
Goodwill
4,566,327
292,190
4,858,517
24,031
4,121
28,152
$ 674,927
243,137
104,681
282,587
64,990
72,336
145,493
324,433
4,183,758
22,823
$
12,364
$
687,291
13,606
(1,269)
(1,788)
5,664
(3,225)
(3,810)
1,375
256,743
103,412
280,799
70,654
69,111
141,683
325,808
164,662
4,348,420
4,121
26,944
2010
Other and
Regulated
Eliminations
Consolidated
Operating revenues
$ 648,768
$
11,418
$
660,186
Operations and maintenance expense
238,093
12,896
Depreciation
Operating income (loss)
Interest expense, net of AFUDC
Income tax
101,644
259,372
63,170
77,318
Income (loss) from continuing operations
119,292
Capital expenditures
307,726
(1,038)
(2,038)
5,392
(2,378)
(2,913)
408
250,989
100,606
257,334
68,562
74,940
116,379
308,134
Total assets
Goodwill
3,986,819
85,647
4,072,466
23,797
4,121
27,918
72
Selected Quarterly Financial Data (Unaudited)
Aqua America, Inc. and Subsidiaries
(In thousands of dollars, except per share amounts)
2012
Operating revenues
Operations and maintenance expense
Operating income
Income from continuing operations
Income/(loss) from discontinuing operations
Net income attributable to common shareholders
Basic income from continuing operations per common share
Diluted income from continuing operations per common share
Basic income (loss) from discontinued operations per common share
Diluted income (loss) from discontinued operations per common share
Basic net income per common share
Diluted net income per common share
Dividend paid per common share
Dividend declared per common share
Price range of common stock
- high
- low
2011
Operating revenues
Operations and maintenance expense
Operating income
Income from continuing operations
Income/(loss) from discontinuing operations
Net income attributable to common shareholders
Basic income from continuing operations per common share
Diluted income from continuing operations per common share
Basic income (loss) from discontinued operations per common share
Diluted income (loss) from discontinued operations per common share
Basic net income per common share
Diluted net income per common share
Dividend paid per common share
Dividend declared per common share
Price range of common stock
- high
- low
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Year
$
164,024 $
191,690 $
214,565 $
187,481 $
757,760
64,825
61,839
26,889
11,015
37,904
0.19
0.19
0.08
0.08
0.27
0.27
0.165
0.165
22.75
21.06
63,571
87,032
41,780
(335)
41,445
0.30
0.30
(0.00)
(0.00)
0.30
0.30
0.165
0.165
25.17
21.52
71,268
100,535
50,284
375
72,179
72,111
65,134
1,421
271,843
321,517
184,087
12,476
50,659
66,555
196,563
0.36
0.36
0.00
0.00
0.36
0.36
0.165
0.340
26.93
24.06
0.47
0.46
0.01
0.01
0.48
0.47
0.175
-
25.94
24.15
1.32
1.32
0.09
0.09
1.41
1.40
0.670
0.670
26.93
21.06
$
157,576 $
171,839 $
191,083 $
166,793 $
687,291
60,379
59,216
29,597
754
30,351
0.21
0.21
0.01
0.01
0.22
0.22
0.155
0.155
23.79
21.56
63,360
71,222
35,719
1,871
37,590
0.26
0.26
0.01
0.01
0.27
0.27
0.155
0.155
23.28
21.03
66,502
86,702
44,861
(3,738)
41,123
0.32
0.32
(0.03)
(0.03)
0.30
0.30
0.155
0.320
22.74
19.28
66,502
63,659
31,506
2,499
256,743
280,799
141,683
1,386
34,005
143,069
0.23
0.23
0.02
0.02
0.25
0.24
0.165
-
22.52
20.16
1.03
1.02
0.01
0.01
1.04
1.03
0.630
0.630
23.79
19.28
High and low prices of the Company’s common stock are as reported on the New York Stock Exchange Composite Tape.
The cash dividend paid in December 2012 of $0.175 was declared in August 2012, and the cash dividend paid in December
2011 of $0.165 was declared in August 2011.
73
Summary of Selected Financial Data (Unaudited)
Aqua America, Inc. and Subsidiaries
(In thousands of dollars, except per share amounts)
Years ended December 31,
PER COMMON SHARE:
Income from continuing operations
Basic
Diluted
Income from discontinuing operations
Basic
Diluted
Net income
Basic
Diluted
Cash dividends declared and paid
Return on Aqua America stockholders' equity
Book value at year end
Market value at year end
INCOME STATEMENT HIGHLIGHTS:
Operating revenues
Depreciation and amortization
Interest expense, net (a)
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Income from discontinued operations
Net income attributable to common shareholders
BALANCE SHEET HIGHLIGHTS:
Total assets
Property, plant and equipment, net
Aqua America stockholders' equity
Long-term debt, including current portion
Total debt
ADDITIONAL INFORMATION:
$
$
$
$
2012
2011
2010
2009
2008
$
$
1.03
1.02
$
0.85
0.85
$
0.72
0.72
1.32
1.32
0.09
0.09
1.41
1.40
0.67
14.2%
9.89
$
25.42
0.01
0.01
1.04
1.03
0.63
11.4%
9.01
22.05
757,760
116,996
77,757
250,968
66,881
184,087
12,476
196,563
4,858,517
3,936,163
1,385,704
1,588,992
1,669,375
$
$
687,291
108,300
77,804
210,794
69,111
141,683
1,386
143,069
4,348,420
3,530,942
1,251,313
1,475,886
1,583,657
0.06
0.06
0.91
0.90
0.59
10.6%
8.52
22.48
660,186
111,716
73,393
191,319
74,940
116,379
7,596
123,975
4,072,466
3,276,517
1,174,254
1,519,457
1,609,125
$
$
$
$
$
$
0.04
0.04
0.77
0.77
0.55
9.4%
8.12
17.51
609,897
107,118
66,345
162,066
63,626
98,440
5,913
104,353
3,749,862
3,032,916
1,108,904
1,404,930
1,432,361
$
$
$
0.71
0.71
0.02
0.02
0.73
0.73
0.51
9.3%
7.82
20.59
573,075
87,151
65,986
158,441
62,712
95,729
2,189
97,918
3,486,339
2,815,985
1,058,446
1,217,815
1,297,349
Operating cash flows from continuing operations
Capital additions
Net cash expended for acquisitions
of utility systems and other
Dividends on common stock
Number of utility customers served (b)
Number of shareholders of common stock
Common shares outstanding (000)
Employees (full-time) (b)
$
377,485
347,985
$
352,041
325,808
$
244,717
308,134
$
244,318
266,190
$
206,742
252,498
121,248
93,423
968,357
26,216
140,167
1,619
8,515
87,133
966,136
26,744
138,815
1,615
8,625
80,907
962,970
27,274
137,776
1,632
3,373
74,729
953,437
27,984
136,486
1,632
14,659
68,504
945,540
28,565
135,370
1,638
(a) Net of allowance for funds used during construction and interest income.
(b) Includes continuing and discontinued operations.
74
Stock Price Performance
The following graph compares the cumulative 5-year total return provided shareholders on Aqua America, Inc.’s common
stock relative to the cumulative total returns of the S&P 500 index and the S&P MidCap 400 Utilities index. An investment
of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes
on 12/31/2007 and its relative performance is tracked through 12/31/2012.
The S&P MidCap 400 Utilities Index consists of the following companies: Alliant Energy Corporation, Aqua America,
Inc., Atmos Energy Corporation, Black Hills Corporation, Cleco Corporation, Great Plains Energy Incorporated, Hawai-
ian Electric Industries, Inc., Idacorp, Inc., Mdu Resources Group, Inc., National Fuel Gas Company, Nv Energy, Inc., Oge
Energy Corp., Pnm Resources, Inc., Questar Corporation, Ugi Corporation, Vectren Corporation, Westar Energy, Inc. and
Wgl Holdings, Inc.
Comparison of Five-Year Cumulative Total Shareholder Return*
Among Aqua America, Inc., the S&P 500 Index and the S&P MidCap 400 Utilities Index
Years as of December 31,
2007
2008
2009
2010
2011
2012
Aqua America, Inc.
$100.00
$99.80
$87.60
$116.05
$117.05
$138.82
S&P 500 Index
100.00
63.00
79.67
91.67
93.61
108.59
S&P MidCap 400 Utilities Index
100.00
76.57
90.87
109.10
125.07
131.27
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
75
Financial Reports and Investor Relations
Copies of the company’s public financial reports, including annual reports and Forms 10–K and 10–Q, are available online
and can be downloaded from the investor relations section of our Website at www.aquaamerica.com. You may also obtain
these reports by writing to us at:
Investor Relations Department
Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Corporate Governance
We are committed to maintaining high standards of corporate governance and are in compliance with the corporate gover-
nance rules of the Securities and Exchange Commission (SEC) and the New York Stock Exchange. Copies of our key corpo-
rate governance documents, including our Corporate Governance Guidelines, Code of Ethical Business Conduct, and the
charters of each committee of our Board of Directors can be obtained from the corporate governance portion of the investor
relations section of our Website, www.aquaamerica.com. Amendments to the Code, and in the event of any grant of waiver
from a provision of the Code requiring disclosure under applicable SEC rules will be disclosed on our Website.
Annual Meeting
8:30 a.m. Eastern Daylight Time
Wednesday, May 8, 2013
Drexelbrook Banquet Facility and Corporate Center
4700 Drexelbrook Drive
Drexel Hill, PA 19026
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
800.205.8314 or 781.575.3100
www.computershare.com
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Two Commerce Square
Suite 1700
2001 Market Street
Philadelphia, PA 19103-7042
Stock Exchange
The Common Stock of the company is listed on the New York Stock Exchange and under the ticker symbol WTR.
Dividend Reinvestment and Direct Stock Purchase Plan
The company’s Dividend Reinvestment and Direct Stock Purchase Plan (“Plan”) enables shareholders to reinvest all, or a
designated portion of, dividends paid on up to 100,000 shares of Common Stock in additional shares of Common Stock at
a 5 percent discount from a price based on the market value of the stock. In addition, shareholders may purchase additional
shares of Aqua America Common Stock at any time with a minimum investment of $50, up to a maximum of $250,000
annually. Individuals may become shareholders by making an initial investment of at least $500. A Plan prospectus may be
obtained by calling Computershare Trust Company at 800.205.8314 or by visiting www.computershare.com/investor. Please
read the prospectus carefully before you invest.
IRA, Roth IRA, Education IRA
An IRA, Roth IRA or Coverdell Education Savings Account may be opened through the Plan to hold shares of Common
Stock of the company and to make contributions to the IRA to purchase shares of Common Stock. Participants in the Plan
may roll over an existing IRA or other qualified plan distribution in cash into an IRA under the Plan to purchase the compa-
ny’s Common Stock. Participants may also transfer the company’s Common Stock from an existing IRA into an IRA under
the Plan. A prospectus, IRA forms and a disclosure statement may be obtained by calling Computershare Trust Company at
800.597.7736. Please read the prospectus carefully before you invest.
76
Direct Deposit
With direct deposit, Aqua America cash dividends are deposited automatically on the dividend payment date of each quarter.
Shareholders will receive confirmation of their deposit in the mail. Shareholders interested in direct deposit should call the
company’s transfer agent at 800.205.8314.
Delivery of voting materials to shareholders sharing an address
The SEC’s rules permit the Company to deliver a Notice of Internet Availability of Proxy Materials or a single set of proxy
materials to one address shared by two or more of the Company’s shareholders. This is intended to reduce the printing and
postage expense of delivering duplicate voting materials to our shareholders who have more than one Aqua America stock
account. A separate Notice of Internet Availability or proxy card is included for each of these shareholders. If you received
a Notice of Internet Availability you will not receive a printed copy of the proxy materials unless you request it by following
the instructions in the notice for requesting printed proxy material.
How to obtain a separate set of voting materials
If you are a registered shareholder who shares an address with another registered shareholder and have received only one
Notice of Internet Availability of Proxy Materials or set of proxy material and wish to receive a separate copy for each share-
holder in your household for the 2013 annual meeting, you may write or call us to request a separate copy of this material at
no cost to you at 610.645.1196 or Attn: Investor Relations, Aqua America, Inc., 762 W. Lancaster Avenue, Bryn Mawr, PA,
19010. For future annual meetings, you may request separate voting material by calling Broadridge at 800.542.1061, or by
writing to Broadridge Financial Solutions, Inc., Householding Department, 51 Mercedes Way, Edgewood, New York 11717.
Account Access
Aqua America shareholders may access their account by visiting www.computershare.com/investor. Shareholders may view
their account, purchase additional shares, and make changes to their account. To learn more, visit www.computershare.com/
investor or call 800.205.8314.
Dividends
Aqua America has paid dividends for 68 consecutive years. The normal Common Stock dividend dates for 2013 and the first
six months of 2014 are:
Declaration Date
February 1, 2013
May 2, 2013
August 1, 2013
November 1, 2013
February 3, 2014
May 1, 2014
Ex-Dividend Date
February 13, 2013
May 15, 2013
August 14, 2013
November 14, 2013
February 13, 2014
May 14, 2014
Record Date
February 15, 2013
May 17, 2013
August 16, 2013
November 18, 2013
February 18, 2014
May 16, 2014
Payment Date
March 1, 2013
June 1, 2013
September 1, 2013
December 1, 2013
March 1, 2014
June 1, 2014
To be an owner of record, and therefore eligible to receive the quarterly dividend, shares must have been purchased before
the ex-dividend date. Owners of any share(s) on or after the ex-dividend date will not receive the dividend for that quarter.
The previous owner — the owner of record — will receive the dividend.
Only the Board of Directors may declare dividends and set record dates. Therefore, the payment of dividends and these dates
may change at the discretion of the Board.
Dividends paid on the company’s Common Stock are subject to Federal and State income tax.
Lost Dividend Checks and Stock Certificates
Dividend checks lost by shareholders, or those that might be lost in the mail, will be replaced upon notification of the lost
or missing check. All inquiries concerning lost or missing dividend checks should be made to the company’s transfer agent at
800.205.8314. Shareholders should call or write the company’s transfer agent to report a lost certificate. Appropriate docu-
mentation will be prepared and sent to the shareholder with instructions.
Safekeeping of Stock Certificates
Under the Direct Stock Purchase Plan, shareholders may have their stock certificates deposited with the transfer agent for
safekeeping free of charge. Stock certificates and written instructions should be forwarded to: Computershare Trust Com-
pany, N.A., P.O. Box 43078, Providence, RI 02940-3078.
77
(cid:47)(cid:80)(cid:85)(cid:70)(cid:84)
CORPORATE INFORMATION
BOARD OF DIRECTORS
OFFICERS
Nicholas DeBenedictis
Chairman, President and Chief Executive
B(cid:24)(cid:17)(cid:11)(cid:13)(cid:18)
Christopher H. Franklin
Executive Vice President,
L(cid:18)(cid:13)(cid:19)(cid:23)(cid:15)(cid:13)(cid:7)(cid:14)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:2)(cid:16)(cid:23)(cid:13)(cid:24)(cid:10)B(cid:5)(cid:13)(cid:18)(cid:6)(cid:14)(cid:23)(cid:7)’(cid:10)B(cid:24)(cid:17)(cid:11)(cid:13)(cid:18)(cid:9)(cid:10)
Regulated Operations
Karl M. Kyriss
Executive Vice President
President, Aqua Capital Ventures
Christopher P. Luning
Senior Vice President, General Counsel
and Secretary
William C. Ross
Senior Vice President
Engineering and Environmental Affairs
Robert A. Rubin
Senior Vice President
(cid:2)(cid:3)(cid:7)(cid:14)(cid:18)(cid:3)(cid:12)(cid:12)(cid:13)(cid:18)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:2)(cid:16)(cid:23)(cid:13)(cid:24)(cid:10)(cid:30)(cid:11)(cid:11)(cid:3)(cid:22)(cid:7)(cid:14)(cid:23)(cid:7)’(cid:10)B(cid:24)(cid:17)(cid:11)(cid:13)(cid:18)
David P. Smeltzer
Executive Vice President
(cid:2)(cid:16)(cid:23)(cid:13)(cid:24)(cid:10)‘(cid:23)(cid:7)(cid:6)(cid:7)(cid:11)(cid:23)(cid:6)(cid:12)(cid:10)B(cid:24)(cid:17)(cid:11)(cid:13)(cid:18)
Nicholas DeBenedictis
(cid:2)(cid:16)(cid:6)(cid:23)(cid:18)(cid:4)(cid:6)(cid:7)(cid:9)(cid:10)L(cid:18)(cid:13)(cid:19)(cid:23)(cid:15)(cid:13)(cid:7)(cid:14)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:2)(cid:16)(cid:23)(cid:13)(cid:24)(cid:10)(cid:135)#(cid:13)(cid:11)(cid:22)(cid:14)(cid:23)(cid:25)(cid:13)(cid:10)B(cid:24)(cid:17)(cid:11)(cid:13)(cid:18)(cid:10)
Aqua America, Inc.
Director since 1992
Mary C. Carroll
X(cid:3)(cid:7)Q(cid:5)(cid:18)(cid:3)(cid:17)(cid:14)(cid:10)(cid:30)(cid:15)(cid:25)(cid:23)(cid:19)(cid:3)(cid:18)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:2)(cid:23)(cid:25)(cid:23)(cid:11)(cid:10)(cid:128)(cid:3)(cid:12)(cid:22)(cid:7)(cid:14)(cid:13)(cid:13)(cid:18)(cid:10)
Director since 1981
(cid:10)
Richard H. Glanton
Chairman
Philadelphia Television Network
Director since 1995
Lon R. Greenberg
(cid:2)(cid:16)(cid:6)(cid:23)(cid:18)(cid:4)(cid:6)(cid:7)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:2)(cid:16)(cid:23)(cid:13)(cid:24)(cid:10)(cid:135)#(cid:13)(cid:11)(cid:22)(cid:14)(cid:23)(cid:25)(cid:13)(cid:10)B(cid:24)(cid:17)(cid:11)(cid:13)(cid:18)
UGI Corporation
Director since 2005
William P. Hankowsky
(cid:2)(cid:16)(cid:6)(cid:23)(cid:18)(cid:4)(cid:6)(cid:7)(cid:9)(cid:10)L(cid:18)(cid:13)(cid:19)(cid:23)(cid:15)(cid:13)(cid:7)(cid:14)(cid:10)(cid:6)(cid:7)(cid:15)(cid:10)(cid:2)(cid:16)(cid:23)(cid:13)(cid:24)(cid:10)(cid:135)#(cid:13)(cid:11)(cid:22)(cid:14)(cid:23)(cid:25)(cid:13)(cid:10)B(cid:24)(cid:17)(cid:11)(cid:13)(cid:18)
Liberty Property Trust
Director since 2004
Wendell F. Holland, Esq.
Partner
Saul Ewing, LLP.
Director since 2011
Mario Mele
President
Fidelio Insurance Company and Dental Delivery
Systems, Inc.
Director since 2009
Ellen T. Ruff
Partner
McGuireWoods, LLP.
Director since 2006
Andrew J. Sordoni, III
Chairman
Sordoni Construction Services, Inc.
Director since 2006
Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, Pennsylvania 19010
877.WTR.AQUA
aquaamerica.com
NYSE: WTR