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Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, Pennsylvania 19010
877.987.2782
AquaAmerica.com
NYSE: WTR
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The Groundwork
for a Better Tomorrow.
2013 Annual Report
Aqua America 2013 Annual Report
Aqua is one of the largest u.S.-based, publicly traded water and wastewater utilities, serving
nearly three million people in Pennsylvania, ohio, North Carolina, Texas, Illinois, New Jersey,
Indiana and virginia. Aqua America, Inc. is listed on the New York Stock Exchange under the
ticker symbol WTR.
The Groundwork for a Better Tomorrow.
At Aqua, we’re committed to renewing and improving our water and wastewater infrastructure
through thoughtful and continuous capital investment. This commitment not only ensures
reliable service and quality water for our current and future customers, but it demonstrates
a more fiscally efficient approach to ensuring the sustainability of our business, the industry
and the environment. As a steward of Earth’s most recycled resource, Aqua takes equal care
in preparing fresh water for drinking as it does treating wastewater for its return to Earth. For
nearly 130 years, we’ve successfully employed engineering, technology and sophisticated
business principles to grow Aqua into one of the nation’s most efficient utilities.
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Principles
Aqua fosters a culture in which
employees hold themselves accountable
for providing reliable service and a
quality product to customers.
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Corporate Information
Board of Directors
Nicholas DeBenedictis
Chairman, President and
Chief Executive Officer
Aqua America, Inc.
Director since 1992
Michael L. Browne
President and Chief Operating
Officer
Harleysville Insurance
Director since 2013
Mary C. Carroll
Non-profit Advisor and Civic
Volunteer
Director since 1981
Richard H. Glanton
Chairman
Philadelphia Television Network
Director since 1995
Lon R. Greenberg
Chairman
UGI Corporation
Director since 2005
William P. Hankowsky
Chairman, President and
Chief Executive Officer
Liberty Property Trust
Director since 2004
Wendell F. Holland, Esq.
Partner
CFSD Group, LLC
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
Officers
Nicholas DeBenedictis
Chairman, President and
Chief Executive Officer
Christopher H. Franklin
Executive Vice President
President and Chief Operating
Officer, 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
Controller and Chief Accounting
Officer
David P. Smeltzer
Executive Vice President
Chief Financial Officer
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Financial Highlights
(in thousands of dollars, except per share amounts)
2013
2012
% Change
Net income
$ 221,300
$ 196,563
Diluted net income per common share(1)
Annualized dividend rate
per common share (12/31)(1)
Aqua America stockholders’ equity
Total assets
Number of utility customers served(2)
1.25
0.61
1,534,835
5,051,817
941,008
1.12
0.56
1,385,704
4,858,517
928,667
(1) Revised for 2013 5-for-4 stock split
(2) 2012 excludes 39,690 customers associated with utility systems disposed of during 2013
Income from Continuing
Operations per Share (diluted)
Dividend per Share
(split-adjusted, annualized)
5-year compound annual growth rate =7.1%
13%
12%
9%
11%
4%
1%
$0.61
$1.16
$1.05
$0.82
$0.68
$0.58
$0.560
$0.528
$0.496
$0.464
’09
’10
’11
’12
’13
’09
’10
’11
’12
’13
Cash Generation and CapEX
(in millions)
Capital Expenditures
Operating Cash Flow from Continuing Operations
$377
$352
$348
$326
$367
$308
$308
$266
$244
$245
Weighted Average Cost of
Long-Term Fixed-Rate Debt
5.49%
5.36%
5.30%
’09
’10
’11
’12
’13
’09
’10
’11
’12
’13
5.06%
5.00%
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Aqua America 2013 Annual Report Page 1
Aqua America 2013 Annual Report
March 11, 2014
Nicholas DeBenedictis
Chairman, President and CEO
Chairman’s Message
We are pleased to announce another successful year for Aqua America. Our continued
focus on customer satisfaction and shareholder value allowed us to achieve a 14th
straight year of increased net income, further growth in the value of our asset base
and the 23rd dividend increase in 22 years. Net income for the full year 2013 rose to
$221.3 million from $196.6 million in 2012, an increase of 13 percent. The company
continued to set industry-leading margins, grew stronger financially, enhanced
shareholder value 19 percent, issued a 5-for-4 stock split, and increased the dividend
by 9 percent. The company also eclipsed the $200 million level for net income just
5 years after passing the $100 million level, which took nearly 125 years to accomplish.
In 2013, the company invested more than $300
million for the fourth straight year to improve
infrastructure across all of its regulated opera
tions as part of its capital investment program.
Over the next three years, the company pro
jects investing an additional $1 billion in pipe
replacement to improve its distribution network;
upgrade plants to enhance water quality; and
make service reliability improvements for our
customers.
Aqua America’s wellacknowledged growth
throughacquisition program yielded 15 acqui
sitions in 2013. Acquisitions and organic growth
led to customer growth of 1.3 percent, the most
growth since 2008.
2013 was one of the strongest years operation
ally in my 22 years as chairman. Thanks to the
diligence of our employees, our base utility
operations expense growth was maintained at
the rate of inflation as a result of Aqua’s industry
leading cost and efficiency practices.
Aqua won multiple awards for innovative pro
grams including the Energy Solutions Center
Partnership Award for Innovative Energy
Solutions recognizing the implementation of
compressed natural gas (CNG) technology
used in company vehicles and fueling stations
throughout Southeastern Pennsylvania. Aqua
was also awarded the National Association of
Water Companies’ (NAWC) 2013 Management
Innovation Award for its pursuit of maximizing
performance in electricity load response
programs.
Aqua America’s weighted average cost of fixed
rate longterm debt is now less than 5 percent,
and the company had $239 million available on
its credit lines as of February 25, 2014. In 2013,
Standard & Poor’s reiterated its A+ credit rating
for Aqua Pennsylvania, our largest subsidiary.
Of the 217 electric, gas and water utilities rated
by S&P, only one has a higher rating than Aqua
Pennsylvania.
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Provides drinking
water to
2.75M
people
Chairman’s Message
During 2013, Aqua received base rate awards
in Ohio, Texas and Virginia, and infrastructure
surcharges in various states increasing annual-
ized revenues by approximately $12.5 million.
To date in 2014, the company has received rate
awards and infrastructure surcharges in Illinois,
Indiana, New Jersey, Ohio and Pennsylvania
(wastewater) estimated to increase annualized
revenues by approximately $2.8 million. The
company has $21.0 million of rate cases pending
before state regulatory bodies in Ohio, New
Jersey, North Carolina, Texas and Virginia.
The timing and extent to which rate increases
might be granted by the applicable regulatory
agencies will vary by state.
As I begin my 23rd year as the CEO of Aqua
America, I continue to be optimistic about the
company’s ability to deliver strong results for
our shareholders. The company is well posi-
tioned to internally fund needed investments for
our customers, and to acquire both municipal
and private water and wastewater utilities that
can benefit from our professional expertise,
ability to control costs and financial capacity
to fund needed infrastructure improvements.
We are also prepared to continue investments
in strategic ventures and deliver strong results
for our shareholders through our record of
growth and 69 consecutive years of paying
quarterly dividends.
Thank you for your confidence in Aqua.
Nicholas DeBenedictis
Chairman, President and CEO
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Provides drinking
water to
2.75M
people
1,447
Public water
systems owned
and operated
Provides wastewater
service to
250K
people
187
Wastewater treatment
plants and collection sys-
tems owned and operated
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Aqua America 2013 Annual Report Page 3
Aqua America 2013 Annual Report
Who We are
Aqua has come a long way since our “founding fathers”—a few
Swarthmore College professors concerned about water quality
in their Southeastern Pennsylvania community—were granted a
charter to supply water to area residents in 1886. We refreshed
our brand in 2013 with a more contemporary look and feel, but
our core values have remained the same.
Since the first pipe was laid in 1886, we have been dedicated to improving infra-
structure and supply, whether through building reservoirs and treatment plants to
service a growing community, or by replacing pipe to strengthen aging systems.
As our nation has grown, so has our company. As early as the 1900s, the company
established a growth strategy that still serves as its foundation today, responsible
for developing Aqua into one of the nation’s largest U.S.-based water and wastewater
utilities serving close to 3 million people in several states.
Aqua is an industry leader, setting the standards for water quality, infrastructure,
customer service and community involvement. Aqua’s dedicated staff consists of
highly skilled scientists, engineers, treatment operators and a host of other profes-
sionals. With our technical expertise and resources, Aqua has become the “go to”
company for officials who continually rely upon us to solve problems with troubled
water and wastewater utilities in their states.
States we serve
Pennsylvania, Ohio, North Carolina,
Texas, Illinois, New Jersey, Indiana, Virginia
people
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1,600 employees
work daily to ensure quality water
and reliable water and wastewater
service for people in eight states.
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Aqua America 2013 Annual Report Page 5
Aqua America 2013 Annual Report
What We Do
Aqua cleans billions of gallons of fresh water each year for
delivery directly to customers’ taps via thousands of miles of pipe.
Its wastewater operations treat millions of gallons of wastewater
annually, restoring its quality so it can be safely returned to
the environment.
Water and wastewater operations are actually the most capital intensive of all utilities,
requiring investment of more capital per dollar of revenue earned than any other
utility. Aqua’s unique ability to continue the reliable delivery of quality water that
meets or out performs state and federal regulations requires strong and stable
infrastructure. The same is true of its wastewater operations. The U.S. Environmental
Protection Agency estimates that investments of $384 billion and $202.5 billion will
be necessary to adequately maintain the nation’s water and wastewater systems,
respectively, over the next 20 years. That is why Aqua singularly has invested $2.8
billion in water and wastewater infrastructure over the last 10 years (2004 through
2013), including $308 million in 2013 alone.
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Water
Our business was born out of a
concern for public health and safety
that remains paramount in all we do.
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Aqua America 2013 Annual Report Page 7
Aqua America 2013 Annual Report
Why We Do It
Aqua employees are driven by the same concern our founders had
for access to clean drinking water. Although it is seemingly ubiqui-
tous, surface water—the primary source of drinking water—makes
up just 0.007 percent of Earth’s total water according to the United
States Geological Survey. That is why water is Earth’s most recycled
—and valuable—natural resource.
We take seriously our role as environmental stewards and understand that the cleaner
our fresh water resources are, the less treatment is required at our plants. That is
one of the reasons our wastewater operations strive to assure that treated waste-
water is returned to the environment in full compliance with all environmental laws.
In addition to the primary environmental and public health benefits of our business,
we also understand the impact that reliable water and wastewater service has on
the economy. Businesses of all sizes require reliable water and wastewater service
to operate. In recent years, we have seen increasing evidence of the need for a
significant infusion of capital to restore our nation’s utility infrastructure. Such an
investment, spearheaded by companies like Aqua, renews crucial infrastructure
while positively impacting the nation’s economy by creating living-wage jobs.
Aqua continues to be a leader in this regard, and plans to invest more than $1 billion
in capital improvements over the next three years, demonstrating the role that the
private sector can play in the nation’s infrastructure renewal and limiting the burden
on tax requirements. Aqua’s ongoing investment helps us achieve regulatory
compliance and continues to provide customers with the quality water and reliable
service they deserve.
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Environment
The safe, responsible treatment of Earth’s
water is at the core of everything we do.
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Aqua America 2013 Annual Report Page 9
Aqua America 2013 Annual Report
Connecting With Customers
“Around the water cooler” took on new meaning for Aqua in 2013,
as customers were able to learn about and engage with the
company for the first time via social media when it launched
Facebook and Twitter pages.
Using Facebook and Twitter to offer customers an alternative to the company’s
website for useful information, Aqua’s social media presence has also served to
leverage Aqua employee news and profiles, providing information about interesting
hobbies and activities in which employees are engaged outside of work. We have
also increased the exposure of our various company-sponsored community relations
activities through social media, expanding the reach of good news, and further
allowing the company to be involved, engaged and approachable. Customers have
become the beneficiaries of frequent, useful and timely tips through the Aqua
Facebook page and have begun to embrace Twitter as an alternative to contacting
the call center for quick information about everything from service appointments
to questions about specific infrastructure projects.
Aqua’s recently refreshed website is infused with many new features including
“WaterSmart,” an interactive program to help customers conserve water in their
homes and learn about the water treatment process. The interactive program is
rooted in an illustration of a home, with clickable elements in each room that provide
practical tips for water conservation. Aqua website visitors can learn how water
travels from a source to the tap, with downloadable diagrams that explain the pro-
cesses to treat surface water, groundwater and wastewater.
w
AquaAmerica.com
@MyAquaAmerica
/MyAquaAmerica
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Aqua America 2013 Annual Report Page 11
Aqua America 2013 Annual Report
Connecting With Communities
With assets that are literally part of the com-
munity, here at Aqua, we take our role as a
corporate citizen very seriously.
Aqua has a long history of strengthening and enriching
the communities we serve. We continue to identify and
support worthy organizations that have a positive impact
on the communities in our service areas. Additionally, we
ardently support Pennsylvania’s Tree Vitalize, an important
environmental initiative created in 2005 to reverse the loss
of tree cover. Through our involvement, nearly 40,000
trees have been planted along river and stream banks to
protect drinking water sources. Aqua has sponsored and
actively participated in myriad charitable events including
the construction of a Habitat for Humanity home in Texas
and the construction and donation of playground equip-
ment to a Virginia school.
Fostering positive relationships by working closely with
local and municipal officials has created partnerships that
continue to be mutually beneficial to Aqua and the com-
munities we serve. As we continue to work cooperatively,
we will continue to deliver on our resolute promise to
provide a groundwork for a better tomorrow.
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Aqua America, Inc.
2013 FINANCIAL DATA
The Groundwork
for a Better Tomorrow.
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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:120) recovery of capital expenditures and expenses in rates;
(cid:120) projected capital expenditures and related financing requirements;
(cid:120) the availability and cost of capital financing;
(cid:120) dividend payment projections;
(cid:120) future financing plans;
(cid:120) future pension contributions;
(cid:120) the impact of changes in income tax laws regarding tax-basis depreciation on capital additions, and
repair tax deductions;
(cid:120) our determination of what qualifies as a capital cost versus a repair expense tax deduction;
(cid:120) opportunities for future acquisitions, the success of pending acquisitions and the impact of future
acquisitions;
(cid:120) acquisition-related costs and synergies;
(cid:120) the sale of water and wastewater divisions;
(cid:120) the capacity of our water supplies, water facilities and wastewater facilities;
(cid:120) the impact of geographic diversity on our exposure to unusual weather;
(cid:120) the impact of conservation awareness of customers and more efficient plumbing fixtures and
appliances on water usage;
(cid:120) the availability and cost of key production necessities, including power, chemicals and purchased water
or wastewater services;
(cid:120) the availability of qualified personnel;
(cid:120) the return performance of our defined benefit pension plan assets;
(cid:120) general economic conditions;
(cid:120) the impact of federal and/or state tax policies and the regulatory treatment of the effects of those
policies; and
(cid:120) 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:120) changes in general economic, business, credit and financial market conditions;
(cid:120) changes in governmental laws, regulations and policies, including those dealing with taxation, the
environment, health and water quality, and public utility regulation;
(cid:120) our determination of what qualifies for a repair expense tax deduction;
(cid:120) the decisions of governmental and regulatory bodies, including decisions on rate increase requests;
(cid:120) our ability to file rate cases on a timely basis to minimize regulatory lag;
(cid:120) abnormal weather conditions, including those that result in water use restrictions;
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:120) changes in, or unanticipated, capital requirements;
(cid:120) changes in our credit rating or the market price of our common stock;
(cid:120) our ability to integrate businesses, technologies or services which we may acquire;
(cid:120) our ability to manage the expansion of our business;
(cid:120) our ability to treat and supply water or collect and treat wastewater;
(cid:120) the extent to which we are able to develop and market new and improved services;
(cid:120) the effect of the loss of major customers;
(cid:120) our ability to retain the services of key personnel and to hire qualified personnel as we expand;
(cid:120) labor disputes;
(cid:120) increasing difficulties in obtaining insurance and increased cost of insurance;
(cid:120) cost overruns relating to improvements to, or the expansion of, our operations;
(cid:120) increases in the costs of goods and services;
(cid:120) civil disturbance or terroristic threats or acts;
(cid:120) the continuous and reliable operation of our information technology systems, including the impact of
cyber security or other events;
(cid:120) changes in accounting pronouncements;
(cid:120) litigation and claims; and
(cid:120) changes in environmental conditions, including the effects of climate change.
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 following discussion and analysis of our financial condition and results of operations should be read together with our
consolidated financial statements and related notes.
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 million people concentrated in Pennsylvania, Ohio, Texas, Illinois, North
Carolina, New Jersey, Indiana, and Virginia. Our largest operating subsidiary is Aqua Pennsylvania, Inc.
(“Aqua Pennsylvania”), which accounted for approximately 54% of our operating revenues and a larger
percentage of our net income for 2013, and, as of December 31, 2013, 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 26 other counties in Pennsylvania. Our other regulated
utility subsidiaries provide similar services in seven other states. In addition, the Company’s non-regulated
subsidiary, Aqua Resources, provides liquid waste hauling and disposal, water and wastewater service through
operating and maintenance contracts with municipal authorities and other parties close to our utility
companies’ service territories, offers, through a third party, water and sewer line repair service and protection
solutions to households, backflow prevention, construction, and other non-regulated water and wastewater
services, and the Company’s non-regulated subsidiary, Aqua Infrastructure, provides non-utility raw water
supply services for firms, with which we enter into a water supply contract, in the natural gas drilling industry.
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
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)
Philadelphia Suburban Water Company. In the early 1990s, we embarked on a growth through acquisition
strategy focused on water and wastewater operations. Our most significant transactions to date have been the
merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater
operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition of
American Water Works Company, Inc.’s (“American Water”) 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, where we have more than quadrupled the number of regulated
customers we serve, and has extended our regulated utility operations from southeastern Pennsylvania to
include our current operations in seven other states.
Beginning in 2010, and substantially completed in 2013, we pursued a portfolio rationalization strategy to
focus our operations in areas where we have critical mass and economic growth potential, and to divest
operations where limited customer growth opportunities exist, or where we are unable to achieve favorable
operating results or a return on equity that we consider acceptable. In 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. In 2012, we began to market for sale our Florida utility operations and our wastewater
treatment facility in Georgia. The sale of our regulated utility operations in Florida concluded in 2013, and
the Company continues to pursue a sale of its Georgia 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.
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
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 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:120) strict environmental, health and safety standards;
(cid:120) aging utility infrastructure and the need for substantial capital investment;
(cid:120) economic regulation by state, and/or, in some cases, local government;
(cid:120) declining consumption per customer as a result of conservation;
(cid:120) lawsuits and the need for insurance; and
(cid:120) 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. Over time, the regulatory party in a particular state may change, as
is the case for our Texas operations, in 2014, where economic regulation changes from the Texas
Commission on Environmental Quality to the Texas Public Utility Commission. The profitability of our
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)
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.
RRate Case Management Capability – We strive to achieve the industry’s mission by effective planning,
efficient investments, and productive 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 our distribution
system, 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, transportation, communication costs, 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 net 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 helps determine the profitability of the Company.
Our water and wastewater operations are composed of 61 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. Seven 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, 2013, we have five active rate proceedings in five of our eight states
proposing an aggregate annualized rate increase of $16,976.
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 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, some states permit our subsidiaries to use a surcharge or credit on their bills to
reflect allowable changes in costs, such as changes in state tax rates, other taxes and purchased water costs,
until such time as the new 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 specific 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
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)
been experienced in 2013, 2012, and 2011, the effects of inflation can have a negative impact on our
operating results.
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.
During 2013, we completed 15 acquisitions and other growth ventures, which along with the organic growth
in our existing systems, represent 12,341 new customers. 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.
In addition to acquisitions, from time to time, we sell utility systems or relinquish ownership in systems
through condemnation. In 2011, 2012, and 2013 consistent with our strategy to evaluate our individual utility
systems, we divested our operations in four states: Missouri in May 2011, Maine in January 2012, New York
in May 2012, and Florida in separate transactions in March, April, and December of 2013. 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, we sold the following utility systems: in 2013 we sold three utility systems representing
1,763 customers, 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., 82% 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 regulated utilities, we believe there are approximately 14,000 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
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)
there are approximately 5,000 wastewater facilities in operation in the states where we operate regulated
utilities.
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:120) the benefits of economies of scale;
(cid:120) the increasing cost and complexity of environmental regulations;
(cid:120) the need for substantial capital investment;
(cid:120) the need for technological and managerial expertise;
(cid:120) the desire to improve water quality and service;
(cid:120) limited access to cost-effective financing;
(cid:120) the monetizing of public assets to support, in some cases, the declining financial condition of
municipalities; and
(cid:120) the use of system sale proceeds by a municipality to accomplish other public purposes.
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. Periodically, we consider
opportunities for the acquisition of non-regulated water and wastewater service businesses We are also
seeking other potential business opportunities, including partnering with public and private utilities to invest
in water and wastewater infrastructure improvements, and growth opportunities provided by both meeting
the needs of industrial facilities and the natural gas 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 during
the late spring, summer, and early fall 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 continue to 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.
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)
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, 2013, our operating revenues were derived principally from the following states:
approximately 54% in Pennsylvania, 12% in Ohio, 9% in Texas, 7%, in Illinois, and 6% in North Carolina.
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 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:120) 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, transportation, 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:120) Acquisitions – In general, acquisitions of smaller undercapitalized utility systems in some 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. In addition, we operate non-regulated subsidiary companies that provide
liquid waste hauling and disposal, water and wastewater service through operating and maintenance
contracts with municipal authorities and other parties in close proximity to our utility companies’
service territories, offers, through a third party, water and sewer line repair service and protection
solutions to households, backflow prevention, construction, and other non-regulated water and
wastewater services, and non-utility raw water supply services for firms, with which we enter into a
water supply contract, in the natural gas drilling industry. The cost-structure of these non-regulated
businesses differs from our utility companies in that, although they may generate free cash flow, these
businesses have a much higher ratio of operations and maintenance expenses to operating revenues
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)
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. These non-regulated subsidiary
companies are not a component of our Regulated segment.
We continue to evaluate initiatives to help control operating costs and improve efficiencies.
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 and eliminations
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 (5)
2013 (1)
2012 (2)
2011 (3)
2010
2009 (4)
784,100
39,513
1,369
17,320
98,705
941,007
463,156 $
121,615
25,442
57,699
73,062
10,303
751,277
17,366
768,643 $
285,340 $
204,993 $
221,300 $
308,171 $
778,350
39,079
1,374
16,730
95,044
930,577
447,338 $
117,992
25,015
70,922
68,225
10,538
740,030
17,730
757,760 $
271,843 $
184,087 $
196,563 $
347,985 $
723,649
35,078
1,213
15,762
84,978
860,680
408,904 $
105,837
21,576
65,118
62,780
10,712
674,927
12,364
687,291 $
256,743 $
141,683 $
143,069 $
325,808 $
719,812
34,649
1,226
15,376
86,108
857,171
391,922 $
99,632
20,716
63,369
62,156
10,973
648,768
11,418
660,186 $
250,989 $
116,379 $
123,975 $
308,134 $
712,619
34,261
1,222
16,242
84,041
848,385
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
$
$
$
$
$
$
37.1%
16.2%
6.9%
10.1%
26.7%
14.4%
2.6
10.0%
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%
(1) Net income attributable to common shareholders includes the gain of $615 ($1,025 pre-tax) realized on the sale of a
utility system. The gain is reported in the 2013 consolidated statement of net income as a reduction to operations
and maintenance expense.
(2) 2012 utility customers were impacted by the addition of 65,577 utility customers associated with utility systems
acquired.
(3) 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 net income as a reduction to operations
and maintenance expense.
(4) 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 net income as a reduction to operations
and maintenance expense.
(5) See Results of Operations – Income Taxes for a discussion of the effective tax rate change for 2013 and 2012.
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 16.4% and
our net income has grown at an annual compound rate of approximately 17.7% during the five-year period
ended December 31, 2013. During the past five years, operating revenues grew at a compound rate of 6.0%
and total expenses, exclusive of income taxes, grew at a compound rate of 5.5%. In addition, as a result of
the implementation of the repair tax accounting change in 2012, the Company’s provision for income taxes
decreased by $40,936 or 64.3% for the five-year period ended December 31, 2013.
Operating Segments
We have identified ten operating segments and we have one reportable segment based on the following:
(cid:120) Eight segments are composed of our water and wastewater regulated utility operations in the eight
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.
(cid:120) Two segments are not quantitatively significant to be reportable and are composed of the businesses
that provide liquid waste hauling and disposal, water and wastewater service through operating and
maintenance contracts with municipal authorities and other parties in close proximity to our utility
companies’ service territories, offer, through a third party, water and sewer line repair service and
protection solutions to households, backflow prevention, other non-regulated water and wastewater
services, and non-utility raw water supply services for firms, with which we enter into a water supply
contract, in the natural gas 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 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, 2013, 2012, and 2011:
Operating revenues
Operations and maintenance expense
Taxes other than income taxes
Earnings before interest, taxes, depreciation and
amortization
Depreciation and amortization
Operating income
Interest expense, net of AFUDC
Gain on sale of other assets
Equity losses (earnings) in joint venture
Provision for income taxes
Income from continuing operations
2013
Other and
Eliminations Consolidated
Regulated
2012
Other and
Eliminations Consolidated
Regulated
$ 751,277 $
272,758
51,106
17,366 $ 768,643
285,340
12,582
53,268
2,162
$ 740,030 $
259,847
45,450
17,730 $ 757,760
271,843
11,996
47,404
1,954
$ 427,413 $
2,622
430,035
124,793
305,242
75,042
(148)
2,665
22,690
204,993
$ 434,733 $
3,780
438,513
116,996
321,517
73,615
(1,090)
(1,976)
66,881
184,087
Income from discontinued operations, net of income taxes
of $8,425 and $8,017, respectively
Net income
16,307
$ 221,300
12,476
$ 196,563
Operating revenues
Operations and maintenance expense
Taxes other than income taxes
Earnings (losses) before interest, taxes, depreciation and
amortization
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 $12,893
Net income
2011
Other and
Eliminations Consolidated
Regulated
$ 674,927 $
243,137
39,677
12,364 $ 687,291
256,743
13,606
41,449
1,772
$ 392,113 $
(3,014)
389,099
108,300
280,799
70,654
(649)
69,111
141,683
1,386
$ 143,069
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 $25,676 in 2013, $39,987 in 2012, and $37,988 in
2011. Negatively impacting our revenue growth in 2013 was a decrease in customer water consumption and a
decrease in infrastructure rehabilitation surcharges of $12,725 primarily in Pennsylvania, and in 2012 was a
slight decline in water consumption as compared to the prior year. The decrease in customer water
consumption in 2013 is largely due to unfavorable weather conditions in many of our service territories
during the second and third quarters of 2013 and what we believe is an increase in water conservation
awareness by our customers. The number of customers increased at an annual compound rate of 3.1% over
the past three years, adjusted to exclude customers associated with utility system dispositions, due to
acquisitions and organic growth. Acquisitions in our Regulated segment have provided additional water and
wastewater revenues of approximately $16,200 in 2013, $28,296 in 2012, and $3,960 in 2011.
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 provided for the flow-through accounting treatment of
qualifying income tax benefits should Aqua Pennsylvania change its tax accounting method to permit the
expensing of qualifying 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
the Company’s Federal and state income tax expense and flowed-through to net income in the fourth quarter
of 2012. In 2013, the Company recorded additional income tax benefits of $14,908, as adjusted for the 2012
tax return. Similar to 2012, the Company recorded $45,647 of income tax benefits in 2013. The Company
recognized a tax deduction on its 2012 Federal tax return of $380,000 for qualifying capital expenditures
made prior to 2012 (the “catch-up adjustment”), and based on the settlement agreement, beginning in 2013,
the Company began to amortize 1/10th of the catch-up adjustment. In accordance with the settlement
agreement, the amortization is expected to reduce income tax expense during periods when qualifying
parameters are met. During 2013, the Company amortized its catch-up adjustment and recognized $15,766
of deferred income tax benefits, which reduced income tax expense and increased the Company’s net income.
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 did not file a water base rate
case or for a DSIC in 2013.
In August 2013, the Company’s operating subsidiary in North Carolina filed an application with the North
Carolina Utilities Commission designed to increase water and wastewater rates by $8,611 or 19.2% on an
annual basis. The amount of the final rate award that might be granted by the North Carolina Utilities
Commission can vary significantly from the amount requested. The Company anticipates a final order to be
issued in May 2014.
In February 2012, two of the Company’s operating divisions in Texas began to bill interim rates in
accordance with authorization from the Texas Commission on Environmental Quality (the “TCEQ”). The
additional revenue billed and collected prior to the TCEQ’s final ruling was subject to refund based on the
outcome of the rate case. The rate case concluded with the issuance of an order on June 3, 2013, and no
refunds of revenue previously billed and collected were required.
Our operating subsidiaries, excluding the 2012 Pennsylvania water rate award, discussed above, received rate
increases representing estimated annualized revenues of $9,431 in 2013 resulting from six rate decisions,
$17,923 in 2012 resulting from nine rate decisions, and $6,311 in 2011 resulting from twelve rate decisions.
Revenues from these increases realized in the year of grant were $8,169 in 2013, $13,754 in 2012, and $3,312
in 2011. As of December 31, 2013, excluding the North Carolina rate request discussed above, our operating
subsidiaries currently have filed four rate requests, which are being reviewed by the state regulatory
commissions, proposing an aggregate increase of $8,425 in annual revenues. During 2014, we intend to file
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)
three additional rate requests proposing an aggregate of approximately $3,425 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, Indiana, and New Jersey allow for the use of infrastructure
rehabilitation surcharges. 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 $3,205 in 2013, $15,911 in 2012,
and $15,937 in 2011. The decrease in infrastructure rehabilitation surcharges for 2013 resulted primarily
from the January 1, 2013 suspension of Aqua Pennsylvania’s DSIC as a result of the implementation of the
Repair Change.
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 qualifying utility asset improvements that were
formerly capitalized and depreciated for book and tax purposes. As a result of Aqua Pennsylvania’s
implementing this tax accounting change, the DSIC was 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 offset the impact of the 2013 DSIC suspension through a substantial
reduction in income tax expense and greater net income and cash flow.
Our Regulated segment also includes non-regulated operating revenues of $10,303 in 2013, $10,538 in 2012,
and $10,712 in 2011. 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 providing liquid waste hauling and disposal, water and wastewater service through
operating and maintenance contracts with municipal authorities and other parties in close proximity to our
utility companies’ service territories, offering, through a third party, water and sewer line repair service and
protection solutions to households, backflow prevention, construction, other non-regulated water and
wastewater services, and non-utility raw water supply services for firms, with which we enter into a water
supply contract, in the natural gas drilling industry of $17,712 in 2013, $18,247 in 2012, and $12,604 in 2011.
OOperations and Maintenance Expenses – Operations and maintenance expenses totaled $285,340 in 2013,
$271,843 in 2012, and $256,743 in 2011. 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, transportation, 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.
Operations and maintenance expenses increased in 2013 as compared to 2012 by $13,497 or 5.0%, primarily
due to increases in operating costs associated with acquired utility systems and other growth ventures of
$7,386, the effect of the recognition in 2012 of a regulatory asset resulting from a completed rate case which
when compared to 2013 resulted in an increase to operations and maintenance expense by $3,356, an increase
in post-retirement benefits expense of $1,175, and normal increases in other operating costs, offset by a
decrease in water production costs of $4,396 attributed to decreased water consumption in 2013 and a gain
on sale of a utility system recognized in 2013 of $1,025. The gain on sale of utility system is reported in the
consolidated statement of net income as a component of operations and maintenance expense.
Operations 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
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)
$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.
DDepreciation and Amortization Expenses – Depreciation expense was $119,258 in 2013, $111,767 in
2012, and $103,412 in 2011, 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 $5,535 in 2013, $5,229 in 2012, and $4,888 in 2011, and increased in 2013 and
2012 primarily due to the amortization of 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 $53,268 in 2013, $47,404 in
2012, and $41,449 in 2011. The increase in 2013 is primarily due to an increase in property taxes of $4,214
associated with our Ohio acquisition, an increase in gross receipt, excise and franchise taxes of $1,797 due
primarily to our Ohio acquisition, as well as the effect of a favorable adjustment recorded in 2012 related to
gross receipts, excise and franchise taxes for one of our operating subsidiaries of $824 which had the effect of
increasing 2013’s taxes other than income taxes, offset by a decrease in capital stock taxes of $1,069
associated with a decrease in capital stock taxes assessed for Aqua Pennsylvania. 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 the partial year effect of our Ohio acquisition, offset by a
decrease in capital stock taxes of $363 for Aqua Pennsylvania.
Interest Expense, net – Net interest expense was $77,316 in 2013, $77,757 in 2012, and $77,804 in 2011.
Interest income of $438 in 2013, $372 in 2012, and $757 in 2011 was netted against interest expense. Net
interest expense decreased in 2013 primarily due to a decline in average short-term borrowings of $43,666,
offset by an increase in average outstanding fixed rate long-term debt of $40,926, as well as a decline in long
and short term interest rates. 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. Interest income decreased in 2012
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 fixed rate long-term
debt was 5.00% at December 31, 2013, 5.06% at December 31, 2012, and 5.30% at December 31, 2011. The
weighted average cost of fixed and variable rate long-term debt was 5.00% at December 31, 2013, 4.81% at
December 31, 2012, and 5.17% at December 31, 2011.
Allowance for Funds Used During Construction – The allowance for funds used during construction
(“AFUDC”) was $2,274 in 2013, $4,142 in 2012, and $7,150 in 2011, 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 specific capital projects. The decreases in 2013 and 2012 are due to decreases of $43,561 and
$63,178, respectively, in the average balance of proceeds held from tax-exempt bond issuances that are
restricted to funding specific capital projects.
Gain on Sale of Other Assets – Gain on sale of other assets totaled $148 in 2013, $1,090 in 2012, and $649
in 2011, and consists of the sales of properties and marketable securities.
Equity Loss (Earnings) in Joint Venture – Equity loss (earnings) in joint venture totaled $2,665 in 2013
and $(1,976) in 2012. The decrease in 2013 reflects a decline in water sales, due to sluggish well drilling
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)
activity, in connection with serving the raw water needs of firms, with which we enter into a water supply
contract, in the natural gas drilling industry.
Income Taxes – Our effective income tax rate was 10.0% in 2013, 26.6% in 2012, and 32.8% in 2011. The
decrease in the effective tax rate for 2013 and 2012 was primarily due to the 2012 change in the Company’s
repair tax accounting method for repair expenditures at Aqua Pennsylvania which resulted in a $67,918 and
$33,565 net reduction to the Company’s 2013 and 2012 Federal and state income tax expense. As of
December 31, 2013, the Company has an unrecognized tax benefit related to the Company’s Repair Change,
of which $9,795 of these tax benefits would further reduce the Company’s effective income tax rate in the
event the Company does sustain all, or a portion, of its tax position in the period this information is
determined.
Summary –
Years ended December 31,
2012
2013
2011
Operating income
Income from continuing operations
Income from discontinuing operations
Net income attributable to common shareholders
Diluted income from continuing operations per share
Diluted income from discontinued operations per share
Diluted net income per share
$
$
$
$
305,242 $
321,517 $
280,799
204,993 $
16,307
221,300 $
184,087 $
12,476
196,563 $
141,683
1,386
143,069
1.16 $
0.09
1.25
1.05 $
0.07
1.12
0.82
0.01
0.83
The changes in the per share income from continuing operations in 2013 and 2012 over the previous years
were due to the aforementioned changes and impacted by a 1.1% increase in the average number of common
shares outstanding during 2013 and a 0.9% increase in the average number of common shares outstanding
during 2012. The increase in the number of shares outstanding in 2013 and 2012 is primarily a result of the
additional shares sold or issued through our equity compensation plan and dividend reinvestment plan.
Income from discontinued operations for 2013 increased by $3,831 or $0.02 per diluted share, in comparison
to 2012 primarily as a result of the net gain on sale recognized on the sales of our Florida operations in 2013,
net of income taxes, of $13,766 and the effects of the 2012 recognition of 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, offset
by the effect of the prior year recognition of the gain on sale of our Maine operating subsidiary net of income
taxes of $10,821. Income from discontinued operations for 2012 increased by $11,090 or $0.06 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 acquirers 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.
Although we have experienced increased income in the recent past, continued adequate rate increases
reflecting increased operating costs and new capital investments, as well as a continuation of income tax
benefits related to repair tax eligible utility asset improvement costs 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 loss (earnings) in joint venture
Income before income taxes
Provision for income taxes
Income from continuing operations
Three Months Ended December 31,
2013
2012
$
188,608 $
187,481
74,106
30,287
1,632
12,947
118,972
69,636
19,482
(806)
(27)
933
50,054
3,324
46,730
72,179
29,031
1,456
12,704
115,370
72,111
19,373
(658)
(264)
(1,045)
54,705
(10,429)
65,134
Income from discontinued operations, net of income taxes of $5,406
and $259
Net income
10,802
57,532 $
1,421
66,555
$
The increase in operating revenues of $1,127 was primarily a result of additional revenues of $972 associated
with a larger customer base due to acquisitions, an increase in customer water consumption, an increase in
water and wastewater rates of $616 from water and wastewater rates implemented in various operating
subsidiaries, offset by a decrease in infrastructure rehabilitation surcharges of $1,921. The increase in
operations and maintenance expense of $1,927 is due primarily to an increase in post-retirement benefits
expenses of $412, the recording of a reserve of $412 for a long-lived asset, $224 of additional operating costs
associated with acquisitions, and normal increases in other operating expenses, offset by a decrease in water
production costs of $313. Depreciation expense increased by $1,256 primarily due to the utility plant placed
in service since December 31, 2012. Amortization expense increased by $176 primarily due to the
amortization of costs associated with, and other costs being recovered in, various rate filings. The increase in
other taxes of $243 is primarily due to an increase in property taxes of $523, offset by a decrease in capital
stock taxes of $274 associated with a decrease in capital stock taxes assessed for Aqua Pennsylvania. Interest
expense increased by $109 due to an increase in our effective interest rate offset by a decrease in the average
outstanding debt balance. Allowance for funds used during construction increased by $148 primarily due to
an increase in the average balance of utility plant construction work in process, to which AFUDC is applied.
Gain on sale of other assets decreased by $237 principally due to the timing of sales of land and other
property. The decrease in equity loss (earnings) in joint venture of $1,978 reflects a decline in water sales, due
to sluggish well drilling activity, in connection with serving the raw water needs of firms , with which we enter
into a water supply contract, in the natural gas drilling industry. The provision for income taxes increased by
$13,753 as a result of the effect of the adoption in the fourth quarter of 2012 of the full year 2012 net tax
benefits recognized of $33,565 resulting from our change in tax method of accounting associated with the
Repair Change. Income from discontinued operations increased by $9,381 primarily due to the gain on sale,
net of taxes, of $10,211 for our water and wastewater utility system in Sarasota, Florida in December 2013.
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)
Consolidated Cash Flow and Capital Expenditures
FINANCIAL CONDITION
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,
2013 were as follows:
Net Operating Cash
Flows
Common
Dividends
Capital
Expenditures
2009
2010
2011
2012
2013
$
$
244,318
244,717
352,041
377,485
366,720
1,585,281
$
$
74,729
80,907
87,133
93,423
102,889
439,081
$
$
266,190
308,134
325,808
347,985
308,171
1,556,288
Acquisitions
$
$
3,373
8,625
8,515
121,248
14,997
156,758
Included in capital expenditures for the five-year period are: expenditures for the rehabilitation of existing
water distribution systems, new water distribution systems, modernization and replacement of existing
treatment plants, and water meters. During this five-year period, we received $25,135 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 $520,402, and have refunded $24,271 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 2014 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 2013. The 2014 capital
program is expected to include $180,600 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 regulatory 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 tax deductions as described below. Although we were not eligible to use
a DSIC with our Aqua Pennsylvania water customers in 2013, we were able to use the income tax savings
derived from the Repair Change to continue to maintain a similar capital investment program as 2012. Our
planned 2014 capital program in Pennsylvania is estimated to be $231,000 a portion of which is expected to
be eligible as a repair deduction for federal income tax purposes. Our overall 2014 capital program, along
with $86,288 of sinking fund obligations and debt maturities, and $152,429 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, and the issuance of long-term
debt.
Future utility construction in the period 2015 through 2016, 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
expenditures of approximately $641,000. We anticipate that less than one-half of these expenditures will
require external financing . We expect to refinance $94,545 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
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)
revolving credit facilities. The estimates discussed above do not include any amounts for possible future
acquisitions of water and wastewater 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 when
necessary 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 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 qualifying 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 qualifying 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 the Company’s Federal and state income tax expense and increased net income in
the fourth quarter of 2012. In 2013, the Company recorded additional income tax benefits, as adjusted for
the 2012 tax return, of $14,908. Similar to 2012, the Company recorded $45,647 of income tax benefits in
2013. The Company recognized a tax deduction on its 2012 Federal tax return of $380,000 for qualifying
capital expenditures made prior to 2012, and based on the settlement agreement, beginning in 2013, the
Company began to amortize 1/10th of the catch-up adjustment. In accordance with the settlement
agreement, the amortization is expected to reduce income tax expense during periods when qualifying
parameters are met. During 2013, the Company amortized its catch-up adjustment and recognized $15,766
of deferred income tax benefits, which reduced income tax expense and increased the Company’s net income.
Our planned 2014 capital program is projected to continue at a similar level compared to 2013, and the repair
tax deduction is anticipated to continue in 2014 and beyond. Our 2014 earnings will be impacted by the
following factors in Aqua Pennsylvania: the repair tax deduction in 2014 is expected to decrease income tax
expense by a similar amount as 2013, 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 2014, and the effect of regulatory
lag as we will likely not be filing a request for a base rate increase in Pennsylvania until after 2014. In
addition, during 2013, additional income tax benefits were recognized of $17,736, related to a change in the
Company’s tax method of accounting for qualifying utility system repairs in some non-Pennsylvania operating
divisions, and we are continuing to evaluate the use of a Repair Change in other states where we operate,
although the rate treatment afforded in operating divisions outside of Pennsylvania 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
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
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)
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 $0.085 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 $156,758 and issued 205,065 shares of common stock,
valued at $2,909 at the time of the acquisition, related to the acquisition of utility systems, both water and
wastewater utilities, as well as investments in the natural gas drilling industry. During 2013, we completed 15
acquisitions of water and wastewater utility systems for $14,997 in cash in four of the states in which we
operate.
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 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 specific 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 205,065 shares of
common stock valued at $2,909 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 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 was
expanded for an additional 38 miles with a permitted intake on the Susquehanna River, which extended the
pipeline to additional drillers. The total cost of this pipeline was $109,000. This project marks an expansion
of our growth venture in serving the raw water needs of firms in the natural gas drilling industry. The joint
venture has entered into water supply contract with natural gas drilling companies and negotiations continue
with other area drilling companies. As of December 31, 2013, our capital contributions since inception
totaled $53,643 in cash. This investment has been financed through the issuance of long-term debt. Our
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)
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 and losses since the commencement of the system’s operations. Since some practices
for natural gas drilling require 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 utility
systems or portions of systems. In 2010, 2011, 2012, and 2013, 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 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 March, April, and December 2013, through five separate sales transactions, we completed the sale of our
water and wastewater utility systems in Florida, which concluded our regulated operations in Florida. The
Company received total net proceeds from these sales of $88,934, and recognized a gain on sale of $21,178
($13,766 after-tax). One of our sales in Florida, which was completed in March 2013, and represented
approximately 8% of our customers served in Florida, remains subject to customary regulatory review, for
which we expect to receive the regulator’s decision by midyear 2014. If the regulator does not approve this
sale, the purchase price would be refunded and the assets sold would revert back to the Company.
In June 2013, the Company sold a water and wastewater utility system for net proceeds of $3,400. The sale
resulted in the recognition of a gain on sale of these assets, net of expenses, of $1,025 ($615 after-tax). The
utility system represented approximately 0.04% of the Company’s total assets.
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 specific 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 specific 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 ($1,615 after-tax), and is reported in the
consolidated statement of net 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 ($1,471 after-tax). The utility system
represented approximately 0.01% of Aqua America’s total assets. The gain is reported in the consolidated
statement of net income as a reduction to operations and maintenance expense.
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 ($605 after-
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)
tax). The gain is reported in the 2009 consolidated statement of net income as a reduction to operations and
maintenance expense. These utility systems represented approximately 0.02% 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 system of one of the Company’s operating subsidiaries in Indiana, Utility
Center, Inc., (the “Northern Assets”). In January 2008, the Company reached a settlement with the City to
transition the Northern Assets in February 2008 upon receipt of the City’s initial valuation payment of
$16,911. The settlement agreement specifically stated that the final valuation of the Northern Assets will be
determined through a continuation of the legal proceedings that were filed challenging the City’s valuation.
On February 12, 2008, the Company turned over the Northern Assets to the City upon receipt of the initial
valuation payment. The proceeds received by the Company are in excess of the book value of the assets
relinquished. No gain has been recognized due to the contingency over the final valuation of the assets. The
net book value of the Northern Assets has been removed from the consolidated balance sheet and the
difference between the net book value and the initial payment received has been deferred and is recorded in
other accrued liabilities on the Company’s consolidated balance sheet. Once the contingency is resolved and
the asset valuation is finalized, through the finalization of the litigation between the Company and the City,
the amounts deferred will be recognized in the Company’s consolidated statement of net income. On March
16, 2009, oral argument was held on procedural aspects with respect to the valuation evidence that may be
presented and whether the Company is entitled to a jury trial. On October 12, 2010, the Wells County
Indiana Circuit Court ruled that the Company is not entitled to a jury trial, and that the Wells County judge
should review the City of Fort Wayne Board of Public Works’ assessment based upon a “capricious, arbitrary
or an abuse of discretion” standard. The Company disagreed with the Court’s decision and appealed the
Wells County Indiana Circuit Court’s decision to the Indiana Court of Appeals. On January 13, 2012, the
Indiana Court of Appeals reached a decision upholding the Wells County Indiana Circuit Court decision. On
February 10, 2012, the Company filed a petition for transfer requesting that the Indiana Supreme Court
review the matter. On April 11, 2013, the Supreme Court of Indiana ruled that the statute at issue gives the
Company the right to a full evidentiary hearing before a jury regarding the value of the assets and remanded
the case to the trial court for a proceeding consistent with that ruling. The Company continues to evaluate its
legal options with respect to this decision. Depending upon the outcome of all of the legal proceedings,
including the planned transaction below, which would resolve this litigation, the Company may be required to
refund a portion of the initial valuation payment, or may receive additional proceeds. The Northern Assets
relinquished represents approximately 0.4% of the Company’s total assets.
In addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare
it a “public convenience and necessity” to acquire some of the Company's water utility system assets located
in the southwest section of the City and in Allen County (the “Southern Assets”), and if negotiations with
Fort Wayne officials were to fail, to condemn the Southern Assets. The first public hearing on the ordinance
was held on January 22, 2013 and a subsequent hearing scheduled for February 5, 2013 was not held due to
ongoing settlement discussions between the parties. On July 2, 2013, the Company’s operating subsidiary and
the City signed a letter of intent, which among other items, addresses many of the terms by which the City
would purchase the Company’s Southern Assets, will resolve the litigation between the Company and the City
with respect to the Northern Assets, and will establish the terms by which the Company’s remaining
operating subsidiary will treat wastewater sent to it by the City. The letter of intent states that the City agrees
to pay the Company $50,100 for the Northern Assets and Southern Assets in addition to the $16,911 paid to
the Company by the City in 2008 as an initial valuation payment for the Northern Assets (for a total payment
of $67,011). The letter of intent is conditioned on the Company’s Board of Directors and City Council
approving the final terms of the proposed transaction, and the Company and the City entering into several
definitive agreements that detail the subject matter of the letter of intent. On February 27, 2014, the
Company’s Board of Directors authorized management to enter into agreements with the City on terms and
conditions that are consistent with the July 2, 2013 letter of intent, for among other items, the sale of the
Company’s Northern Assets and Southern Assets to the City. Further, the completion of the transaction is
subject to regulatory requirements and approval. If this transaction is consummated, the Company will
relinquish its water utility system yet expand its sewer customer base in the City. The completion of the
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)
transaction is not expected to close until the third quarter of 2014. The Company continues to evaluate its
legal and operational options on an ongoing basis.
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 of the consolidated
financial statements 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.
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 $745,112 of long-term debt and obtained other
short-term borrowings during the past five years. At December 31, 2013, we have a $150,000 long-term
revolving credit facility that expires in March 2017, of which $24,428 was designated for letter of credit usage,
$125,572 was available for borrowing and no borrowings were outstanding at December 31, 2013. In
addition, we have short-term lines of credit of $160,500, of which $123,760 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.
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 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 specific
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 2013, 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 2013,
2012, 2011, and 2010, we did not issue any shares under the acquisition shelf registration. During 2009, we
issued 205,065 shares of common stock totaling $2,909 to acquire a water system. The balance remaining
available for use under the acquisition shelf registration as of December 31, 2013 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 the Company. 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%
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)
discount on the purchase of shares of common stock with reinvested dividends. As of the December 2013
dividend payment, holders of 13.1% 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
3,588,168 original issue shares of common stock for net proceeds of $58,635 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. In 2013, 154,900 shares of the Company were
purchased under the dividend reinvestment portion of the Plan by the Company’s transfer agent in the open-
market for $3,693.
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. As of December 31, 2013, 685,348 shares remain
available for repurchase. Funding for future stock purchases, if any, is not expected to have a material impact
on our financial position.
In May 2013 the Board of Directors approved a five-for-four stock split to be effected in the form of a 25%
stock distribution to shareholders of record on August 16, 2013. Common shares outstanding do not include
shares held by the Company in treasury. The new shares were distributed on September 1, 2013. Aqua
America’s par value of $0.50 per share did not change as a result of the common stock distribution, and
$17,655 was transferred from capital in excess of par value to common stock to record the stock split.
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.
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)
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2013:
Payments Due By Period
Total
Less than 1
year
1 - 3 years 3 - 5 years
More than 5
years
Long-term debt (1)
Interest on fixed-rate, long-term debt (2)
Operating leases (3)
Unconditional purchase obligations (4)
Other purchase obligations (5)
$ 1,554,871 $
1,218,782
21,809
79,911
38,038
86,288 $
77,512
2,659
12,637
38,038
94,545 $ 107,013 $ 1,267,025
860,049
13,892
28,548
-
137,360
1,790
12,579
-
143,861
3,468
26,147
-
Pension and other post-retirement benefit
plans' obligations (6)
Other obligations (7)
Total
20,638
20,534
-
11,402
$ 2,954,583 $ 238,717 $ 269,972 $ 264,978 $ 2,180,916
20,638
945
-
1,951
-
6,236
(1) Represents sinking fund obligations and debt maturities.
(2) Represents interest payable on fixed rate, long-term debt. Amounts reported may differ from actual due to future
refinancing of debt.
(3) Represents operating leases that are noncancelable, before expiration, for the lease of motor vehicles, buildings, land
and other equipment.
(4) 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.
(5) Represents an approximation of the open purchase orders for goods and services purchased in the ordinary course
of business.
(6) Represents contributions contractually obligated to be made to pension and other post-retirement benefit plans.
(7) 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
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 2023 and amounts not paid by the contract
expiration dates become non-refundable.
In addition to the obligations disclosed in the contractual obligations table above, we have uncertain tax
positions of $28,690. Although we believe our tax positions comply with applicable law, we have made
judgments as to the sustainability of each uncertain tax position based on its technical merits. Due to the
uncertainty of future cash outflows, if any, associated with our uncertain tax positions, we are unable to make
a reasonable estimate of the timing or amounts that may be paid.
We will fund these contractual obligations with cash flows from operations and liquidity sources held by or
available to us.
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)
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, 2013, the debt maturities by period
and the weighted average interest rate for long-term debt are as follows:
2014
2015
2016
2017
2018
Thereafter
Total
Fair Value
Long-term debt:
Fixed rate
Variable rate
Total
Weighted average
interest rate
$ 86,288 $ 58,695 $ 35,850 $ 53,019 $ 53,994 $ 1,267,025 $ 1,554,871 $ 1,540,296
-
$ 86,288 $ 58,695 $ 35,850 $ 53,019 $ 53,994 $ 1,267,025 $ 1,554,871 $ 1,540,296
-
-
-
-
-
-
-
5.18%
5.19%
4.81%
5.14%
6.32%
4.90%
5.00%
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,
2013, the carrying value of these investments, which reflects market value, was $196.
Capitalization
The following table summarizes our capitalization during the past five years:
December 31,
Long-term debt (1)
Aqua America stockholders' equity
2013
2012
2011
2010
2009
50.3%
49.7%
100.0%
53.4%
46.6%
100.0%
54.8%
45.2%
100.0%
57.0%
43.0%
100.0%
56.6%
43.4%
100.0%
(1) Includes current portion, as well as our borrowings under a variable rate revolving credit
agreement of $0 at December 31, 2013 and $100,000 at December 31, 2012.
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,
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 69 years. Effective May 8, 2013, our Board of Directors
authorized an increase of 8.6% in the September 1, 2013 quarterly dividend over the dividend we paid in the
previous quarter. As a result of this authorization, beginning with the dividend payment in September 2013,
the annualized dividend rate increased to $0.608 per share from $0.560 per share. This is the 23rd dividend
increase in the past 22 years and the 15th 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 55.6% of net income
attributable to common shareholders.
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)
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:582) 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:582) 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:582) We review our long-lived assets for
impairment, including utility plant in service and investment in joint venture. 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.
We test the goodwill attributable to each of our reporting units for impairment at least annually on July 31, or
more often, if circumstances indicate a possible impairment may exist. When testing goodwill for
impairment, we may assess qualitative factors for some or all of our reporting units to determine whether it’s
more likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, we
may bypass this qualitative assessment for some of our reporting units and perform step 1 of the quantitative
two-step goodwill impairment test. If we perform step 1 and determine that the fair value of a reporting unit
is less than its carrying amount, we would perform step 2 to measure such impairment. The assessment
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 2013 concluded that the estimated fair
value of each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount by
at least 55%, for reporting units that were tested quantitatively, indicating that none of our goodwill was
impaired
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)
AAccounting for Post-Retirement Benefits (cid:582) We maintain qualified defined benefit pension plans and plans
that provide for 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 2013 pension expense by
$898 and the pension liabilities by $10,270. The present values of Aqua America’s future pension and other
post-retirement obligations were determined using discount rates of 5.12% at December 31, 2013 and 4.17%
at December 31, 2012. Our expense under these plans is determined using the discount rate as of the
beginning of the year, which was 4.17% for 2013, and will be 5.12% for 2014. 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 2013 pension expense by $492. For 2013, we used a 7.50% expected return on assets
assumption which will remain unchanged for 2014. The expected return on assets is based on a targeted
allocation of 25% to 75% domestic equities, 0% to 10% international equities, 25% to 50% fixed income, 0%
to 5% alternative investments, and 0% to 20% cash and cash equivalents. 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
2014 our pension contribution is expected to approximate $17,875. Future years’ contributions will be
subject to economic conditions, plan participant data and the funding rules in effect at such time as the
funding calculations are performed, though we expect future changes in the amount of contributions and
expense recognized to be generally included in customer rates. During 2014, our funding of other post-
retirement benefit plans are expected to approximate $2,763.
Accounting for Income Taxes (cid:582) 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 specific 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. 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.
26
AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)
Our 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 as well as IRS
audits, changes in tax laws, the expiration of a statute of limitations, or other unforeseen matters, and could
impact the tax benefits that have already been recognized. We establish reserves for uncertain tax positions
based upon management’s judgment as to the sustainability of these positions. These accounting estimates
related to the uncertain tax position reserve require judgments to be made as to the sustainability of each
uncertain tax position based on its technical merits. We believe our tax positions comply with applicable law
and that we have adequately recorded reserves as required. However, to the extent the final tax outcome of
these matters is different than our estimates recorded, we would then need to adjust our tax reserves which
could result in additional income tax expense or benefits in the period that this information is known.
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.
27
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
(1992). As a result of management’s assessment and based on the criteria in the framework, management has concluded that,
as of December 31, 2013, the Company’s internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2013 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
March 3, 2014
28
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, 2013 and 2012, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2013 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, 2013, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework)
(“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
March 3, 2014
29
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(In thousands of dollars, except per share amounts)
Years ended December 31, 2013, 2012, and 2011
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 loss (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
2013
2012
2011
$
768,643 $
757,760 $
687,291
285,340
119,258
5,535
53,268
463,401
271,843
111,767
5,229
47,404
436,243
256,743
103,412
4,888
41,449
406,492
305,242
321,517
280,799
77,316
(2,274)
(148)
2,665
227,683
22,690
204,993
77,757
(4,142)
(1,090)
(1,976)
250,968
66,881
184,087
24,732
8,425
16,307
221,300 $
20,493
8,017
12,476
196,563 $
1.16 $
1.16 $
1.06 $
1.05 $
0.09 $
0.09 $
0.07 $
0.07 $
1.26 $
1.25 $
1.13 $
1.12 $
77,804
(7,150)
(649)
-
210,794
69,111
141,683
14,279
12,893
1,386
143,069
0.82
0.82
0.01
0.01
0.83
0.83
176,140
176,814
174,201
174,918
172,727
173,361
$
$
$
$
$
$
$
Cash dividends declared per common share
$
0.584 $
0.536 $
0.504
See accompanying notes to consolidated financial statements.
30
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
Years ended December 31, 2013, 2012, and 2011
Net income attributable to common shareholders
Other comprehensive income, net of tax:
2013
2012
2011
$
221,300 $
196,563 $
143,069
Unrealized holding gain (loss) on investments, net of tax of $76, $106, and $(5) for the
years ended December 31, 2013, 2012, and 2011, respectively
141
198
(10)
Reclassification adjustment for loss (gain) reported in net income, net of tax (benefit)
of $(49), $182, and $125 for the twelve months ended December 31, 2013, 2012, and
2011, respectively (1)
Comprehensive income
90
221,531 $
(339)
196,422 $
(233)
142,826
$
See accompanying notes to consolidated financial statements.
(1) Amount of pre-tax loss (gain) of $139, $(521), and $(358) reclassified from accumulated other comprehensive income to
loss (gain) on sale of other assets on the consolidated statements of net income for the years ended December 31, 2013, 2012,
and 2011, respectively.
See accompanying notes to consolidated financial statements.
31
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 2013 and 2012
Assets
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
Aqua America stockholders' equity:
Liabilities and Equity
Common stock at $.50 par value, authorized 300,000,000 shares, issued 177,928,922 and 175,985,437 in
2013 and 2012
Capital in excess of par value
Retained earnings
Treasury stock, at cost, 1,178,323 and 776,355 shares in 2013 and 2012
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.
32
2013
2012
$
$
5,387,852
1,220,559
4,167,293
5,050,400
1,114,237
3,936,163
$
$
5,058
95,356
7,873
40,038
11,438
11,112
794
171,669
585,600
50,290
48,695
47
28,223
5,051,817
88,964
743,335
729,272
(27,082)
346
1,534,835
208
1,535,043
1,468,583
-
86,288
36,740
65,816
13,615
15,442
34,193
14,816
266,910
867,880
74,257
281,014
81,552
1,304,703
476,578
5,051,817
$
$
$
$
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
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 2013 and 2012
2013
2012
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
$
88,964 $
743,335
729,272
(27,082)
346
1,534,835
208
1,535,043
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
2023 to 2033
2014 to 2035
2024 to 2031
2016 to 2047
2020 to 2048
2014 to 2043
2015 to 2036
2022 to 2027
2021 to 2025
2018 to 2026
2018
5,035
28,615
14,903
167,365
447,297
284,362
64,923
35,056
19,283
28,500
6,000
1,101,339
70,472
718,482
611,303
(14,668)
115
1,385,704
188
1,385,892
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
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 2014 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.
-
100,000
50,000
171,400
232,132
1,554,871
86,288
1,468,583
3,003,626 $
$
50,000
193,000
242,132
1,588,992
45,038
1,543,954
2,929,846
33
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars)
der
Common
stock
Capital in
excess of
par value
Retained
earnings
Treasury
stock
Accumulated
Other
Comprehensive
Income
Noncontrolling
Interest
Total
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
-
-
-
-
-
-
-
-
143,069
-
-
(87,133)
-
-
-
-
Sale of stock (753,958 shares)
295
11,987
Repurchase of stock (51,431 shares)
Equity Compensation Plan (79,133 shares)
Exercise of stock options (530,613 shares)
Stock-based compensation
Employee stock plan tax benefits
-
32
212
-
-
-
(32)
6,391
3,964
(573)
-
-
-
-
(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
-
-
-
-
-
-
-
-
196,563
-
-
(93,423)
Sale of stock (726,093 shares)
285
12,610
Repurchase of stock (77,355 shares)
Equity Compensation Plan (19,015 shares)
-
8
-
(8)
Exercise of stock options (1,041,796 shares)
417
14,181
-
-
-
-
Stock-based compensation
-
5,593
(171)
-
-
-
-
295
(1,818)
-
-
-
Balance at December 31, 2012
70,472
718,482
611,303
(14,668)
Net income
Other comprehensive gain, net of income tax
of $125
Dividends
Stock split
Sale of stock (449,129 shares)
Repurchase of stock (415,233 shares)
Equity Compensation Plan (43,500 shares)
Exercise of stock options (1,566,089 shares)
Stock-based compensation
Employee stock plan tax benefits
-
-
-
-
-
-
221,300
-
(102,889)
17,655
(17,655)
188
9,693
-
17
632
-
-
-
(17)
25,066
5,066
2,700
-
-
-
-
-
(442)
-
-
-
-
-
409
(12,823)
-
-
-
-
-
-
(141)
-
-
-
-
-
-
115
-
231
-
-
-
-
-
-
-
-
17
196,580
(333)
(333)
-
-
-
-
-
-
-
(141)
(93,423)
13,190
(1,818)
-
14,598
5,422
188
1,385,892
20
221,320
-
-
-
-
-
-
-
-
-
231
(102,889)
-
10,290
(12,823)
-
25,698
4,624
2,700
Balance at December 31, 2013
$
88,964 $ 743,335 $
729,272 $ (27,082) $
346 $
208 $
1,535,043
See accompanying notes to consolidated financial statements.
34
AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years ended December 31, 2013, 2012, and 2011
2013
2012
2011
$
221,300
$
196,563
$
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 decrease (increase) in receivables, inventory and prepayments
Net increase (decrease) in payables, accrued interest, accrued taxes and other accrued liabilities
Decrease (increase) in income tax receivable
Other
Operating cash flows from continuing operations
Operating cash flows from (used in) discontinued operations, net
Net cash flows from operating activities
Cash flows from investing activities:
Property, plant and equipment additions, including the non-equity component of allowance for funds used during construction of
$1,741, $3,954, and $6,832
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 (repayments) proceeds 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 continuing operations
Financing cash flows from discontinuing operations, net
Net cash flows used in 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
See accompanying notes to consolidated financial statements.
16,307
204,993
124,793
26,742
4,712
5,066
(1,025)
(148)
2,238
(12,870)
8,209
4,010
366,720
1,099
367,819
(308,171)
(14,997)
23,531
(6)
5,315
-
(14,700)
76
(308,952)
87,389
(221,563)
5,119
(4,429)
(43,643)
263,834
(300,323)
9,872
10,290
25,698
2,420
(12,823)
(102,889)
(146,874)
155
(146,719)
(463)
5,521
12,476
184,087
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
5,058
$
5,521
$
143,069
1,386
141,683
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
$
$
$
75,453
6,995
$
$
74,152
9,319
$
$
71,640
5,431
See Note 1 – Summary of Significant Accounting Policies – Property, Plant and Equipment and Depreciation, 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.
35
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:582) Aqua America, Inc. (“Aqua America,” the “Company,” “we,” or “us”) is the
holding company for regulated utilities providing water or wastewater services concentrated in Pennsylvania,
Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, and Virginia. Our largest operating subsidiary,
Aqua Pennsylvania, Inc.(“Aqua Pennsylvania”), which accounted for approximately 54% of our operating
revenues and a larger percentage of our net income for 2013, and provided water or wastewater services to
customers in the suburban areas north and west of the City of Philadelphia and in 26 other counties in
Pennsylvania. The Company’s other regulated utility subsidiaries provide similar services in seven other
states. In addition, the Company’s non-regulated subsidiary, Aqua Resources, provides liquid waste hauling
and disposal, water and wastewater services through operating and maintenance contracts with municipal
authorities and other parties in close proximity to our utility companies’ service territories, offers, through a
third party, water and sewer line repair service and protection solutions to households, backflow prevention,
construction, and other non-regulated water and wastewater services, and the Company’s non-regulated
subsidiary, Aqua Infrastructure, provides non-utility raw water supply services for firms, with which we enter
into a water supply contract, in the natural gas drilling industry.
In September 2012, we began to market for sale our water and wastewater operations in Florida, which
served approximately 38,000 customers, and our non-regulated wastewater treatment facility in Georgia. In
March, April, and December 2013, through five separate sales transactions, we completed the sale of our
water and wastewater utility systems in Florida, which concluded our regulated operations in Florida. One of
our sales in Florida which was completed in March 2013, and represented approximately 8% of our
customers served in Florida, remains subject to customary regulatory review, for which we expect to receive
the regulator’s decision by midyear 2014. If the regulator does not approve this sale, the purchase price
would be refunded and the assets sold would revert back to the Company. 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. In January 2012, we sold our regulated water operations in
Maine, which served approximately 16,000 customers, to Connecticut Water Services, Inc. These
transactions concluded our regulated operations in Maine and New York. 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. 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. Unless specifically noted, the financial information presented in the notes to consolidated
financial statements reflects the Company’s continuing operations.
The company has identified ten operating segments and has one reportable segment named the Regulated
segment. The reportable segment is comprised of eight operating segments for 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 water and wastewater services through operating and maintenance
contracts with municipal authorities and other parties in close proximity to our utility companies’ service
territories as well as offers, through a third party, water and sewer line repair service and protection solutions
to households, liquid waste hauling and disposal, backflow prevention, construction, and other non-regulated
water and wastewater services, and non-utility raw water supply services for firms, with which we enter into a
water supply contract, in the natural gas 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.
36
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
RRegulation (cid:582) Most of the operating companies that are regulated public utilities are 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
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.
Use of Estimates in Preparation of Consolidated Financial Statements (cid:582) The preparation of
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.
Basis of Presentation – The consolidated financial statements include the accounts of the Company and its
subsidiaries. All intercompany accounts and transactions have been eliminated. All common share, per
common share, stock unit, and per stock unit data, for all periods presented, has been adjusted to give effect
to the September 1, 2013 five-for-four stock split effected in the form of a 25% stock distribution (See Note
12). 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:582) Revenues in our Regulated segment include amounts 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. In addition, the Company has non-regulated revenues that are recognized when services are
performed and are primarily associated with water and wastewater services through operating and
maintenance contracts with municipal authorities and other parties in close proximity to our utility
companies’ service territories as well as offers, through a third party, water and sewer line repair service and
protection solutions to households, liquid waste hauling and disposal, backflow prevention, construction, and
other non-regulated water and wastewater services, and non-utility raw water supply services for firms in the
natural gas industry of $17,366 in 2013, $17,730 in 2012, and $12,364 in 2011.
Property, Plant and Equipment and Depreciation (cid:326)(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 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, 2013, utility plant
includes a net credit acquisition adjustment of $27,466, which is generally being amortized from 2 to 53 years,
except where not permitted or appropriate. Amortization of the acquisition adjustments totaled $2,641 in
2013, $2,858 in 2012, and $2,741 in 2011.
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, 2013, $10,293 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. Information technology
costs associated with major system installations, conversions and improvements, such as software training,
37
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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, 2013, $19,280 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
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.
As of December 31, 2013, 2012, and 2011, property, plant and equipment additions purchased at the period
end, but not yet paid for are $30,974, $29,588, and $32,578, respectively.
AAllowance for Funds Used During Construction (cid:582) The allowance for funds used during construction
(“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 applicable 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 2013 was $533, 2012 was $188, and 2011 was
$318. No interest was capitalized by our non-regulated businesses.
Cash and Cash Equivalents (cid:582) The Company considers all highly liquid investments with an original
maturity of three months or less, which are not restricted for construction activity, to be cash equivalents.
The Company had a book overdraft for specific disbursement cash accounts of $21,753 and $11,881 at
December 31, 2013 and 2012, 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:582) Accounts receivable are recorded at the invoiced amounts. The allowance 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:582) Deferred charges and other assets consist of
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
38
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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.
IInvestment 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 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 or losses
since the commencement of the system’s operations. Our share of equity earnings or losses in the joint
venture is reported in the consolidated statements of net income as equity losses (earnings) in joint venture.
During 2013 and 2012 we received distributions of $1,960 and $2,744, respectively.
Funds Restricted for Construction Activity (cid:582) The proceeds received from specific financings for
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:582) Goodwill represents the excess cost over the fair value of net tangible and identifiable intangible
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. When testing goodwill for
impairment, we may assess qualitative factors for some or all of our reporting units to determine whether it’s
more likely than not that the fair value of a reporting unit is less than its carrying amount. Alternatively, we
may bypass this qualitative assessment for some of our reporting units and perform step 1 of the quantitative
two-step goodwill impairment test. If we perform step 1 and determine that the fair value of a reporting unit
is less than its carrying amount, we would perform step 2 to measure such impairment. The Company tested
the goodwill attributable for each of our reporting units for impairment as of July 31, 2013, 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, exceeded the reporting unit’s carrying amount by at least 55%,
for reporting units that were tested quantitatively, 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, 2011
Goodwill acquired during year
Reclassifications to utility plant
acquisition adjustment
Other
Balance at December 31, 2012
Goodwill acquired during year
Reclassifications to utility plant
acquisition adjustment
Other
Balance at December 31, 2013
Regulated
Segment
Other
Consolidated
$
22,823 $
1,679
4,121 $
-
-
-
4,121
-
-
-
4,121 $
(496)
25
24,031
552
(481)
-
$
24,102 $
39
26,944
1,679
(496)
25
28,152
552
(481)
-
28,223
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
As of December 31, 2012 and 2013 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 some acquisitions upon achieving specific objectives.
IIncome Taxes (cid:582) The Company accounts for some income and expense items in different time periods for
financial and tax reporting purposes. Deferred income taxes are provided on specific 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 currently recovered 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 establishes reserves when it believes that its tax positions are likely to be challenged and it may not
fully prevail in these challenges. The Company’s provision for income taxes includes interest, penalties and
reserves for uncertain tax positions.
In 2012, the Company changed its tax method of accounting for 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 qualifying 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 qualifying income tax benefits resulting from the Repair Change. The Repair Change
for 2013 and 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, a ten year amortization of the income tax benefits, which reduces future income tax expense,
commenced in 2013. During 2013, some of our other operating divisions outside of Pennsylvania adopted
the Repair Change. These divisions do not employ a flow-through method of accounting and had no impact
on the Company’s effective income tax rate.
Customers’ Advances for Construction and Contributions in Aid of Construction (cid:582) Water mains, other
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 $26,188, $27,212, and
$20,823 in 2013, 2012, and 2011, 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 some 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, some 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
40
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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.
IInventories, Materials and Supplies (cid:582) Inventories are stated at cost. Cost is determined using the first-in,
first-out method.
Stock-Based Compensation (cid:582) The Company records compensation expense in the financial statements for
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:120) Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company
has the ability to access;
(cid:120) 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:120) 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, 2013 and
2012.
Recent Accounting Pronouncements (cid:582) In July 2013, the FASB issued updated accounting guidance on
the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a
tax credit carryforward exists. The update requires an entity to present in certain cases, an unrecognized tax
benefit, or portion of an unrecognized tax benefit in the financial statements as a reduction to a deferred tax
asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement is
available in this manner under the tax law. The updated guidance is effective prospectively for reporting
periods beginning after December 15, 2013, with early adoption permitted. The Company early adopted the
provisions of the updated guidance beginning July 1, 2013, 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 February 2013, the FASB issued updated accounting guidance to improve the reporting of reclassifications
out of accumulated other comprehensive income (“AOCI”). The update requires an entity to present
information about the amounts reclassified from AOCI in their financial statements in either a single note or
parenthetically on the face of the financial statements. The updated guidance is effective prospectively for
reporting periods beginning after December 15, 2012. The Company adopted the provisions of the updated
guidance for its reporting period beginning January 1, 2013, and the adoption of the revised guidance did not
have an impact on the Company’s consolidated results of operations or consolidated financial position.
41
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Note 2 – Acquisitions
In 2013, the Company completed 15 acquisitions of water and wastewater utility systems in various states.
The total purchase price consisted of $14,997 in cash. The operating revenues included in the consolidated
financial statements of the Company during the period owned by the Company were $2,103. The pro forma
effect of the businesses acquired is not material to the Company’s results of operations.
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 specific 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 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 $41,167 and $3,987 in 2013, respectively, and $27,981 and $3,265 in 2012, 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 and 2011. The purchase price allocation was 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 $4,033 in 2013 and $1,527 in 2012. 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 $3,408 in 2013, $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
42
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
owned by the Company were $708 in 2013, $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.
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 served approximately 38,000 customers, and the Company’s waste
water treatment facility in Georgia. In March, April, and December 2013, through five separate sales
transactions, we completed the sale of our water and wastewater utility systems in Florida, which concluded
our regulated operations in Florida. The Company received total net proceeds from these sales of $88,934
and recognized a gain on sale of $21,178 ($13,766 after-tax). One of the Company’s sales in Florida, which
was completed in March 2013, and represented approximately 8% of our customers served in Florida,
remains subject to customary regulatory review, for which we expect to receive the regulator’s decision by
midyear 2014. If the regulator does not approve this sale, the purchase price would be refunded and the
assets sold would revert back to the Company. The Company has accounted for these operations as business
held for sale. The sale of the Company’s wastewater operation in Georgia will conclude the Company’s
operations in this state.
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 specific 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 specific 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.
43
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
Other expenses, net
Income from discontinued operations before income taxes
Provision for income taxes
Income from discontinued operations
$
$
Years Ended December 31,
2013
12,264 $
8,710
3,554
2012
31,458 $
24,286
7,172
67,391
49,617
17,774
2011
(21,178)
-
24,732
8,425
16,307 $
(14,718)
1,397
20,493
8,017
12,476 $
-
3,495
14,279
12,893
1,386
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
Other assets
Assets of discontinued operations held for sale
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,
2013
319 $
119
200
594
-
-
794
14,348
-
-
468
14,816
2012
128,463
48,856
79,607
4,656
2,034
126
86,423
2,074
5,166
15,560
837
23,637
Net (liabilities) assets
$
(14,022) $
62,786
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
gains disclosed below are reported in the consolidated statements of net income as a reduction to operations
and maintenance expense.
In June 2013, the Company sold a water and wastewater utility system for net proceeds of $3,400. The sale
resulted in the recognition of a gain on sale of these assets, net of expenses, of $1,025 ($615 after-tax), and is
reported in the consolidated statement of net income as a reduction to operations and maintenance expense.
The utility system represented approximately 0.04% of the Company’s total assets.
44
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 ($1,615 after-tax), and is reported
in the consolidated statement of net 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 ($1,471 after-
tax), and is reported in the consolidated statement of net income as a reduction to operations and
maintenance expense. The utility system represented approximately 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, Utility
Center Inc., (the “Northern Assets”). In January 2008, the Company reached a settlement with the City to
transition the Northern Assets in February 2008 upon receipt of the City’s initial valuation payment of
$16,911. The settlement agreement specifically stated that the final valuation of the Northern Assets will be
determined through a continuation of the legal proceedings that were filed challenging the City’s valuation.
On February 12, 2008, the Company turned over the Northern Assets to the City upon receipt of the initial
valuation payment. The proceeds received by the Company are in excess of the book value of the assets
relinquished. No gain has been recognized due to the contingency over the final valuation of the assets. The
net book value of the Northern Assets has been removed from the consolidated balance sheet and the
difference between the net book value and the initial payment received has been deferred and is recorded in
other accrued liabilities on the Company’s consolidated balance sheet. Once the contingency is resolved and
the asset valuation is finalized, through the finalization of the litigation between the Company and the City,
the amounts deferred will be recognized in the Company’s consolidated statement of net income. On March
16, 2009, oral argument was held on procedural aspects with respect to the valuation evidence that may be
presented and whether the Company is entitled to a jury trial. On October 12, 2010, the Wells County
Indiana Circuit Court ruled that the Company is not entitled to a jury trial, and that the Wells County judge
should review the City of Fort Wayne Board of Public Works’ assessment based upon a “capricious, arbitrary
or an abuse of discretion” standard. The Company disagreed with the Court’s decision and appealed the
Wells County Indiana Circuit Court’s decision to the Indiana Court of Appeals. On January 13, 2012, the
Indiana Court of Appeals reached a decision upholding the Wells County Indiana Circuit Court decision. On
February 10, 2012, the Company filed a petition for transfer requesting that the Indiana Supreme Court
review the matter. On April 11, 2013, the Supreme Court of Indiana ruled that the statute at issue gives the
Company the right to a full evidentiary hearing before a jury regarding the value of the assets and remanded
the case to the trial court for a proceeding consistent with that ruling. The Company continues to evaluate its
legal options with respect to this decision. Depending upon the outcome of all of the legal proceedings,
including the planned transaction below, which would resolve this litigation, the Company may be required to
refund a portion of the initial valuation payment, or may receive additional proceeds. The Northern Assets
relinquished represents approximately 0.4% of the Company’s total assets.
In addition, in December 2012, the Fort Wayne City Council considered an ordinance that sought to declare
it a “public convenience and necessity” to acquire some of the Company's water utility system assets located
in the southwest section of the City and in Allen County (the “Southern Assets”), and if negotiations with
Fort Wayne officials were to fail, to condemn the Southern Assets. The first public hearing on the ordinance
was held on January 22, 2013 and a subsequent hearing scheduled for February 5, 2013 was not held due to
ongoing settlement discussions between the parties. On July 2, 2013, the Company’s operating subsidiary and
the City signed a letter of intent, which among other items, addresses many of the terms by which the City would
purchase the Company’s Southern Assets, will resolve the litigation between the Company and the City with
respect to the Northern Assets, and will establish the terms by which the Company’s operating subsidiary will treat
wastewater sent to it by the City. The letter of intent states that the City agrees to pay the Company $50,100 for
45
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
the Northern Assets and Southern Assets in addition to the $16,911 paid to the Company by the City in 2008 as an
initial valuation payment for the Northern Assets (for a total payment of $67,011). The letter of intent is
conditioned on the Company’s Board of Directors and City Council approving the final terms of the proposed
transaction, and the Company and the City entering into several definitive agreements that detail the subject matter
of the letter of intent. On February 27, 2014, the Company’s Board of Directors authorized management to enter
into agreements with the City on terms and conditions that are consistent with the July 2, 2013 letter of intent, for
among other items, the sale of the Company’s Northern Assets and Southern Assets to the City. Further, the
completion of the transaction is subject to regulatory requirements and approval. If this transaction is
consummated, the Company will expand its sewer customer base in the City. The completion of the transaction is
not expected to close until the third quarter of 2014. The Company continues to evaluate its legal and
operational options on an ongoing basis.
Note 4 – Property, Plant and Equipment
December 31,
2013
2012
Approximate Range
of Useful Lives
Weighted Average
Useful Life
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
$
2,353,812 $
2,190,078
26 to 92 years
76 years
1,361,534
240,083
1,275,221
233,743
5 to 85 years
14 to 70 years
48 years
47 years
639,314
594,687
5 to 90 years
37 years
610,257
85,272
5,290,272
116,259
(27,466)
8,787
5,387,852 $
573,899
95,436
4,963,064
107,944
(31,347)
10,739
5,050,400
$
4 to 78 years
-
-
2 to 53 years (1)
4 to 25 years
26 years
-
-
19 years
6 years
(1) Net utility plant acquisition adjustment is generally being amortized from 2 to 53 years, except where not permitted.
Note 5 – Accounts Receivable
Billed utility revenue
Unbilled utility revenue
Other
Less allowance for doubtful accounts
Net accounts receivable
December 31,
2013
2012
$
$
56,569
33,624
9,593
99,786
4,430
95,356
$
$
53,173
33,590
10,479
97,242
4,321
92,921
46
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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, 2013, 2012,
and 2011. 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,
2013
2012
2011
$
$
4,321 $
4,712
(5,897)
1,294
4,430 $
4,485 $
4,805
(5,939)
970
4,321 $
4,367
4,854
(5,780)
1,044
4,485
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, 2013
Regulatory
Assets
Regulatory
Liabilities
December 31, 2012
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
$
$
494,308 $
12,083
66,535
1,715
223,592
22,365
34,983
-
4,371
6,588
585,600 $
-
74
281,014
$
$
348,359 $
16,976
139,139
2,836
192,551
19,936
28,795
-
4,739
9,215
521,264 $
-
81
241,363
Items giving rise to deferred state income taxes, as well as a portion of deferred Federal income taxes related
to specific 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 specific utility asset improvement costs capitalized for book and deducted as a repair expense for tax
purposes.
The regulatory liability related to the catch up component of the Aqua Pennsylvania repair tax accounting
change represents the tax benefits realized on the Company’s 2012 tax return, which have not yet flowed-
through as a reduction to income tax expense due to the ten year amortization period which began in 2013.
This amortization was stipulated in a June 2012 rate order issued to Aqua Pennsylvania and is subject to
specific parameters being met each year. During 2013, the Company amortized $15,766 of its deferred
income tax benefits, which reduced income tax expense and increased the Company’s net income.
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.
47
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
Post-retirement benefits include pension and other post-retirement benefits. A regulatory asset has been
recorded at December 31, 2013 and 2012 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 post-retirement benefits costs includes deferred expense in excess of amounts
funded, which the Company believes will be recoverable in future years as funding of post-retirement benefits
is required. The regulatory liability for post-retirement benefits represents costs recovered in rates in excess
of post-retirement benefits expense.
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 8
to 17 years.
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,
2013
2012
2011
$
(9,891) $
5,839
(4,052)
(13,854) $
3,172
(10,682)
30,218
(3,476)
26,742
67,743
9,820
77,563
(936)
(2,063)
(2,999)
76,479
(4,369)
72,110
Total tax expense
$
22,690 $
66,881 $
69,111
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.
48
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:
Years Ended December 31,
2012
2013
2011
Computed Federal tax expense at statutory rate
Decrease in Federal tax expense related to repair tax accounting
State income taxes, net of federal tax benefit
$
79,689 $
(57,467)
1,536
87,839 $
(28,948)
8,445
73,778
-
(4,180)
Increase in tax expense for depreciation expense to be recovered in
future rates
Stock-based compensation
295
(421)
361
(386)
551
(355)
Deduction for Aqua America common dividends paid under employee
benefit plan
Amortization of deferred investment tax credits
Other, net
Actual income tax expense
$
(414)
(420)
(108)
22,690 $
(387)
(420)
377
66,881 $
(345)
(340)
2
69,111
In December 2012, the Company changed its tax method of accounting for 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 qualifying 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 some 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 the Company’s Federal and state
income tax expense and flowed-through to net income in the fourth quarter of 2012. In 2013, the Company
recorded additional income tax benefits of $14,908, as adjusted for the 2012 tax return. Similar to 2012, the
Company recorded $45,647 of income tax benefits in 2013. The Company recognized a tax deduction on its
2012 Federal tax return of $380,000 for qualifying capital expenditures made prior to 2012 (“catch-up
adjustment”), and based on the settlement agreement, in 2013, the Company began to amortize 1/10th of the
catch-up adjustment. In accordance with the settlement agreement, the amortization is expected to reduce
income tax expense during periods when qualifying parameters are met. During 2013, the Company
amortized its catch-up adjustment and recognized $15,766 of deferred income tax benefits, which reduced
income tax expense and increased the Company’s net income. The Company’s effective income tax rate for
2013, 2012, and 2011, for its continuing operations, was 10.0%, 26.6%, and 32.8%, respectively.
During 2013, additional income tax benefits were recognized of $17,736, related to a change in the
Company’s tax method of accounting for qualifying utility system repairs in some non-Pennsylvania operating
divisions. These divisions currently do not employ a flow-through method of accounting and as such the
change in the Company’s tax method of accounting in these operating divisions had no impact on the
Company’s effective income tax rate.
In September 2013, the Department of Treasury and the Internal Revenue Service issued “Guidance
Regarding Deduction and Capitalization of Expenditures Related to Tangible Property” which contains
standards for determining whether and when a taxpayer must capitalize costs incurred in acquiring,
maintaining or improving tangible property. These regulations will be effective for the Company’s 2014 fiscal
year and early adoption is available. The Company has reviewed the regulations and concluded that the
regulations will not have a material impact on the Company’s consolidated results of operations or
consolidated financial position when they are fully adopted.
49
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company establishes reserves for uncertain tax positions based upon management’s judgment as to the
sustainability of these positions. These accounting estimates related to the uncertain tax position reserve
require judgments to be made as to the sustainability of each uncertain tax position based on its technical
merits. The Company believes its tax positions comply with applicable law and that it has adequately
recorded reserves as required. However, to the extent the final tax outcome of these matters is different than
the estimates recorded, the Company would then adjust its tax reserves or unrecognized tax benefits in the
period that this information becomes known. The Company has elected to recognize accrued interest and
penalties related to uncertain tax positions as income tax expense.
The following table provides the changes in the Company’s unrecognized tax benefits:
Balance at January 1, 2013
Additions based on tax position related to the current year
Balance at December 31, 2013
$
$
-
28,690
28,690
The unrecognized tax benefits relate to the Repair Change, and the tax position is attributable to a temporary
difference. As a result of the regulatory treatment afforded by the Repair Change in Pennsylvania and despite
this position being a temporary difference, as of December 31, 2013, $9,795 of these tax benefits would have
an impact on the Company’s effective income tax rate in the event the Company does sustain all, or a
portion, of its tax position. The Company does not anticipate material changes to its unrecognized tax
benefits within the next year.
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.
50
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:
December 31,
2013
2012
$
26,732 $
26,820
11,085
9,922
19,311
128,688
3,133
198,871
6,431
192,440
13,124
12,496
45,015
111,452
2,360
211,267
7,506
203,761
Utility plant, principally due to depreciation and differences in the basis of fixed
assets due to variation in tax and book accounting
881,007
772,006
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
Net deferred tax liability
112,307
19,311
7,657
1,020,282
66,361
45,015
5,928
889,310
$
827,842 $ 685,549
At December 31, 2013, the Company has a cumulative Federal net operating loss (“NOL”) of $258,094. 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 2031.
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 $4,822.
At December 31, 2013 the Company has a cumulative state NOL of $531,160, a portion of which is 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 2023.
The Company has unrecognized tax positions that result in the associated tax benefit being unrecognized.
The Company’s Federal and state NOL carryforwards are reduced by an unrecognized tax position, on a
gross basis, of $62,219 and $86,016, respectively, which results from the Company’s adoption in 2013 of the
FASB’s accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward exists. The amounts of the Company’s Federal
and state NOL carryforwards prior to being reduced by the unrecognized tax positions are $320,313 and
$617,176, respectively. The Company records its unrecognized tax benefit as a reduction to its deferred
income tax liability.
51
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
As of December 31, 2013, the Company’s Federal income tax returns for all years through 2011 have been
closed. Tax years 2012 through 2013 remain open to Federal examination. The statute remains open for the
Company’s state income tax returns for tax years 2010 through 2013 in the various states the Company’s
conducts business in. In 2013, the Company’s Illinois subsidiary’s state income tax audit for tax years 2008
and 2009 was completed, which resulted in no significant audit adjustments.
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,
2013
2012
2011
$
$
25,764 $
2,127
11,857
7,452
6,068
53,268 $
21,550 $
3,196
10,060
6,967
5,631
47,404 $
16,618
3,559
9,408
6,441
5,423
41,449
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:
2014
2015
2016
2017
2018
Thereafter
$
2,072 $
1,443
$
862 $
481 $
$202 $
361
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 renewal provisions. Some 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 $571 of annual lease payments for land is due, and the aggregate of the years remaining
approximates $13,531. The Company leases treatment plants to other parties under lease agreements that
require payments to the Company of:
2014
2015
2016
2017
2018
Thereafter
$
494 $
531
$
531 $
531 $
531 $
3,100
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
2018 are expected to average $10,273 and the aggregate of the years remaining approximates $28,548.
52
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The Company has entered into purchase obligations, in the ordinary course of business, that include
agreements for water treatment processes at some 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 are as follows:
2014
2015
2016
2017
2018
Thereafter
$
945 $
965
$
986 $
1,007 $
1,029 $
11,402
In addition, as of December 31, 2013, the estimated capital expenditures required under legal and binding
long-term contracts are approximately $4,200 in 2017.
Rent expense under operating leases, purchased water expense, and water treatment expenses under these
agreements were as follows:
Years Ended December 31,
2012
2011
2013
Operating lease expense
Purchased water under long-term agreements
Water treatment expense under contractual agreement
$
3,413 $
12,923
926
3,850 $
11,796
897
3,553
14,507
865
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, 2013, the aggregate amount of $11,342 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
insurance coverage for a number of these loss contingencies, and as of December 31, 2013, estimates that
approximately $1,184 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:120) 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:120)
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
53
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 severed the litigation so that the plaintiffs are
grouped by the houses in which they lived and a separate trial was to be held for each of the
households. Some of these plaintiffs testified in the trial of the original lawsuit in which all
allegations were resolved in the Company’s favor. The claims from the first of these households
were expected to go to trial in May 2013. However, all of the plaintiffs in the 2008 lawsuit have
entered into a confidential comprehensive settlement agreement and in October 2013, the court
dismissed all claims of all the plaintiffs in that matter with prejudice, which completely concludes the
2008 litigation matter. The settlement is covered by the Company’s insurance coverage. Based on
the settlement agreement, the Company believes that the amount of loss is not material to the
Company’s consolidated results of operations or consolidated financial condition.
(cid:120) One of the Company’s subsidiaries acquired in 2008 had entered into a Consent Decree with the
United States Environmental Protection Agency (“EPA”) and received from the United States
Department of Justice a proposed civil penalty related to alleged violations, which was 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. On April 15,
2013, Company’s subsidiary and the EPA and the Department of Justice submitted a proposed
modification of the Consent Decree for approval by the Northern District of Indiana US District
Court. The Court entered the modification on April 25, 2013. The modification includes the
provision of operational compliance and implementation of a Capacity, Management, Operations,
and Maintenance program for one year and a civil penalty of $254. The Company had withheld
payment of an amount of shares of the Company’s common stock 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, and in January 2013, released a number of shares to the sellers. The Company
intends to release a final designated amount of shares to the seller that were withheld, which are in
excess of the amount needed, to cover contingent increases in the absence of such contingent
increases.
(cid:120)
In January 2014, the Company’s subsidiary in Texas was notified by the Hays Trinity Groundwater
Conservation District of alleged violations of its rules with potential fines totaling $227 for four of
our water systems in which the unaccounted for water is alleged to exceed a certain level of the
groundwater withdrawn from the district in 2013. The Company plans to challenge these potential
fines and is unable to estimate the amount of the final fines.
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.
In addition to the aforementioned loss contingencies, the Company self-insures its employee medical benefit
program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s
reserve for these claims totaled $1,965 at December 31, 2013 and represents a reserve for unpaid claim costs,
including an estimate for the cost of incurred but not reported claims.
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, 2013 and 2012. The supplemental indentures with respect to specific issues of the First
Mortgage Bonds restrict the ability of Aqua Pennsylvania and other operating subsidiaries of the Company to
54
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
declare dividends, in cash or property, or repurchase or otherwise acquire the stock of these companies.
Loan agreements for Aqua Pennsylvania and other operating subsidiaries of the Company contain restrictions
on minimum net assets. As of December 31, 2013, restrictions on the net assets of the Company were
$1,102,879 of the total $1,535,043 in net assets. Included in this amount were restrictions on Aqua
Pennsylvania’s net assets of $818,514 of their total net assets of $1,168,863. As of December 31, 2013,
approximately $864,000 of Aqua Pennsylvania’s retained earnings of approximately $884,000 and
approximately $79,000 of the retained earnings of approximately $127,000 of other subsidiaries were free of
these restrictions. Some supplemental indentures also prohibit Aqua Pennsylvania and some 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 specific 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
2014
2015
2016
2017
2018
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%
$
194 $
437 $
437 $
437 $
2,322
1,030
2,469
27,260
51,673
-
345
295
700
-
2,249
1,056
2,553
272
38,614
12,000
409
405
700
-
2,128
1,083
2,649
11,087
16,887
-
442
437
700
-
1,994
1,112
2,736
11,096
25,069
8,923
479
473
700
-
Total
$
86,288 $
58,695 $
35,850 $
53,019 $
437 $
2,026
1,143
2,827
11,111
10,720
13,000
518
512
5,700
6,000
53,994 $
3,093
17,896
9,479
204,131
557,871
373,531
31,000
32,863
17,161
20,000
-
1,267,025
In October 2013, the Company’s operating subsidiary, Aqua Pennsylvania, Inc., issued $75,000 of first
mortgage bonds, of which $25,000 is due in 2031, $25,000 in 2045, and $25,000 in 2046 with interest rates of
3.94%, 4.61%, and 4.62%, respectively. The proceeds from these bonds were used to repay existing
indebtedness and for general corporate purposes.
In May 2013, the Company’s operating subsidiary, Aqua Ohio, Inc., issued $85,000 of first mortgage bonds,
of which $35,000 is due in 2033, $30,000 is 2044, and $20,000 in 2048 with interest rates of 3.75%, 4.18%,
and 4.43%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for
general corporate purposes.
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, 2013, the trustee for one issue held $47 pending construction of the projects to be
financed with the issue of bonds in 2012 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, 2013 and 2012 was 5.00% and 4.81%,
respectively. The weighted average cost of fixed rate long-term debt at December 31, 2013 and 2012 was
5.00% and 5.06%, respectively.
55
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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, 2013, the Company has the
following sublimits and available capacity under the credit facility: $50,000 letter of credit sublimit, $25,572 of
letters of credit available capacity, $0 borrowed under the swing-line commitment, and $0 of funds borrowed
under the agreement. Interest under this facility is based at the Company’s option, on the prime 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
0.83% and 0.85%, and the average borrowing was $26,954 and $68,609, during 2013 and 2012, 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
specific 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 2013, 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 2013, 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, 2013 and 2012, funds borrowed under the agreement
were $30,000 and $70,902, 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 0.075% is charged on the total commitment amount of Aqua Pennsylvania’s revolving credit
agreement. The average cost of borrowing under the facility was 0.89% and 0.94%, and the average
borrowing was $75,621 and $78,525, during 2013 and 2012, respectively. The maximum amount outstanding
at the end of any one month was $96,103 and $89,973 in 2013 and 2012, respectively.
At December 31, 2013 and 2012, 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, 2013 and 2012, funds borrowed under the short-term lines of credit were $6,740 and
$9,481, respectively. The average borrowing under the lines was $11,531 and $15,583 during 2013 and 2012,
respectively. The maximum amount outstanding at the end of any one month was $17,081 and $22,941 in
2013 and 2012, respectively. 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 2013 and 2012 was 1.67% and 1.83%, respectively.
Interest Income – Interest income of $438, $372, and $757 was netted against interest expense on the
consolidated statement of net income for the years ended December 31, 2013, 2012, and 2011, respectively.
The total interest cost was $77,754, $78,129, and $78,561 in 2013, 2012, and 2011, including amounts
capitalized of $2,274, $4,142, and $7,150, 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, 2013 and 2012, the
carrying amount of the Company’s funds restricted for construction activity was $47 and $23,572,
respectively, which equates to their estimated fair value. As of December 31, 2013 and 2012, the carrying
56
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
amount of the Company’s loans payable was $36,740 and $80,383, 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, 2013 and 2012, the carrying amounts of the Company's cash and cash equivalents were $5,058
and $5,521, which equates to their fair value.
The carrying amount and estimated fair value of the Company’s long-term debt are as follows:
December 31,
2013
2012
Carrying amount
Estimated fair value
$
1,554,871 $
1,540,296
1,588,992
1,702,997
The fair value of long-term debt has been determined by discounting the future cash flows using current
market interest rates for similar financial instruments of the same duration utilizing level 2 methods and
assumptions. The Company’s customers’ advances for construction have a carrying value of $74,257
and $71,595 at December 31, 2013 and 2012, 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 2028 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, 2013, the Company had 300,000,000 shares of common stock authorized; par value $0.50.
Shares outstanding and treasury shares held were as follows:
2013
December 31,
2012
2011
Shares outstanding
Treasury shares
176,750,599
1,178,323
175,209,082
776,355
173,518,872
710,482
At December 31, 2013, the Company had 1,738,619 shares of authorized but unissued Series Preferred Stock,
$1.00 par value.
In May 2013, the Board of Directors of the Company approved a five-for-four stock split to be effected in
the form of a 25% stock distribution to shareholders of record on August 16, 2013. Common shares
outstanding do not include shares held by the Company in treasury. The new shares were distributed on
September 1, 2013. Aqua America’s par value of $0.50 per share did not change as a result of the common
stock distribution, and $17,655 was transferred from capital in excess of par value to common stock to record
the stock split. All common share, per common share, stock unit, and per stock unit data, for all periods
presented, has been adjusted to give effect to the stock split.
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
57
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
remaining available for use under the acquisition shelf registration as of December 31, 2013 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 2013, 2012, and 2011, under the dividend reinvestment portion of the
Plan, 432,894, 711,740, and 735,931 original issue shares of common stock were sold providing the Company
with proceeds of $10,107, $12,921, and $12,304, respectively. In 2013, 154,900 shares of the Company were
purchased under the dividend reinvestment portion of the Plan by the Company’s transfer agent in the open-
market for $3,693.
In October 2013, the Company’s Board of Directors approved a resolution authorizing the Company to
purchase, from time to time, up to 685,348 shares of its common stock in the open market or through
privately negotiated transactions. This authorization renewed the number of shares that had remained, when
affected for stock splits, from an existing share buy-back authorization from 1997. The specific timing,
amount and other terms of repurchases will depend on market conditions, regulatory requirements and other
factors. As of December 31, 2013, 685,348 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-based compensation is included in the computation of
diluted net income per share. The dilutive effect of stock-based compensation is calculated using the treasury
stock method and expected proceeds upon exercise or issuance of the stock-based compensation. The
following table summarizes the shares, in thousands, used in computing basic and diluted net income per
share:
Years ended December 31,
2012
2013
2011
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
176,140
174,201
172,727
674
717
634
176,814
174,918
173,361
For the year ended December 31, 2013, all of the Company’s employee stock options were included in the
calculation of diluted net income per share as the calculated cost to exercise the stock options was less than
the average market price of the Company’s common stock during this period.
58
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
For the years ended December 31, 2012, and 2011, employee stock options to purchase 534,315 and
1,157,875 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 $8.68 and $7.91 at December 31, 2013 and 2012, 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
6,250,000 shares for issuance under the plan. A maximum of 50% of the shares available for issuance under
the 2009 Plan may be issued 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 250,000. 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, 2013, 4,680,779 shares underlying stock-based compensation awards were still available for
grant under the 2009 Plan. No further grants may be made under the 2004 plan.
PPerformance Share Units – During 2013, 2012, and 2011, the Company granted performance share units.
A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if
specified performance goals are met over the three year performance period specified in the grant, subject to
exceptions through the respective vesting periods, generally three years. Each grantee is granted a target
award of PSUs, and may earn between 0% and 200% of the target amount depending on the Company’s
performance against the performance goals, which consist of the following metrics for the 2012 and 2011
grants: 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), and for the 2013
grant: 30% 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), 30% of the PSUs will be
earned based on the Company’s TSR compared to the TSR for the companies listed in the Standard and
Poor’s Midcap Utilities Index (a market-based condition), 20% of the PSUs will be earned based on
maintaining an average ratio of operations and maintenance expenses as a percentage of revenues at Aqua
Pennsylvania compared to a target average ratio for the three year performance period (a performance-based
condition), and 20% of the PSUs will be earned based on earning a cumulative total earnings before taxes for
the Company operations other than Aqua Pennsylvania for the three year performance period compared to a
target (a performance-based condition).
The following table provides compensation costs for PSUs:
Stock-based compensation within operations and maintenance expense
Income tax benefit
$ 3,451 $ 2,552 $
1,406
1,040
943
384
Years ended December 31,
2011
2012
2013
59
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes nonvested PSU transactions for the year ended December 31, 2013:
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
414,168 $
166,641
(15,165)
(19,552)
(18,000)
-
528,092 $
18.82
26.88
18.21
21.74
19.51
-
21.25
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the
market-based conditions associated with the PSUs using the Monte Carlo valuation method. The other
portion of the fair value of the PSUs 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, generally 36 months. The accrual of compensation costs is based on an
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
Weighted average fair value of PSUs granted
Years ended December 31,
2013
2012
2011
3.0
0.36%
20.0%
$ 26.88
$
3.0
0.43%
22.1%
19.11 $
3.0
1.22%
29.7%
19.50
As of December 31, 2013, $4,486 of unrecognized compensation costs related to PSUs is expected to be
recognized over a weighted average period of approximately 1.6 years. The intrinsic value of vested PSUs for
the year ended December 31, 2013 was $415. The aggregate intrinsic value of PSUs as of December 31, 2013
was $12,458. 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.
60
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, the right to receive the shares is subject to specific
performance goals established at the time the grant is made. The Company assumes that forfeitures will be
minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense. The
following table provides compensation costs for RSUs:
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
813 $
336
634 $
262
342
142
The following table summarizes nonvested RSU transactions for the year ended December 31, 2013:
Years ended December 31,
2011
2012
2013
Nonvested stock units at beginning of period
Granted
Vested
Forfeited
Nonvested stock units at end of period
The following table summarizes the value of RSUs:
Number of
Stock Units
Weighted
Average Fair
Value
85,597 $
48,133
(19,500)
(1,564)
112,666 $
17.89
23.28
17.83
20.78
20.16
Weighted average fair value of RSUs granted
Years ended December 31,
2013
$ 23.28
2012
2011
$
17.99 $
17.77
As of December 31, 2013, $1,070 of unrecognized compensation costs related to RSUs is expected to be
recognized over a weighted average period of approximately 1.6 years. The intrinsic value of vested RSUs for
the years ended December 31, 2013 and 2012 was $449 and $247. The fair value of vested RSUs for the years
ended December 31, 2013 and 2012 was $348 and $195. The aggregate intrinsic value of RSUs as of December
31, 2013 was $2,658. 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 options:
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
30 $
461
612 $ 1,361
673
580
Years ended December 31,
2011
2012
2013
61
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
There were no stock options granted during the years ended December 31, 2013, 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
years from the date of the grant. The fair value of each option was 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 summarizes stock option transactions for the year ended December 31, 2013:
Options:
Outstanding, beginning of year
Granted
Forfeited
Expired
Exercised
Outstanding and exercisable at end of year
Shares
3,121,388 $
-
-
(17,189)
(1,566,089)
1,538,110 $
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (years)
Aggregate
Intrinsic
Value
16.65
-
-
22.84
16.41
16.82
3.7 $
10,410
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,
2013
2012
2011
Intrinsic value of options exercised
Fair value of options vested
$
10,410
500
$
5,547
1,318
$
3,071
2,077
62
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes information about the options outstanding and options exercisable as of
December 31, 2013:
Options Outstanding and Exercisable
Range of prices:
$12.00 - 12.99
$13.00 - 14.99
$15.00 - 16.99
$17.00 - 19.99
$20.00 - 23.99
Weighted Average
Remaining Life
(years)
Shares
Weighted Average
Exercise Price
78,471
451,318
518,231
236,157
253,933
1,538,110
0.2 $
3.7
4.5
3.2
2.2
3.7 $
12.92
14.04
15.71
18.61
23.57
16.82
As of December 31, 2013, there was $0 of total unrecognized compensation cost related to nonvested stock
options granted under the plans.
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 restricted stock:
Years ended December 31,
2011
2012
2013
Stock-based compensation within operations and maintenance expense
Income tax benefit
$
770 $ 1,739 $ 1,800
740
721
320
The following table summarizes nonvested restricted stock transactions for the year ended December 31,
2013:
Number of
Shares
147,160
16,000
(100,660)
-
62,500
$
$
Weighted
Average Fair
Value
15.38
25.09
15.49
-
17.70
Nonvested shares at beginning of period
Granted
Vested
Forfeited
Nonvested shares at end of period
63
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The following table summarizes the value of restricted stock awards:
Years ended December 31,
2013
2012
2011
Intrinsic value of restricted stock awards vested
Fair value of restricted stock awards vested
Weighted average fair value of restricted stock awards granted
$
2,236 $
1,560
25.09
2,384 $
1,971
18.47
2,020
1,650
17.77
As of December 31, 2013, $338 of unrecognized compensation costs related to restricted stock is expected to be
recognized over a weighted average period of approximately 6 months. The aggregate intrinsic value of
restricted stock as of December 31, 2013 was $1,474. 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 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 some 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 some employees from being penalized by these
limitations. The Company also has non-qualified Supplemental Executive Retirement Plans for some 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 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 eligible retirees. The Company funds its gross
PBOP cost through various trust accounts. The benefits of retired officers and other eligible retirees are paid
by the Company and not from plan assets due to limitations imposed by the Internal Revenue Code.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid
in the years indicated:
Pension Benefits
Other Post-retirement Benefits
$
Years:
2014
2015
2016
2017
2018
2019-2023
$
11,601
12,400
13,212
14,048
14,948
87,278
64
1,680
1,897
2,177
2,464
2,760
17,027
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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:
Change in benefit obligation:
Benefit obligation at January 1,
Service cost
Interest cost
Actuarial (gain) 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,
Pension Benefits
2013
2012
Other Post-retirement Benefits
2013
2012
$
$
303,077 $
5,313
12,660
(30,223)
-
(10,332)
666
-
-
281,161
190,084
36,517
16,078
(10,332)
-
-
232,347
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
63,033 $
1,525
2,579
(9,024)
190
(1,129)
-
-
-
57,174
34,054
5,800
1,913
(927)
-
-
40,840
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
$
48,814 $
112,993
$
16,334 $
28,979
The Company’s pension plans had an accumulated benefit obligation of $246,843 and $267,400 at December
31, 2013 and 2012, respectively. The following table provides the net liability recognized on the consolidated
balance sheets at December 31,:
Pension Benefits
2013
2012
Other Post-retirement
Benefits
2013
2012
Current liability
Noncurrent liability
Net liability recognized
$
$
366 $
48,448
48,814 $
222
112,771
112,993
$
$
- $
16,334
16,334 $
-
28,979
28,979
65
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
At December 31, 2013 and 2012, 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 Exceeds the Fair Value
of Plan Assets
2013
2012
Projected benefit obligation
Fair value of plan assets
$
281,161
232,347
$
303,077
190,084
Accumulated Benefit Obligation Exceeds the Fair
Value of Plan Assets
2013
2012
Accumulated benefit obligation
Fair value of plan assets
$
246,843
232,347
$
267,400
190,084
66
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,:
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of prior service cost
Amortization of actuarial loss
Amortization of regulatory asset
Settlement loss
Capitalized costs
Pension Benefits
Other Post-retirement Benefits
2013
2012
2011
2013
2012
2011
$
5,313 $
4,920 $
4,127
$
1,525 $
1,309
$
1,092
12,660
12,728
12,052
(14,770)
(13,588)
(11,731)
-
228
8,169
-
-
-
277
6,568
-
304
-
253
3,578
-
-
2,579
(2,268)
-
(295)
1,479
-
-
2,482
(1,950)
-
(299)
1,024
69
90
(4,231)
(3,696)
(3,499)
(745)
(671)
2,414
(1,689)
104
(268)
783
137
-
(668)
Net periodic benefit cost
$
7,369 $
7,513 $
4,780
$
2,275 $
2,054
$
1,905
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, 2013 and
2012. 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
2013
2012
Other Post-retirement Benefits
2013
2012
Net actuarial loss
Prior service cost (credit)
Total recognized in regulatory assets
$
$
46,843 $
1,734
48,577 $
106,980
1,297
108,277
$
$
7,280 $
(682)
6,598 $
21,315
(977)
20,338
The estimated net actuarial loss, prior service cost, and transition asset for the Company’s pension plans that
will be amortized in 2014 from the regulatory assets into net periodic benefit cost are $2,001, $277, 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 2014 from regulatory assets into net periodic
benefit cost are $329, $295, 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
differences will impact the amount of pension and other post-retirement benefit expense that the Company
recognizes.
67
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
The significant assumptions related to the Company’s benefit obligations are as follows:
Pension Benefits
2012
2013
Other Post-
retirement
Benefits
2013
2012
Weighted Average Assumptions Used to Determine Benefit Obligations as of
December 31,
Discount rate
Rate of compensation increase
5.12%
4.17%
4.0-4.5% 4.0-4.5%
5.12% 4.17%
4.0% 4.0%
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
n/a
n/a
n/a
n/a
n/a
n/a
7.5% 8.0%
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
2012
2011
2013
Other Post-retirement Benefits
2011
2012
2013
Weighted Average Assumptions Used to
Determine Net Periodic Benefit Costs for Years
Ended December 31,
Discount rate
Expected return on plan assets
Rate of compensation increase
Assumed Health Care Cost Trend Rates Used
to Determine Net Periodic Benefit Costs for
Years Ended 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
4.17%
7.50%
5.75%
7.8%
4.0-4.5% 4.0-4.5% 4.0-4.5%
5.00%
7.75%
5.00%
4.17%
5.75%
5.00-7.50% 5.17-7.75% 5.17-7.75%
4.0%
4.0%
4.0%
n/a
n/a
n/a
8.0%
8.5%
9.0%
n/a
n/a
n/a
n/a
n/a
n/a
5.0%
2019
5.0%
2019
5.0%
2019
n/a – Assumption is not applicable to pension benefits.
68
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:
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
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
$
$
3,690
$
(3,490)
308
$
(285)
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
2013 pension expense by $898 and the pension liabilities by $10,270.
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 2013 pension expense by $492. For 2013, the Company used a 7.50%
expected return on assets assumption which will remain unchanged for 2014. 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:
Target Allocation
Percentage of Plan Assets at
December 31,
2013
2012
Asset Class:
Domestic equities
International equities
Fixed income
Alternative investments
Cash and cash equivalents
Total
65%
7%
24%
1%
3%
100%
55%
8%
22%
2%
13%
100%
25 to 75%
0 to 10%
25 to 50%
0 to 5%
0 to 20%
100%
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 pension plans’ assets at December 31, 2013 by asset class are as follows:
Asset Class:
Domestic equities (1)
Common stocks
Mutual funds
International equities (2)
Fixed income (3)
U.S. Treasury and government agency bonds
Corporate and foreign bonds
Mutual funds
Alternative investments (4)
Real estate
Commodity funds
Cash and cash equivalents (5)
Total pension assets
Total
Level 1
Level 2
Level 3
$ 149,456
2,215
16,256
24,750
6,459
24,640
1,950
1,291
5,330
$ 232,347
$ 149,456 $
2,215
16,256
-
-
24,640
1,950
1,291
-
- $
-
-
24,750
6,459
-
-
-
5,330
$ 195,808 $ 36,539 $
-
-
-
-
-
-
-
-
-
-
The fair value of the Company’s pension plans’ assets at December 31, 2012 by asset class are as follows:
Asset Class:
Domestic equities (1)
Common stocks
International equities (2)
Fixed income (3)
Total
Level 1
Level 2
Level 3
$ 105,381
14,531
$ 105,381 $
14,531
- $
-
U.S. Treasury and government agency bonds
Corporate and foreign bonds
Mutual funds
12,156
5,975
23,226
-
-
23,226
12,156
5,975
-
Alternative investments (4)
Real estate
Commodity funds
Cash and cash equivalents (5)
Total pension assets
2,890
1,700
24,225
$ 190,084
2,890
1,700
-
-
-
24,225
$ 147,728 $ 42,356 $
-
-
-
-
-
-
-
-
-
(1) 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.
(2) Investments in international equities are valued using unadjusted quoted prices obtained from active
markets.
(3) 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.
(4) Investments in real estate are comprised of investments in real estate funds and real estate investment
trusts and are valued using unadjusted quoted prices obtained from active markets. Investments in
commodity funds are valued using unadjusted quoted prices obtained from active markets.
70
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
(5) 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 $14,983 or 6.5% and $12,596
or 6.6% of total pension plans’ assets as of December 31, 2013 and 2012, respectively.
The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset
class are as follows:
Percentage of Plan Assets at
December 31,
Asset Class:
Domestic equities
International equities
Fixed income
Alternative investments
Cash and cash equivalents
Total
Target Allocation
2013
2012
25 to 75%
0 to 10%
25 to 50%
0 to 5%
0 to 20%
100%
58%
5%
24%
1%
12%
100%
40%
6%
26%
1%
27%
100%
The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2013 by asset
class are as follows:
Asset Class:
Domestic equities (1)
Common stocks
Mutual funds
International equities (2)
Fixed income (3)
U.S. Treasury and government agency bonds
Corporate and foreign bonds
Mutual funds
Alternative investments (4)
Cash and cash equivalents (5)
Total other post-retirement assets
Total
Level 1
Level 2
Level 3
$
$
12,811
10,977
2,061
12,811 $
10,977
2,061
- $
-
-
4,679
3,933
1,393
162
4,824
40,840
$
-
-
1,393
162
-
4,679
3,933
-
-
4,824
$
27,404 $ 13,436 $
-
-
-
-
-
-
-
-
-
71
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, 2012 by asset
class are as follows:
Asset Class:
Domestic equities (1)
Common stocks
Mutual funds
International equities (2)
Fixed income (3)
U.S. Treasury and government agency bonds
Corporate and foreign bonds
Mutual funds
Alternative investments (4)
Cash and cash equivalents (5)
Total other post-retirement assets
Total
Level 1
Level 2
Level 3
$
$
8,219
5,378
1,895
8,219 $
5,378
1,895
- $
-
-
4,751
2,735
1,398
143
9,535
34,054
$
-
-
1,398
143
-
4,751
2,735
-
-
9,535
$
17,033 $ 17,021 $
-
-
-
-
-
-
-
-
-
(1) 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.
(2) Investments in international equities are valued using unadjusted quoted prices obtained from active
markets.
(3) 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.
(4) Investments in alternative investments are comprised of investments in real estate funds and real estate
investment trusts and are valued using unadjusted quoted prices obtained from active markets.
(5) 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 2014 our pension contribution is expected to be approximately $17,875. The Company’s
funding of its PBOP cost during 2014 is expected to approximate $2,763.
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 specific 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 $2,790, $2,741,
and $2,496, for the years ended December 31, 2013, 2012, and 2011, respectively.
Note 16 – Water and Wastewater Rates
In August 2013, the Company’s operating subsidiary in North Carolina filed an application with the North
Carolina Utilities Commission designed to increase water and wastewater rates by $8,611, or 19.2%, on an
annual basis. The amount of the final rate aware that might be granted by the North Carolina Utilities
Commission can vary significantly from the amount requested. The Company anticipates a final order to be
issued by May 2014.
72
AQUA AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)
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 qualifying income tax benefits if the Company changes its tax accounting method to
permit the expensing of qualifying utility asset improvement costs that were previously being capitalized and
depreciated for tax purposes. 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 the Company’s Federal
and state income tax expense as it was flowed-through to net income in the fourth quarter of 2012. In
addition, the Company recognized a tax deduction on its 2012 Federal tax return of $380,000 for qualifying
capital expenditures made prior to 2012, and, based on the settlement agreement, in 2013, the Company
began to amortize 1/10th of the catch-up adjustment. In accordance with the settlement agreement, the
amortization is expected to reduce income tax expense during periods when qualifying parameters are met.
During 2013, the Company amortized its catch-up adjustment and recognized $15,766 of deferred income tax
benefits, which reduced income tax expense and increased the Company’s net income. 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 did not file a water base rate case or a DSIC 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 was subject to refund based on the
outcome of the rate case. The rate case concluded with the issuance of an order on June 3, 2013, and no
refunds of revenue previously billed and collected were required.
The Company’s operating subsidiaries, excluding the 2012 Pennsylvania water award discussed above, were
allowed annual rate increases of $9,431 in 2013, $17,923 in 2012, and $6,311 in 2011, represented by six, nine,
and twelve rate decisions, respectively. Revenues from these increases realized in the year of grant were
approximately $8,169, $13,754, and $3,312 in 2013, 2012, and 2011, 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, New Jersey, and Indiana allow for the use of
infrastructure rehabilitation surcharges, and in 2013, North Carolina legislators passed a law allowing for an
infrastructure rehabilitation surcharge for regulated water and wastewater utilities; as a result, the Company’s
operating subsidiary in North Carolina has filed a request to implement an infrastructure rehabilitation
surcharge for 2014, which is subject to approval by the North Carolina Utilities Commission. 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. In 2013, the infrastructure rehabilitation surcharge was suspended for Aqua Pennsylvania’s water
customers as a result of the implementation of the repair tax accounting change. Infrastructure rehabilitation
surcharges provided revenues in 2013, 2012, and 2011 of $3,205, $15,911, and $15,937, respectively.
73
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 ten operating segments and one reportable segment. The Regulated segment, the
Company’s single reportable segment, is comprised of eight 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 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 water and wastewater services
through operating and maintenance contracts with municipal authorities and other parties in close proximity
to our utility companies’ service territories as well as offers, through a third party, water and sewer line repair
service and protection solutions to households, liquid waste hauling and disposal, backflow prevention,
construction, and other non-regulated water and wastewater services, and non-utility raw water supply
services for firms, with which we enter into a water supply contract, in the natural gas drilling industry. In
addition to these segments, other is comprised of other business activities not included in the reportable
segment, including corporate costs that have not been allocated to the Regulated segment and intersegment
eliminations. Corporate costs include general and administrative expenses, and interest expense.
The following table presents information about the Company’s reportable segment:
2013
Other and
2012
Other and
Regulated
Eliminations
Consolidated
Regulated
Eliminations
Consolidated
Operating revenues
$ 751,277
$
17,366
$
768,643
$ 740,030
$
17,730
$
757,760
Operations and maintenance expense
Depreciation
Operating income
Interest expense, net of AFUDC
Income tax (benefit)
Income (loss) from continuing operations
Capital expenditures
Total assets
Goodwill
272,758
119,436
302,961
69,103
25,578
208,481
307,295
12,582
(178)
2,281
5,939
(2,888)
(3,488)
876
285,340
119,258
305,242
75,042
22,690
204,993
308,171
259,847
113,139
316,602
67,433
66,821
182,769
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
4,897,752
154,065
5,051,817
4,566,327
292,190
4,858,517
24,102
4,121
28,223
24,031
4,121
28,152
2011
Other and
Regulated
Eliminations
Consolidated
Operating revenues
$ 674,927
$
12,364
$
687,291
Operations and maintenance expense
Depreciation
Operating income (loss)
Interest expense, net of AFUDC
Income tax (benefit)
Income (loss) from continuing operations
Capital expenditures
Total assets
Goodwill
243,137
104,681
282,587
64,990
72,336
145,493
324,433
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
4,183,758
164,662
4,348,420
22,823
4,121
26,944
74
Selected Quarterly Financial Data (Unaudited)
Aqua America, Inc. and Subsidiaries
(In thousands of dollars, except per share amounts)
2013
Operating revenues
Operations and maintenance expense
Operating income
Income from continuing operations
Income 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 from discontinued operations per common share
Diluted income 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
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 from discontinued operations per common share
Diluted income 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
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
$
180,035 $
195,655 $
204,345 $
188,608 $
768,643
68,311
67,561
41,231
5,334
46,565
0.24
0.23
0.03
0.03
0.27
0.26
0.140
0.140
25.17
20.61
70,858
80,665
53,548
38
72,065
87,380
63,484
133
53,586
63,617
0.30
0.30
0.00
0.00
0.30
0.30
0.140
0.292
26.62
23.52
0.36
0.36
0.00
0.00
0.36
0.36
0.152
-
28.12
24.01
74,106
69,636
46,730
10,802
57,532
0.26
0.26
0.06
0.06
0.33
0.32
0.152
0.152
25.78
22.69
285,340
305,242
204,993
16,307
221,300
1.16
1.16
0.09
0.09
1.26
1.25
0.584
0.584
28.12
20.61
$
164,024 $
191,690 $
214,565 $
187,481 $
757,760
64,825
61,839
26,889
11,015
37,904
0.16
0.15
0.06
0.06
0.22
0.22
0.132
0.132
18.20
16.85
63,571
87,032
41,780
(335)
41,445
0.24
0.24
0.00
0.00
0.24
0.24
0.132
0.132
20.14
17.22
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
0.29
0.29
0.00
0.00
0.29
0.29
0.132
0.272
21.54
19.25
0.37
0.37
0.01
0.01
0.38
0.38
0.140
-
20.75
19.32
1.06
1.05
0.07
0.07
1.13
1.12
0.536
0.536
21.54
16.85
All per share data presented above has been adjusted for the 2013 5-for-4 common stock split effected in the form of a 25%
stock distribution.
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 September 2013 of $0.152 was declared in May 2013, and the cash dividend paid in December 2012
of $0.140 was declared in August 2012.
75
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 (1)
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:
2013
2012
2011
2010
2009
$
$
$
$
1.16 $
1.16
0.09
0.09
1.26
1.25
0.58
14.4%
8.68 $
23.59
1.06 $
1.05
0.07
0.07
1.13
1.12
0.54
14.2%
7.91 $
20.34
0.82 $
0.82
0.01
0.01
0.83
0.83
0.50
11.4%
7.21 $
17.64
0.68 $
0.68
0.04
0.04
0.72
0.72
0.47
10.6%
6.82 $
17.98
0.58
0.58
0.03
0.03
0.61
0.61
0.44
9.4%
6.50
14.01
768,643 $
124,793
77,316
227,683
22,690
204,993
16,307
221,300
757,760 $
116,996
77,757
250,968
66,881
184,087
12,476
196,563
687,291 $
108,300
77,804
210,794
69,111
141,683
1,386
143,069
660,186 $
111,716
73,393
191,319
74,940
116,379
7,596
123,975
609,897
107,118
66,345
162,066
63,626
98,440
5,913
104,353
5,051,817 $
4,167,293
1,534,835
1,554,871
1,591,611
4,858,517 $
3,936,163
1,385,704
1,588,992
1,669,375
4,348,420 $
3,530,942
1,251,313
1,475,886
1,583,657
4,072,466 $
3,276,517
1,174,254
1,519,457
1,609,125
3,749,862
3,032,916
1,108,904
1,404,930
1,432,361
Operating cash flows from continuing operations
Capital additions
$
366,720 $
308,171
377,485 $
347,985
352,041 $
325,808
244,717 $
308,134
244,318
266,190
Net cash expended for acquisitions of utility systems and
other
Dividends on common stock
Number of utility customers served (2)
Number of shareholders of common stock
Common shares outstanding (000)
Employees (full-time) (2)
14,997
102,889
941,008
25,833
176,751
1,553
121,248
93,423
968,357
26,216
175,209
1,619
8,515
87,133
966,136
26,744
173,519
1,615
8,625
80,907
962,970
27,274
172,219
1,632
3,373
74,729
953,437
27,984
170,607
1,632
All per share data presented above has been adjusted for the 2013 5-for-4 common stock split effected in the form of a 25%
stock distribution.
(1) Net of allowance for funds used during construction and interest income.
(2) Includes continuing and discontinued operations.
76
Stock Price Performance
The graph below matches the cumulative 5-Year total return to shareholders of Aqua America, Inc.’s common stock with
the cumulative total returns of the S&P 500 Index and the S&P MidCap 400 Utilities Index, a customized peer group of
seventeen companies that includes: Alliant Energy Corp., Aqua America Inc., Atmos Energy Corp., Black Hills Corp., Cleco
Corp., Great Plains Energy Inc., Hawaiian Electric Industries Inc., Idacorp Inc., MDU Resources Group Inc., National Fuel
Gas Company, OGE Energy Corp., PNM Resources Inc., Questar Corp., UGI Corp., Vectren Corp., Westar Energy Inc. and
WGL Holdings Inc. The graph assumes that the value of the investment in our common stock, in each index, and in the
peer group (including reinvestment of dividends) was $100 on 12/31/2008 and tracks it through 12/31/2013.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN*
Aqua America, Inc.
S&P 500 Index
Years as of December 31,
2008
2009
2010
2011
2012
2013
100.00
87.77
116.28
117.29
139.10
165.20
100.00
126.46
145.51
148.59
172.37
228.19
S&P MidCap 400 Utilities Index
100.00
118.01
141.79
162.03
168.86
213.17
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
77
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 cor-
porate governance and are in compliance with the cor-
porate governance rules of the Securities and Exchange
Commission (SEC) and the New York Stock Exchange.
Copies of our key corporate 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 7, 2014
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 company’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.
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 instruc-
tions in the notice for requesting printed proxy materials.
78
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 materials and wish to receive a separate
copy for each shareholder in your household for the
2014 annual meeting, you may write or call us to request
a separate copy of this material at no cost to you at
Attn: Investor Relations, Aqua America, Inc., 762 W.
Lancaster Avenue, Bryn Mawr, PA, 19010 or 610.645.1196.
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 69 consecutive years. The normal Common Stock dividend dates for 2014 and the
first six months of 2015 are:
Declaration Date
February 3, 2014
May 1, 2014
August 1, 2014
Ex-Dividend Date
February 13, 2014
May 14, 2014
August 13, 2014
Record Date
February 18, 2014
May 16, 2014
August 15, 2014
November 3, 2014
November 12, 2014
November 14, 2014
February 2, 2015
February 11, 2015
February 13, 2015
May 1, 2015
May 13, 2015
May 15, 2015
Payment Date
March 1, 2014
June 1, 2014
September 1, 2014
December 1, 2014
March 1, 2015
June 1, 2015
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.
the lost or missing check. All inquiries concerning lost or
missing dividend checks should be made to the company’s
transfer agent, Computershare, at 800.205.8314. Share-
holders should call or write Computershare to report a lost
certificate. Appropriate documentation will be prepared
and sent to the shareholder with instructions.
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
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 cer-
tificates and written instructions should be forwarded to:
Computershare Trust Company, N.A., P.O. Box 43078,
Providence, RI 02940-3078.
79
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Aqua America 2013 Annual Report
Aqua is one of the largest u.S.-based, publicly traded water and wastewater utilities, serving
nearly three million people in Pennsylvania, ohio, North Carolina, Texas, Illinois, New Jersey,
Indiana and virginia. Aqua America, Inc. is listed on the New York Stock Exchange under the
ticker symbol WTR.
The Groundwork for a Better Tomorrow.
At Aqua, we’re committed to renewing and improving our water and wastewater infrastructure
through thoughtful and continuous capital investment. This commitment not only ensures
reliable service and quality water for our current and future customers, but it demonstrates
a more fiscally efficient approach to ensuring the sustainability of our business, the industry
and the environment. As a steward of Earth’s most recycled resource, Aqua takes equal care
in preparing fresh water for drinking as it does treating wastewater for its return to Earth. For
nearly 130 years, we’ve successfully employed engineering, technology and sophisticated
business principles to grow Aqua into one of the nation’s most efficient utilities.
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Principles
Aqua fosters a culture in which
employees hold themselves accountable
for providing reliable service and a
quality product to customers.
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Corporate Information
Board of Directors
Nicholas DeBenedictis
Chairman, President and
Chief Executive Officer
Aqua America, Inc.
Director since 1992
Michael L. Browne
President and Chief Operating
Officer
Harleysville Insurance
Director since 2013
Mary C. Carroll
Non-profit Advisor and Civic
Volunteer
Director since 1981
Richard H. Glanton
Chairman
Philadelphia Television Network
Director since 1995
Lon R. Greenberg
Chairman
UGI Corporation
Director since 2005
William P. Hankowsky
Chairman, President and
Chief Executive Officer
Liberty Property Trust
Director since 2004
Wendell F. Holland, Esq.
Partner
CFSD Group, LLC
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
Officers
Nicholas DeBenedictis
Chairman, President and
Chief Executive Officer
Christopher H. Franklin
Executive Vice President
President and Chief Operating
Officer, 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
Controller and Chief Accounting
Officer
David P. Smeltzer
Executive Vice President
Chief Financial Officer
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Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, Pennsylvania 19010
877.987.2782
AquaAmerica.com
NYSE: WTR
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The Groundwork
for a Better Tomorrow.
2013 Annual Report