documen d d 7 folder · 6016 maint. labor • 6206 maint. materials & supplies 6316 maint....

1. REPORT DATE: 00/00/00 2. BUREAU: OTS 3 . SECTION(S) : 5. APPROVED BY:

DIRECTOR: SUPERVISOR:

6. PERSON IN CHARGE: I. DOCKET NO: R-00072711

CAPTION SHEET * CASE MANAGEMENT SYSTEM

4. PUBLIC MEETING DATE: 00/00/00

7. DATE FILED: 10/19/07 9. EFFECTIVE DATE: 00/00/00

PARTY/COMPLAINANT: PUC

RESPONDENT/APPLICANT: AQUA PENNSYLVANIA, INC.

COMP/APP COUNTY: UTILITY CODE: 210104

ALLEGATION OR SUBJECT

AQUA PENNSYLVANIA (CONFIDENTIAL MATERIALS)

DOCUMEN FOLDER D OCT 2 3 2007 D

1. REPORT DATE: 00/00/0 2. BUREAU: OSA 3. SECTION(S): 5. APPROVED BY:

DIRECTOR: SUPERVISOR:

6. PERSON IN CHARGE: !. DOCKET NO; R-00072711

CAPTION SHEET E MANAGEMENT SYSTEM

PUBLIC MEETING DATE: 00/00/00

7. DATE FILED: 10/19/07 9. EFFECTIVE DATE: 00/00/00

PARTY/COMPLAINANT: PUC

RESPONDENT/APPLICANT: AQUA PENNSYLVANIA, INC.

COMP/APP COUNTY: UTILITY CODE: 210104

ALLEGATION OR SUBJECT

AQUA PENNSYLVANIA (CONFIDENTIAL MATERIALS)

11/21/07 - AQUA PENNSYLVANIA, INC. HAS FILED SUPPLEMENT NO. 82 TO WATER PA PUC NO. 1 TO BECOME EFFECTIVE JANUARY 21, 2008 WHICH PROPOSES A GENERAL RATE. INCREASE OF $41,700,000 OR APPROXIMATELY 13.6 OVER THE LEVEL OF REVENUES ANTICIPATED FOR THE FUTURE TEST YEAR ENDING JUNE 30, 2008".. TOTAL NUMBER OF • CUSTOMERS : RESIDENTIAL-371, 078 ; COMMERCIAL-2 0 , 14 0 ; INDUSTRIAL - 878 ; P.UBLIC-6,770; METERED FIRE-4,357; SALES TO OTHER UTILITIES-12. AREA SERVED ;IN PORTIONS OF ADAMS, BERKS, BRADFORD, BUCKS, CARBON, CHESTER, .COLUMBIA, CRAWFORD CUMBERLAND, DELAWARE, FOREST, JUNIATA, LACKAWANNA, LAWRENCE,. LEHIGH, LUZERNE, MERCER, MONTGOMERY, MONROE, NORTHHAMPTON, NORTHUMBERLAND, PIKE, SCHUYLKILL, SUSQUEHANNA, SNYDER, WAYNE AND WYOMING COUNTIES.

DOCUMEN FOLDER

9 AOUA

Pennsylvania. Aqua Pennsylvania, Inc. 762 W. Lancaster Avenue Bryn Mawr, PA 19010

D n

www.aquapennsylvania.com

November 21, 2007

NOV 2 1 2007

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VIA HAND DELIVERY

James J. McNulty, Secretary Pennsyivania Public Utility Commission Two North Keystone Commonwealth Keystone Building 400 North Street Harrisburg, PA 17120

RE: Request of Aqua Pennsylvania, Inc. For A General Water Rate Increase Docket No. R-000727n

Dear Secretary McNulty:

In compliance with the Commission's general rate case filing requirements, as set forth al 52 Pa. Code §53.53, we are delivering herewith for filing eight copies of Aqua Pennsylvania, Inc.'s Supplement No. 82 to Tariff Water-Pa. P.U.C. No. 1, to become effective January 21, 2008 and eight copies of each of the documents listed below. Please note that one copy of Exhibit 5-A Part I is filed in the box marked "original" and that a CD containing Exhibit 5-A Part I is filed with all other boxes.

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Exhibit 1-A

Exhibit 2-A

Exhibit 3-A

Statement of Specific Reasons for Proposed Increase in Rales

Proposed Tariff

Revenue and Expense Data and Rate Base Claims - June 2007 & June 2008 Test Years

Payroll Calculations, Supporting Data

Original Cost Data for New Acquisitions Closed Since June 30, 2006

Exhibit 4-A

Exhibit 5-A, Part I

Exhibit 5-A, Part II

Fair Rale of Return

Bill Frequency/Water Consumption Analysis for the Twelve Months Ended June 30, 2007

Application of Rates to Consumption Analysis for the Twelve Months Ended June 30, 2007

11/2796738.1 An Aqua America Company

#

Page Two

Exhibit 6-A, Part I

Exhibit 6-A, Part II

Exhibit 50-A

Exhibit 50-B

BS-I ToBS-13

DP-I To DP-6

OE-l To OE-28

OR-1 To OR-13

OD-1 To OD-6

QS-1 To QS-7

RB-1 To RB-16

RR-1 To RR-32

RS-1 To RS-2

SI-1 To SI-4

TX-1 To TX-18

AP Statement No. 1

AP Statement No. 2

AP Statement No. 3

AP Statement No. 4

AP Statement No. 5

AP Statement No. 6

AP Statement No. 7

AP Statement No, 8

AP Statement No. 9

Depreciation Study - Calculated Annual Depreciation Accruals Related to Utility Plant at June 30, 2007 Depreciation Study - Calculated Annual Depreciation Accruals Related to Utility Plant at June 30, 2008

Operating Revenue from Sales of Water for the Twelve Months Ended June 30, 2008

Cost of Service Allocation Study as of June 30, 2008

Minimum Filing Requirements-Balance Sheet

Minimum Filing Requirements-Depreciation

Minimum Filing Requirements-Operating Expense

Minimum Filing Requirements-Operating Revenue

Minimum Filing Requirements-Other Data

Minimum Filing Requirements-Quality of Service

Minimum Filing Requirements-Rate Base

Minimum Filing Requirements-Rate of Return

Minimum Filing Requirements-Rate Structure

Minimum Filing Requirements-Statement of Income

Minimum Filing Requirements-Taxes

Direct Testimony of Robert M. Griffin

Direct Testimony of David P. Smeltzer rn !s>

Direct Testimony of Richard L. Drager

Direct Testimony of Paul R. Moul

Direct Testimony of Paul Herbert

Direct Testimony of John Spanos

Direct Testimony of William J. Jerdon

Direct Testimony of William C. Packer Jr.

Direct Testimony of Steve E. Tagert

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I-PH/2796738.1

Page Three

The Company is being represented in this filing by:

Thomas P. Gadsden, Esquire Morgan, Lewis and Bockius LLP 1701 Market Street Philadelphia, PA 19103-2921 (215) 963.5234 [email protected]

I hereby certify that a printed Notice of Proposed Rate Changes was mailed on or before November 21, 2007 to all customers of the Company affected thereby. True and correct copies of said notices are attached hereto.

Sincerely,

Robert M. Griffin Senior Manager of Regulatory Accounting

RMG Enclosures

cc: Office of Consumer Advocate, w/enclosures Office of Small Business Advocate, w/enclosures PA. P.U.C. Office of Public Information, w/o enclosures PA. P.U.C. Bureau of Fixed Utility Services, w/enclosures PA. P.U.C. Office ofTrial Staff, w/enclosures Mr. Thomas P. Gadsden, Esquire, w/enclosures

l-PH/2 79673 8.1

AQUA PENNSYLVANIA, INC. 2007 RATE C A S E

FILING REQUIREMENTS

A. Statement of Income

SI1. Provide comparative operating statements for the test year and the immediately preceding 12 months showing increases and decreases between the two periods. These statements should supply detailed explanation of the causes of the major (greater than 15%) variances between the historic test year and preceding year by detailed account number. Limit the explanation to differences of $10,000 or greater.

A. Please see attached

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AQUA PENNSYLVANIA, 'INC. — REVENUE AND EXPENSE BY DETAILED ACCOUNTS

JUNE 30, 2007 & 2006 Current Year Prior Year

12 Months 12 Months NUMBER ' ACCOUNT IIILE 6/30/2007 6/30/2006 Variance %

WATER OPERATING REVENUE-SALES OF WATER:

METERED SALES TO GENERAL CUSTOMERS -1611 RESIDENTIAL $ 188,855,537 $ 167,051,393 $ 21,804,144 13.1% 4612 COMMERCIAL 62,778,994 56,543,995 6,234,999 11.0% 4613 INDUSTRIAL 13,566,861 13,157,905 408,956 3.1% 4614 PUBLIC AUTHORnY 5,823,715 5,166,278 657,437 12.7% 4620 PRIVATE FIRE PROTECTION 11,337,583 7,300,408 4,037,175 55.3% 4630 ABATEMENT (97,716) (61,841) (35,875) 58.0% 4660 SALES TO OTHER UTILITIES 2,623,067 2,907,059 (283,992) -9.8%

TOTAL 284,888,041 252,065,297 32,822,844 13.0%

UNMETERED SALES TO GENERAL CUSTOMERS: 4607 AVAILABILITY CHARGES $ 64,427 32,109 32,318 100.7% 4621 PUBLIC FIRE PROTECTION 5,061,874 4,970,364 91,510 1.8% 4622 PRIVATE FIRE PROTECTION 884,626 871,491 13,135 1.5%

TOTAL SALES OF WATER 290,898,968 257,939,161 32,959,807 12.8%

OTHER WATER REVENUES: , 4700 FORFtl 1 tD DISCOUNTS & MISC. $ 64,558 $ 153,909 (89,351) • -58.1% 4710 HISC SERVICE REVENUES 1,484,957 1,000,183 484,774 48.5% 4712 STATE TAX SURCHARGE 1,168,261 (51) 1,168,312

TOTAL OTHER WATER REVENUES $2,717,776 $1,154,041 1,563,735 135.5% DSIC CHARGE 3,987,648 11,434,750 (7,447,102) -65.1%

TOTAL WATER OPERATING REVENUES $ 297,604,392 $ 270,527,952 % 27;076,440 10.0%

WATER OPERATING EXPENSES-SOURCE OF SUPPLY EXPENSES OPERATION:

6011 OPERATING LABOR $ 253,384 $ 164,589 88,795 53.9% 6201 OPERATION MATERIALS & SUPPUtS 103,499 125,381 (21,882) -17:5% 6311 OPERATION CONTRACTOR SERVICES - ENG 2,332 (2,332) 100 ;0% 6361 OPERATION CONTRACTOR SERVICES - OTHER 35,464 28,415 7,049 24.8%

6411 OPERATION BUILDING RENTAL 385,128 33,079 352,049 100.0% 6421 OPERATION EQUIPMENT RENTAL - - - 100.0% 6501 OPERATION TRANSPORTATION. - - -6751 OPERATION MISCELLANEOUS 10,274 3,570 6,704 100.0%

TOTAL OPERATION 787,749 357,366 430,383 120.4% MAINTENANCE:

6012 MAINTENANCE LABOR 404,394 517,138 (112,744) -21.8% 6202 . MAINTENANCE MATERIALS & SUPPLIES 2,153 3,631 (1,478) -100.0% 6312 MAINT. CONTRACTOR SERVICES - ENG 8,700 18,991 (10,291) 100.0% 6362 MAINTENANCE CONTRACTOR SERVICES • OTHER 60,589 42,945 17,644 41.1% 6422 MAINT. EQUIPMENT RENTAL - - - 0.0% 6502 MAINTENANCE TRANSPORTATION 2,691 2,494 197 7.9% 6752 MAINTENANCE MISCELLANEOUS 3,576 3,036 540 17.8%

TOTAL MAINTENANCE 482,103 588,235 (106,132) -18.0%

6101 WATER PURCHASED FOR RESALE 9,949,163 9,312,464 636,699 6.8%

6151 POWER PURCHASED 10,840,602 10,464,407 376,195 3.6%

TOTAL SOURCE OF SUPPLY EXPENSES 22,059,617 20,722,472 1,337,145 6.5%

WATER TREATMENT EXPENSES OPERATION:

6013 OPERATING LABOR 6,054,830 5,811,684 243,146 4.2%

6183 CHEMICALS 3,471,661 3,613,741 (142,080) -3.9% 6203 OPERATION MATERIALS & SUPPUES 372,222 324,407 47,815 14.7% 6313 OPERATING CONTRACTOR SERVICES - ENG 459 1,339 (880) 100.0% 6353 OPERATING CONTRACTOR SERVICES - TESTING 72,911 82,971 (10,060) -12.1% 6363 OPERATING CONTRACTOR SERVICES - OTHER 517,806 732,457 (214,651) :29.3% 6423 OPERATING EQUIPMENT RENTAL 5,796 535 5,261 -100.0% 6503 OPERATING TRANSPORTATION - - -6753 OPERATING MISCELLANEOUS 611 4,924 (4,313) -87.6%

TOTAL OPERATION 10,496,296 10,572,058 (75,762) -0.7% MAINTENANCE:

6014 MAINT. LABOR 2,140,823 1,995,982 144,841 7.3% 6204 MAINT. MATERIALS & SUPPLIES 33,656 32,766 890 2.7% 6314 MAINT. CONTRACTOR SERVICES - ENG 7,632 9,336 (1,704) -18.3% 6364 MAINT. CONTRACTOR SERVICES • OTHER 349,322 409,041 (59,719) -14.6% 6424 MAINT. EQUIPMENT RENTAL - 31 (31) -100.0% 6504 MAINT. TRANSPORTATION - -6754 MAINTENANCE MISCELLANEOUS 2,276 213 2,063 100.0%

• AQUA PENNSYLVANIA, INC. REVENUE AND EXPENSE BY DETAILED ACCOUNTS

JUNE 30, 2007 & 2006

NUMBER ACCOUNT TTTLE TOTAL MAINTENANCE

TOTAL WATER TREATMENT EXPENSES

TRANSMISSION & DISTRIBUTION EXPENSES OPERATION:

6015 OPERATING LABOR 6205 OPERATION MATERIALS & SUPPLIES 6315 OPERATING CONTRACTOR SERVICES - ENG 6365 OPERATING CONTRACTOR SERVICES -.OTHER 6115 OPERATION BUILDING RENTAL 6125 OPERATING EQUIPMENT RENTAL 6505 • OPERATION TRANSPORTATION 6755 OPERATION MISCELUNEOUS

TOTAL OPERATION MAINTENANCE:

6016 MAINT. LABOR • 6206 MAINT. MATERIALS & SUPPLIES 6316 MAINT. CONTRACTOR SERVICES - ENG 6366 MAINT. CONTRACTOR SERVICES - OTHER 6426 MAINT. EQUIPMENT RENTAL 6506 MAINT. TRANSPORTATION 6756 MAINTENANCE MISCELLANEOUS

TOTAL MAINTENANCE

TOTAL TRANSMISSION & DISTRIBUTION EXPENSES

CUSTOMER'S ACCOUNTING & COLLECTING EXPENSE

CUSTOMER ACCOUNTING LABOR MATERIALS & SUPPLIES CONTRACTOR SERVICES - OTHER TRANSPORTATION BAD DEBT EXPENSE

CUSTOMER ACCOUNTING - MISCELLANEOUS

6017 6207 6367 6507 6707 6757

TOTAL CUSTOMER'S ACCOUNTING & COLLECTING EXPENSE

ADMINISTRATIVE & GENERAL EXPENSES

6018 A&G LABOR

6038 A8iG OFFICERS LABOR 6048 EMPLOYEE BENEFITS 6208 . A8iG MATERIALS & SUPPLIES 6318 A8iG CONTRACTOR SERVICES-ENGINEERING 6328 A&G CONTRACTOR SERVICES-ACCOUNTING 6338 A&G CONTRACTOR SERVICES-LEGAL 6348 A&G CONTRACTOR SERVICES-MGMT FEE 6358 A&G CONTRACTOR SERVICES_TESnNG 6368 A&G CONTRACTOR SERVICES-OTHER 6418 A&G RENT - BUILDING RENTAL 6428 A&G RENT - EQUIPMENT 6508 A&G TRANSPORTATION 6568 VEHICLE INSURANCE 6578 GENERAL LIABILITY INSURANCE 6588 WORKERS COMPENSATION'INSURANCE 6598 OTHER INSURANCE 6608 ADVERTISING 6668 OTHER EXPENSE AMORTIZATION 6668 CWC MERGER AMORTIZATION 6668 RATE CASE AMORTIZATION 6758 . A&G MISCELLANEOUS

UnLITY PLANT ACQ ADJ AMORT. TOTAL ADMINISTRATIVE & GENERAL EXPENSES

TOTAL OPERATING EXPENSES TOTAL MAINTENANCE EXPENSES TOTAL OPERATING EXPENSES

Current Year Prior Year 12 Months 12 Months 6/30/2007 6/30/2006 Variance %

2,533,709 2,447,369 86,340 3.5%

13,030,005 13,019,427 10,578 0.1%

4,151,462 3,879,969 271,493 7.0% 1,079,388 905,850 173,538 19.2%

9,155 6,090 3,065 50.3% 451,861 317,454 134,407 42.3%

14,107 11,029 3,078 99:0% 2,605 3,482 (877) -25.2%

992,177 1,492,945 (500,768) -33.5% 5,982 1,845 4,137 224.2%

6,706,737 6,618,664 88,073 1.3%

3,595,982 3,091,549 504,433 16.3% 474,612 527,873 (53,261) -10.1%

- 4,671 (4,671) -100.0% 2,192,433 1,928,757 263,676 13.7%

- 286 (286) -100.0% 1 (9,739) 9,740 -100.0%

6,282 6,928 (646) -9.3% 6,269,310 5,550,325 718,985 13.0%

12,976,047 12,168,989 807,058 6.6%

988,030 2,829,252 (1,841,222) -65.1% 638,361 518,508 119,853 23.1%

6,425,885 2,901,690 3,524,195 121.5% 274 (1,756) 2,030 -115.6%

1,457,689 1,122,750 334,939 29.8% 667 1,651 (984) -59.6%

9,510,906 7,372,095 2,138,811 29.0%

3,292,340 3,202,092 90,248 2.8%

3,226,889 2,862,451 364,438 12.7% 11,419,943 11,229,918 190,025 1.7%

197,614 181,411 16,203 8.9% 98,059 98,354 (295) -0.3%

907,215 909,749 (2,534) -0.3% 676,623 426,498 250,125 58.6%

9,855,208 9,069,557 785,651 8.7% 11,230 600 10,630 100.0%

2,707,884 2,672,006 35,878 1.3% 52,310 59,404 (7,064) -11.9% 82,268 75,320 6,948 9.2% (1,768) (47) (1,721) -100.0%

259,290 237,420 21,870 9.2% 1,921,282 1,648,473 275,809 16.7%

774,730 772,314 2,416 0.3% 1,082,238 1,114,320 (32,082) -2.9%

22,277 18,324 3,953 21.6% 328,862 298,946 29,916 10.0% 529,521 529,524 0.0% 414,151 375,250 29,916 10.0%

2,313,045 2,572,556 (259,511) -10.1% (422,460) (357,204) (65,256) 0.0%

39,751,784 37,997,236 1,745,563 4.6%

88,043,237 82,694,290 5,339,962 6.5% 9,285,122 8,585,929 699,193 8.1%

$ 97,328,359 $ 91,280,219 $ 6,039,155 6.6%

97,328,359 91,280,219

NUMBER ACCOUNT TTTLE

AQUA PENNSYLVANIA, INC. REVENUE AND EXPENSE BY DETAILED ACCOUNTS

JUNE 30, 2007 & 2006 Current Year Prior Year

12 Months 12 Months 6/30/2007 6/30/2006 Variance

CONSOLIDATED ACCOUNTS Labor $ 24,108,134 5 24,354,706 S (246,572) -1.0%

Materials & Supplies $ 2,901,505 3 i 2,619,827 $ 281,678 10.8%

Contractor 24,388,436 19,663,253 $ 4,725,183 24.0%

Contractor-Other 12,741,244 9,032,765 s 3,708,479 41.1%

Rental 542,244 183,166 $ 359,078 196.0%

Transportation $ 993,375 3 ; 1,483,897 $ (490,522) -33.1%

Insurance 4,040,540 3,772,527 $ 268,013 7 .1%

Aqua Pennsylvania, Inc. Minimum Filing Requirement Sll

Statement of Income Question 1

Contractor Services, in total, increased by $8,433,662 or 29.3% due to the reclassification of customer bill production from Labor, Materials and Supplies and other accounts to this accounl. The former AP customer service and customer billing employees now work for a non-regulated affiliate. Their time, as well as postage and contractor services, is now allocated across Aqua America. The portion billed to AP is charged to. this account.

Rental increased $359,078 or 196.0% due to new copier leases.

Transportation decreased ($490,522) or (33.1%) primarily due to an AP accounting policy change made in 2006 to capitalize 44% of total transportation charges instead of the former policy to capitalize 35%.

M^ilebt expen^jiicreaiidby $ p f | ^ ! 4 i ^ ? : p ^ e ' t ^ j

jjenerai tiafiilityTnsufance increased by $275;809 orJ.g.7&>

Aqua Pennsylvania. Inc. Minimum Filing Requirement SI!

Statement of Income Question 1

Contractor Services, in total, increased by $8,433,662 or 29.3% due to the reclassification of customer bill production from Labor, Materials and Supplies and other accounts to this account. The former AP customer service and customer billing employees how work for a non-regulated affiliate. Their time, as well as postage and contractor services, is how allocated across Aqua America. The portion billed to AP is charged to this account.

Rental increased $359,078 or 196.0% due to new copier leases.

Transportation decreased ($490,522) or (33.1%) primarily due to an AP accounting policy change made in 2006 to capitalize 44% of total transportation charges instead of the former policy to capitalize 35%.

iMletftfexJ^^

General Liability;! nslirance mcreasedby $275,:809 ;or 16:7%

AQUA PENNSYLVANIA. INC. 2007 RATE CASE

FILING REQUIREMENTS


SI2. Prepare a Statement of Income for the various time frames of the rate proceeding including:

Col. 1 - Book recorded statement for the test year.

2 - Adjustments to book recorded income statement to annualize and normalize under present rates. •

3 - Income statement under present rates after adjustment in Col.

2.

4 - Adjustments to Col. 3 for revenue increase requested.

5 - Income statement under proposed rates.

A. Refer to Exhibit 1-A, page 2.

AQUA PENNSYLVANIA, INC. 2007 RATE CASE

FILING REQUIREMENTS


SIS. If a company has separate operating divisions, an income statement must be shown for each division, plus an income statement for company as a whole.

A. Refer to Exhibit OD1.


FILING REQUIREMENTS


SI4. Provide Operating Income claims under:

(a) Present rates

(b) Pro forma present rates (annualized & normalized)

(c) Proposed rates (annualized & normalized)

A. Operating Income claims are reflected on page of Exhibit 1-A.

315.


FILING REQUIREMENTS


Provide Rate of Return on Original Cost under:

(a) Present rates

(b) Pro forma present rates

(c) Proposed rates

A. Rates of Return on original cost rate base are reflected on page 80 of Exhibit 1-A.


FILING REQUIREMENTS

G. Rate of Return

RR1. Provide capitalization and capitalization ratios for the last five-year period and projected through the next two years. (With short-term debt and without short-term debt.) for the Company, Parent and consolidated system.

a. Provide year-end interest coverages before and after taxes for the last three years and at latest date, including Indenture and SEC Bases, for the Company, Parent and consolidated system.

b. Provide year-end preferred stock dividend coverages for the last three years and at latest date, including Charter and SEC bases.

A. Please see attached Schedule RR1(a) that shows the capitalization and capitalization ratios for the last five-year period (2002-2006) with short-term debt and without short-term debt for the Company, Parent and consolidated system. The forecast for the Company for 2007 and the six months ended June 30, 2008 is also attached. The next two year period, 2007 and 2008, is not available for the Parent and consolidated system at the present time.

a. Please see attached Schedule RR1(b) that provide year-end interest coverages before and after taxes for the last three years (2006-2004) and at latest date (9/30/07), including Indenture and SEC Bases, for the Company, Parent and consolidated system.

b. There is no preferred stock outstanding for the Company, Parent and consolidated system for the last three years.


CAPITALIZATION RATIOS

Schedule RRI (a)

Aciual Actual Actual Aciual Actual Forecast Forecast

Aqua Pennsylvania. Inc. Long-term debt (ind. current portion) Short-term debt

Preferred Equity Common Equity (ind. minority int.)

Exd short-term debt Long-term debt (ind. current portion) Preferred equity

Common Equity (ind. minority int.)

Aqua America, Inc. (Parent) Long-term debt (incl. current portion) Short-term debl

Preferred Equity Common Equity (ind. minority"int.)

Exci shoft-lerm debt Long-term debt (ind. current portion) Preferred equity

Common Equity (ind. minority Int.)

Aqua America. Inc. (Consolidated) Long-term debt (ind. current portion) Short-term debt

Preferred Equity Common Equity (incl. minority int.)

Exci short-term debt Long-term debt (ind. current portion) Preferred equity

Common Equity (incl. minority int.)

12/31/2002 S %

482,030 36,190

433.969

482,030

433.969

788 43,500 44,288

493.097

493.097

617,175 115,113 732,288

172 493,097

617,175 172

493,097

50.6% 3.8%

45.6% 952.189 100.0%

52.6%

47.4% 915,999 100.0%

0.1% 8.1% 8.2%

91.8% 537,385 100.0%

0.2%

99.8% 493.885 100,0%

50.4% 9.4%

59.8% 0.0%

40.2% 1.225,557 100.0%

55.6% 0.00

44.4%

12/31/2003 S %

12/31/2004 $ %

12/31/2005 S %

12/31/2006 12/31/2007 S %_

1.110,444 100.0%

6/30/2008 S %

454.526 45.7% 514,344 49.5% 550,514 • 47.7% 595,683 49.6% 640,324 49.2% 645,980 48.4% 52.068 5.2% 29,000 2.8% 75,000 6.5% 13,000 1.1% 12,390 1.0% 20.415 1.5%

5 5 2 ; m 3&2% SCP.W

488.426 49.1% 495,574 47.7% 527,875 45.8% 592.014 49.3% 648.465 49.8% 667,020 50.0% 995,020 100.0% 1,038,918 100.0% 1,153,389 100.0% 1,200.697 100.0% 1.301.179 100.0% 1.333,415 100.0%

454,526 48.2% 514,344 50.9% 550,514 51.0% 595.683 50.2% 640.324 49.7% 645,980 49.2%

488,426 51.8% 495,574 49.1% 527,875 49.0% 592.014 49.6% 648,465 50.3% 667,020 50.8% 942.952 100.0% 1.009,918 100.0% 1,078,389 100.0% 1,187.697 100.0% 1,288.789 100.0% 1.313,000 100.0%

135,960 16.8% 135,960 14.8% 165.960 16.4% 175,315 14.9% N/A N/A N/A N/A 12.000 1.5% 36,000 3.9% 35,000 3.5% 80,000 6.8% N/A N/A N/A N/A

147.960 18.3% 171,960, 18.7% 200,960 19.8% 255,315 21.7% N/A N/A N/A N/A

- - . N/A N/A N/A N/A 659.030 81.7% 748,468 81.3% 813,474 80.2% 923.444 78.3% N/A N/A N/A N/A 806.990 100.0% 920,428 100.0% 1,014,434 100.0% 1.178,759 100.0% N/A N/A N/A N/A

135.960 17.1% 135,960 ' 15.4% 165,960 16.9% 175,315 16,0% N/A N/A N/A N/A

. - - NIA N/A N/A N/A 659.030 82.9% 743,468 84.6% 813,474 83.1% 923,444 84.0% NIA N/A N/A N/A 794.990 100.0% 884,428 100.0% 979,434 100.0% 1,098.759 100.0% N/A N/A N/A N/A

736,052 49.3% 834,656 50.3% 903,083 48.7% 982.815 48.5% N/A N/A N/A N/A 96.459 6.5% 74,810 4.5% 138,505 7.5% 119;150 5,9% N/A N/A N/A N/A

832.511 55.8% 909,466 54.9% 1,041,588 56.1% ' 1.101,965 54,4% . N/A NIA N/A N/A

- 0.0% - 0.0% - 0.0% 0.0% N/A N/A N/A N/A 659,030 44.2% 748,468 45.1% 813,474 43.9% 923.444 45.6% N/A • NIA N/A N/A

1,491.541 100.0% 1,657,934 100.0% 1.655,062 100.0% 2,025,409 100.0% N/A N/A N/A N/A

736,052 52.8% 834,655 52.7% 903.083 52,6% 982.815 51.6% N/A N/A N/A N/A

- . . - - N/A N/A N/A N/A 659.030 47.2% 748.468 47.3% 813,474 47.4% 923.444 48.4% N/A N/A N/A N/A

1.395,082 100.0% 1.583,124 100.0% 1,716,557 100.0% 1,906,259 100.0% N/A N/A N/A N/A


INTEREST COVERAGES - INDENTURE & SEC BASIS

Schedule RR1(b)

9/30/2007 2006 2005 2004

Aaua Pennsvlvania. Inc. Interest Coverage - Indenture Basis - Before Tax Interest Coverage - SEC Basis - Before Tax

4.78 4.26

4.51 4.12

4.43 4.26

4.22 4.21

Interest Coverage - Indenture Basis - After Tax Interest Coverage - SEC Basis - After Tax

3.26 2.90

3.12 2.85

3.05 2.93

2.90 2.90

Aaua America, inc. (Parent! Interest Coverage - Indenture Basis - Before Tax Interest Coverage - SEC Basis - Before Tax

N/A 0.98

N/A 0.57

N/A 0.55

N/A 0.78

Interest Coverage - indenture Basis - After Tax Interest Coverage - SEC Basis - After Tax

N/A 1.00

N/A 0.76

N/A 0.82

N/A 0.91

Aaua America. Inc. (Consolidated) Interest Coverage - Indenture Basis - Before Tax Interest Coverage - SEC Basis - Before Tax

5.30 3.42

5.10 3.77

4.94 3.96

4.47 3.82

Interest Coverage - Indenture Basis - After Tax Interest Coverage - SEC Basis - After Tax

3.80 2.45

360 2.67

3.51 2.81

3.15 2.70


FILING REQUIREMENTS

G. Rate of Return

RR2. Provide latest Prospectus (Company and Parent).

A. There is no Prospectus for Company. Piease see attached for latest Prospectus for Parent.

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Filed Pursuant to Rule 424(b)(5) Registration No. 333-130400

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities To Be Registered Amount To Be Registered (2)

Maximum Offering Price Per Share

Maximum Aggregate

Offering Price (2) Amount of

Registration Fee (3) Common1 stock, par value $0.50 per share (1) 4,025,000 $22.65 • $91,166,250 $9,755

(1) Includes associated rights to purchase shares of our Series A Junior Participating Preferred Stock pursuant to that certain First Amended and Restated Rights Agreement between us and Equiserve Trust Company, N.A., dated as of February 20, 2004.

(2) Includes 525,000 shares of common stock that may be purchased by the underwriters upon the exercise of the underwriters' over-allotment option.

(3) - The filing fee for tiie securities offered hereby has.been satisfied, in part, by applying, pursuant to Rule 457(p) promulgated urider-the, : ..-Securities Act of 1933, the $1,466 unutilized registration fee previously paid by us in connection with the Registration Statement we filed-' on April 3,2003 (Registration No. 333-104290). - •

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PECTUS SUPPLEMENT ospectus dated December 16, 2005)

3,500,000 Shares

AQUA America.

Aqua America, Inc. Common Stock We: are offering 500,0.00 shares of our common stock. In addition, UBS AG, whom we refer to as the forward purchaser, or an affiliate.of the forward -: • purchasei'/is, gt oiir'r6que;st,'borroWm"g"an'd•deliyering to the underwrit'ere'for sale'ah aggregate of 3,000,000 shares of our.coniirion;stpck.in'comiection:W forward sale agreement between us and the forward purchaser.-If the forward purchaser (or an affiliate thereof);is unable to Borrow,.orunable;to borrow at a ' ' ;

cost not greater than a specified threshold, and deliver for sale on the anticipated closing date of the offering, all .or a portion of the rmmberbf shares df our common stock to which the forward sale agreement relates, we will sell the shares of common stock that the forward purchaser (or its affiliate) does not borrow and sell. We will not receive any proceeds from the sale of the shares by the forward purchaser or its affiliate. See "Underwriting— Forward Sale Agreement" for a description of the forward sale agreement.

Our common stock is listed on the New York Stock Exchange and the Philadelphia Stock Exchange under the symbol "WTR". The last sale.price of our common stock on the New York Stock Exchange on August 10, 2006 was $22.75 per share.

Investing ID our common stock involves risks. Before buying any shares, you should read the discussion of material risks of investing in our common stock in "Risk factors" on page S-5 ofthis prospectus supplement and in our Annual Report on Form 10-K for the year ended December 31, 2005, which update the "Risk factors" beginning on page 5 of the accompanying prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determinedjf pospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Per share Total Public offering price $ . .22.650 $ 79,275,000 Underwriting discounts and commissions^) $ 0.793 $• 2,775,500' Proceeds, before expenses, to usO - ..$•/ • 21.857 . $ 76,499,500

We will receive net proceeds, before expenses, of approximately $!0,928,500 upon closing of ihe sale of the common stock being offered by it's in this' . . offering. With respect to the common stock being offered by the forward purchaser (or an affiliate thereof) in this offering,, depending, on.the price of. our common stock'at the time of settlement of tlte forward'sale agreement and the relevant settlement method, we may receive proceeds from the sale of- • common stock upon settlement, which settlement must occur no later than August I, 2008 (such date subject to deferral in certaindimited circumstances). For purposes of calculating the proceeds to us with respect to the common stock being offered by the forward purchaser (or an affiliate thereof), we have assumed that the forward sale agreement is physically settled based upon the initial forward sale price of $21,857 on the effective date of the forward sale agreement, which wil! be August 10, 2006. The actual proceeds are subject to the final settlement of the forward sale agreement. See " Underwriting— Forward Sale Agreement "for a description of the forward sale agreement.

The forward purchaser has granted the underwriters an option to purchase up to an additional 525,000 shares of common stock to cover over-allotments. If, in connection with the exercise of such option, the forward purchaser (or an affiliate thereof) is unable to borrow, or unable to borrow at a cost not greater than a specified threshold, and deliver for sale on the anticipated closing date for the exercise of such option, all or a portion of the shares of our common stock with respect to which such option has been exercised, we will sell the shares of common stock that the forward purchaser (or its affiliate) does not borrow and selL

The underwriters are offering the shares of our common stock as set forth under "Underwriting." Delivery of the shares of common stock will be made on or about August 16, 2006.

Sole Book-Running Manager

UBS Investment Bank

A.G. Edwards Janney Montgomery Scott L L C The date of this prospectus supplement is August 10, 2006.


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Prospectus Supplement

Fonvard-looking statements S-iii Summary information S-l Risk factors S-S Use of proceeds * S-6 Price range of common stock and dividends S-7 Underwriting S-9 Legal matters S-l 5 Experts S-l 5

Prospectus

-Kbout this prospe'cfiis ' ' '•^'-'j^y' ;•; y ; ' ^^v;^'- "'• •• ] '^,". vl^' :»> :.' '•' • : ' : : . , '"1'" ;

'Foiw^d-lopldig-statements'' •"' "'" '' V'" ' :"''' !' 1 '•""!" ''' ' ' * * ' '' '" •' ;', : 2" " A-qiia America, Inc.' ' * ' *•> • ' ' 4' Risk factors 5 Jse of proceeds 8 Certain ratios 8 Description of capital stock ' 9 Description of depository shares 12 Description of debt securities 12 Description of common stock purchase contracts and common stock purchase units 21 Where you can find more information 22

*

matters 23

:s • ' • • -tS _ . . . _

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[portant notice about information in this prospectus supplement and the accompanying prospectus You should rely only on the information contained in this prospectus supplement, the accompanying prospectus and the documents we have incorporated by reference in the accompanying prospectus. We have not, and the underwriters and the forward purchaser have not, authorized anyone to provide you with different information. We are not, and the underwriters and the forward purchaser are not making an offer of the shares of common stock in any jurisdiction where the offer or sale is not permitted. You should not assume that the information provided by this prospectus supplement or the accompanying prospectus or the information we have previously filed with the Securities and Exchange Commission that is incorporated by reference in the accompanying prospectus is accurate as ofany date other than their respective dates.

We provide information to you about this offering of shares of our common stock in two parts. The first part is this prospectus supplement, which describes die specific details regarding this offering. The second part is the accompanying prospectus, which provides general information, some.of which may ncit.apply to this offering. The accompanying.prospectus refers to additional documents we have filed, and • inay" file;m;the futiue.witbhthe Securities and Exchange Comnussi6h,-,.w^ by reference: in'the ac'compariyu^prdspWtus.Fdr.; .puiposes of this offering, references, to the. accompanying prospectus also refer to the documents incoiporated by feferehcetherein,; including- .. our Annual Report on Forrh 10-K for theyearended^DecemberSl, 2005 (including portions of our 2005 Annual'Reportto Shareholders and -our definitive Proxy Statement for the 2006 Annual Meeting of Shareholders incorporated by reference therein), our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006, and our Current Reports on Form 8-K filed on March 13, 2006, May 22, 2006, June 8, 2006, June 28, 2006 and August 2, 2006, filed with the Securities and Exchange Commission prior to the completion of this offering. I f information in this prospectus supplement is inconsistent with information in the accompanying prospectus, you should rely on this prospectus supplement.

For purposes of this prospectus supplement and the accompanying prospectus, when we refer to "us," "we," "our," "ours," or the "Company," we are describing Aqua America, Inc. and its direct and indirect subsidiaries, unless the context suggests otherwise. S-ii


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rward-looking statements Certain statements contained, or incorporated by reference, in this prospectus supplement or the accompanying prospectus are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 2IE of the Securities Exchange Act of 1934 made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control, 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" or similar expressions.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this prospectus supplement, the accompanying prospectus and the documents incorporated by reference in the accompanying prospectus completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements represent our estimates and assumptions only as of tire date of the applicable document. Except for our ongoing obligations to disclose material ihfdrhktionunder tiie federal securities laws', we may not be obligated to.update these.f6nvard-lookmg::statemehtsreveri;thbugh:6ur situation v.-mayfch'a'nge in the! future.;We (jualifj'.all of our fori^ard-iookmg^tate'ments by.the;cauri6naiy states accompanying prospectus."1' '• " ".' '"' ?' '" "'' y '"' T !' • •-- -' .."y . - • • ^ --r.. 11 '


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1 ummary information This summary highlights material information contained elsewhere in this prospectus supplement and contained or incorporated by reference in the accompanying prospectus. Because it is a summary, it may not contain all of the information that may be important to you. Before making an investment decision, you should read carefully this entire prospectus supplement, the accompanying prospectus as well asdocuments incorporated by reference therein. As you read these documents, you should pay particular attention to the information in "Risk factors" beginning on page S-5 of this prospectus supplement and included in our Annual Report on Form 10-K for the year ended December 31, 2005, which update the "Risk factors " beginning on page 5 of the accompanying prospectus. Unless otherwise indicated, the information in this prospectus supplement assumes that the underwriters do not exercise their over-allotment option.

AQUA AMERICA, INC.

Aqua America, Inc. is the holding company for regulated utilities providing water or wastewater services to what we estimate to be more than 2.51 million people .in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey,: Florida, Indiana^Virginia,, Maine, Missouri,

.-,:New;Y(3rk and Sbuii p^oiinav'Our'Iargest ^stewaWriervices^to approxima •; total number ;o'f people ;we serve,; Ibcated' in. the. suburban areas;north;and: west of^^e j&ity/df Philadel^lula aHd!W22JqthV^ '"-p - Pennsylvania:'Our other, subsidiaries provide similar services in i2.other-states. In addition, we..prpvide water arid wastewaterservices • •

through operating and maintenance contracts with municipal authorities and other parties, and septage hauling services, close to"our operating companies' service territories. We are the largest U.S.-based publicly-traded water and wastewater utility based on number of people served.

Our principal executive office is located at 762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania 19010-3489, and our telephone number is 610-527-8000.

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1 he offering We are offering 500,000 shares of our common stock, and the forward purchaser (or an affiliate thereof) is offering 3,000,000 shares of our common stock in connection with the execution of the forward sale agreement between us and the forward purchaser. If the forward purchaser (or an affiliate thereof) is unable to borrow, or unable to borrow at a cost not greater than a specified threshold, arid deliver for sale to the underwriters all or a portion of the 3,000,000 shares of our common stock that the forward purchaser (or an affiliate thereof) is offering, we will sell the shares of our common stock that the forward purchaser (or its affiliate) does not borrow and deliver for sale. See "Underwriting— Forward Sale Agreement."

Issuer

Common stock offered by us

Common stock offered by the forward

Aqua America, Inc.

500,000 shares of common stock

•, j,p.urchaser,(or-anaffiUate,'thereof) - 3,000,000 shares of common stock (and an additional 525,000 shares of common stock i f the •

Cpmihon stock 'to be outstandings ^ -v. immediately after-this offering (which-excludes any shares of common stock to be issued upon settlement of the forward sale agreement)

Common stock to be outstanding after settlement of the forward sale agreement assuming physical settlement

131,908,815 sharesOM2)

^tture. ent indicated annual dividend per

Current dividends paid since

Use of proceeds

S-2

134,908,815 shares^

$0.46W

1944

We will receive approximately $10,686,500 in net proceeds from the sale of the common stock we are offering pursuant to this prospectus supplement, after deducting underwriting discounts and commissions and our estimated offering expenses. We will not receive any proceeds from the sale of the shares of common stock offered by the forward purchaser (or its affiliate) pursuant to this prospectus supplement, unless an event occurs that requires us to sell our common stock to the underwriters in lieu of the forward purchaser (or its affiliate) selling our common stock to the underwriters. Depending on the price of our common stock at the time of settlement and.the relevant settlement method, we may receive proceeds from the sale of common stock upon settlement of the forward sale agreement, which settlement must occur no later than August 1, 2008 (such date subject to deferral in certain limited circumstances). See "Underwriting— Forward Sale Agreement" for a description of the forward sale agreement.

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We intend to use the net proceeds that we receive from the sale of the common stock we are offering pursuant to this prospectus supplement and any proceeds that we receive upon settlement of the forward sale agreement to fund our capital expenditure program and any acquisition opportunities, and for working capital and other general coiporate purposes. In addition, i f an event occurs that requires us to sell our common stock to the underwriters in lieu of the forward purchaser (or its affiliate) selling our common stock to the underwriters, we intend to use any net proceeds we receive from such sale for the same purposes. See "Underwriting— Forward Sale Agreement."

Accounting treatment for the forward sale agreement

—'v.

Before the issuance of our common stock upon settlement of the forward sale agreement, the forward sale agreement will be reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in calculating diluted earnings per share is" deemed to be increased by the excess, i f any, of the

--..number of shares, that would be jssued.upon physical settiement .of the. forward sale agreement,, • :^over&e;humbex ^ ~;:Tnarket price duririg'the pdriod) usingthe;proceeds. receivable upon'settlement (based on the.! ' '-• " adjusted forward sale price atthe endof the-reporting period).'Consequently,' we anticipate there

will be no dilutive effect on our earnings per share except during periods when the average market price of our common stock is above the per share adjusted forward sale price, which is initially $21.857 (which is the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus supplement), subject to adjustment based on the federal funds rate less a spread, and subject to decrease by $0,115 on each of August 18, 2006, November 17, 2006, February 15, 2007 and May 18, 2007 and .by $0,125 on each of August 17, 2007, November 16, 2007, February 15, 2008 and May 16, 2008.

New York Stock Exchange and ladelphia Stock Exchange market ^^iladel

^ B i b o l WTR

(1) The "Common stock to be outstanding immediately after this offering (which excludes any shares of co/nmon stock to be issued upon settlement of the forward sale agreement) " is based on 131,408,815 shares outstanding as ofAugust 2, 2006.

(2) _ This amount-assumes that no event-occurs that requires us. to sell our common stock to .the underwriters in lieu of.the forward •• • . purchase?:.(or, its affiliate) selling our common stock to the underwriters.. . . • •. ,. •,,. . / * . .

;'(3)'' The forward purchaser hasyadvisedus thai'it oritsdffilidte intends to acquire shares of common stock to-be-sold under this'- • * - • prospectus supplement through borrowings from stock lenders. Subject to the occurrence of certain events, we will not be obligated td deliver shares of common stock, if any, under the forwdrd'sdle agreement until final settlement of the forward sale agreement.

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.\.'.

Except in certain circumstances, we have the right to elect physical, cash or net stock settlement under the forward sale agreement. We cannot be required to net cash settle under the forward sale agreement. See "Underwriting— Forward Sale Agreement "for a description of the forward sale agreement. The "Common stock to be outstanding after settlement of the forward sale agreement assuming physical settlement" is based on 131,408,815 shares outstanding as of August 2, 2006.

(4) On August 1, 2006, our Board of Directors approved a 7.6% increase in our quarterly cash dividend payable on September ], 2006 to.shareholders of record on August 18, 2006from $0.1069 per share, or $0.4276per share on an annualized basis, to $0.115.per share, or $0.46 per share on an annualized basis. Purchasers of shares in this offering who remain holders on August 18, 2006 will be entitled to receive this dividend-

Unless otherwise indicated, the information in this prospectus supplement assumes that the underwriters do not exercise their over-allotment option. See "Underwriting— Forward Sale Agreement" for a description of the forward sale agreement.

RISK FACTORS

...Investing in.our common stock involves risks. Before buying any3sh,ares,;you should read the discussion of material risks of investingin.. ;:Lp^ common-stock iri;"Risk factors":On page S-5 of this'prospeetus.-supjplpment;and:m^

, :iDecember31y.2005;vwHich^update.th^^ briVpage 5. of:the accompanying'prbspectus .•2 ^Vi..! *•^>. •1 • j ^ i i " / , ;iv sA -...

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sk factors In addition to the other information contained in this prospectus supplement, the accompanying prospectus and the information incorporated by reference herein and therein, including the matters listed under "Risk factors " and "Forward-looking statements, "prospective investors should consider carefully the following factor before investing in the common stock.

Settlement provisions contained in the forward sale agreement subject us to certain risks.

The forward purchaser will.have the right to require us to physically settle the forward sale agreement on a date specified by the forward purchaser in certain events, including (a) i f the average of the closing bid and offer price or, i f available, the closing sale price of our common stock is less than or equal to $10.00 per share on any trading day, (b) if our board of directors votes to approve, or there is a public announcement of, in either case, an action that, if consummated, would result in a merger or other takeover event of our company, (c) i f we declare any cash dividend or distribution above a specified threshold, or any non-cash dividend or distribution (other than a dividend or .distribution of shares of our common stock), m either case, on shares of our common stock and set a record date for .paymentfor such dividend

.^ori<istr&^ if thefomardjpurchaser.foran iv:.::ni^bef;bf sharesi.pf our common stock"equal.tp:the number;,pf shares.linderlymg fee.foiwardsale/agreeiherit . common stock has increased above a specified amount, (f) if a.nationalization, delisting or change indaw- occurs, each.as defined in the forward,

sale agreement or (g) in connection with certain events of default and termination events under the deemed master agreement governing such forward sale agreement. In the event that early settlement of the forward sale agreement occurs as a result of any of .the foregoing events, we will be required,!© physically settle the forward sale agreement by delivering shares of our common stock. The forward purchaser's decision to exercise its right to require us to settle the forward sale agreement will be made irrespective of our need for capital. In the event that we elect, or are required, to settle the forward sale agreement with shares of our common stock, delivery of such shares would likely result in dilution to our earnings per share and return on equity.

In addition, upon certain events of bankruptcy, insolvency or reorganization relating to us, the forward sale agreement will terminate'without further liability of either party. Following any such termination, we would not issue any shares, and we would not receive any proceeds pursuant to the forward sale agreement.

agreerr k under the circumstances described above, we have the right to elect physical, cash or net stock settlement under the forward sale

ajpfement. If we elect cash or net stock settlement, we would expect the forward purchaser (or an affiliate thereof) to purchase in the open • market the number of shares necessary; based upon the portion of the forward sale agreement that we have elected to so settle, to return to stock ? lenders theishares of our common stock that the forward purchaser (or its affiliate) has borrowed in connection with the sale of our common ' stock under this prospectus supplement and, i f applicable-in connection, with net stock settlement, to deliver, shares'to us. If the market value of • our common stock at the time of these purchases is above the forward price at that time, we would pay , or deliver, !as; the. case may be, to the _ forward purchaser under the forward sale agreement an amount of cash, or common stock with a value; equal to. this difference.. Any such, difference could be significant. If the market value of our common'stock at the time of these purchases -is below-the'forward-price at that time,- • we would be paid this difference in cash by, or we would receive the value of this difference in common stock from, the forward purchaser (or. its affiliate) under the forward sale agreement, as the case may be. See "Underwriting— Forward Sale Agreement."

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e of proceeds We will receive approximately $10,686,500 in net proceeds from the sale of the common stock we are offering pursuant to this prospectus supplement, after deducting underwriting discounts and commissions and our estimated offering expenses. We will not receive any proceeds from the sale of the shares of common stock offered by the forward purchaser (or its affiliate) pursuant to this prospectus supplement, unless an event occurs that requires us to sell our common stock to the underwriters in lieu of the forward purchaser (or its affiliate) selling our common stock to the underwriters. Depending on the price of our common stock at the time of settlement and the relevant settlement method, we may receive proceeds from the sale of common stock upon settlement of the forward sale agreement, which settlement must occur no later than August 1, 2008 (such date subject to deferral in certain limited circumstances).

We intend to use the net proceeds that we receive from the sale of the common stock we are offering pursuant to this prospectus supplement and any proceeds that we receive upon settlement of the forward sale agreement to fund our capital expenditure program and any acquisition opportunities, and for working capital and other general corporate purposes. In addition, if an event occurs that requires us to sell our common stock to the underwriters in. lieu of the forward purchaser (or its affihate) selling our common stock to the underwriters, we intend to use any

rriet.pro,ceeds.'We jeceiye.from'iSUch.saleiforithe.same purposeg..See-,'1Underw^ ;j. .:\.,,:.^.. ^.['-.-K:


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ice range of common stock and dividends PRICE RANGE OF COMMON STOCK

The following table shows the high and low intraday sales prices for our common stock as reported on the New York Stock Exchange composite transactions reporting system and the cash dividends per share paid for the periods indicated. Our common stock is listed on the New York Stock Exchange and the Philadelphia Stock Exchange under the symbol "WTR".

Common stock High Low Dividends

$ 17.14 $ 15.00 $ .0900 16.47 14.24 .0900 16.67 14.18 .0900

.J..;yl8.48 ,;,•;: :,.^.15.58 :y r : . . ; ; . . 0 9 7 5 .

S V 19.37.': ; S 17:49 $" .0975 "23.24 18.03 .0975 29.15 21.61 .0975 29.22 22.88 .1069

$ 29.79 $ 26.50 $ .1069 27.82 20.13 .1069 23.44 21.13 ( i )

Year Ended December 31,2004 First Quarter Second Quarter Fhird Quarter

.Rouj '.Quarter.>-:,, . v-V'.', - : . . . . ) . , . '-...:/..*-Year. Ended December 3^ 2005 ^ First Quarter . . Second Quarter Third Quarter Fourth Quarter Year Ended December 31,2006 First Quarter Second Quarter Hiird Quarter (through August 10, 2006)

(!) The third quarter dividend payment of $0.115 per share was declared on August 1, 2006 and will be paid on September I, 2006 to holders of record on August 18, 2006.

"ugust 10, 2006, the last reported sale price of our common stock on the New York Stock Exchange composite transactions reporting system was $22.75 per share. As of August 2, 2006, there were approximately 28,023 holders of record of our common stock.

DIVIDEND POLICY • ; ..

On August 1, 2006, our Board of Directors approved a 7.6% increase in our quarterly cash dividend:from $0.1069 per share to $0,115 per share: ^effective with the September 1, 2006 dividend payment to shareholders of record on August.18, 2006.:This represents an increaseiin the dividend rate on an annualized basis from $0.4276 per share to $0.46 per share effective with the September 1; 2006 dividend'payhient.The increase in the September 1, 2006 dividend is the 16th increase to our dividend payment that the Board approved in the past 15 years.

The share and per share data, including the dividend data, contained in this prospectus supplement have been restated to give effect to the 4-for-3 common stock split effected in December 2005 in the form of a 3 3 73% stock distribution for all common shares outstanding.

We or our predecessor companies have paid dividends each year since 1944. 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, regulatory requirements and such other factors as our Board of Directors may deem relevant.

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.range of common stock and dividends

We offer holders of record of less than 100,000 shares of our common stock the opportunity to reinvest part or all of the dividend payments on their shares of common stock through purchases of original issue common stock without payment of any brokerage commission or service charge through our dividend reinvestment and direct stock purchase plan. The purchase price for original issue shares of common stock purchased through the reinvestment of dividends is 95% of the average of the high and low prices of common stock as reported on the New York Stock Exchange composite transactions reporting system for each of the five trading days immediately preceding the dividend payment date. This plan also permits,shareholders and investors to invest up to $250,000 annually in our common stock in the open market through our transfer agent. At June 1, 2006, holders of 16.2% of our outstanding shares of common stock participated in the dividend reinvestment portion of this plan. S-8


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ft derwriting In this offering, we are offering 500,000 shares of our common stock, and the forward purchaser (or an affiliate thereof) is, at our request,. borrowing and offering 3,000,000 shares of our common stock in connection with the execution of the forward sale agreement between us and the forward purchaser. UBS Securities LLC is acting as representative of each of the underwriters named below and as agent of the forward purchaser. Subject to the terms and conditions set forth in the underwriting agreement, dated August 10, 2006, among us, the forward purchaser and the underwriters, we and the forward purchaser have agreed to sell to the underwriters, and the underwriters have severally agreed to purchase from us and the forward purchaser (or an affiliate thereof), the respective number of shares listed opposite their names below.

Underwriter Number of shares

UBS Securities LLC 2,275,000 A.G. Edwards & Sons, Inc. 612,500 Fanney Montgomery Scott LLC 612,500

Total 3,500,000

, The underwriting agreement provides, that the underwriters are obligated to purchase all the shares bfcommon: stock in.the.offering if any are: .i : purchased, other than those shares covered by the over-allotment option described below. The underwriting,agreement also.provides that if an . underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering'may be terminated.

We have agreed to indemnify the underwriters and the forward purchaser against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the underwriters or the forward purchaser may be required to make in respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officers' certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and1 to reject orders in whole or in part.

ARD SALE AGREEMENT

We will enter into a forward sale agreement on the date of this prospectus supplement with an affiliate of UBS Securities LLC, which affiliate we refer to as the forward purchaser, relating to 3,000,000 shares of our common stock. The forward purchaser or its affiliate is borrowing and offering 3,000,000.'shares of our common stock to hedge its obligations under the forward sale agreement; . ' ..: : ;

. If'the;forward purchaser (or an affiliate thereof) under, the forward sale.agreement is unable to,boiTOW,"or unable tq borrow:at a cost notgreater than a specified-threshold, and deliver for. sale on the anticipated closing date of the offering all or a:portipn;of,tKe shares of our common stock to which such agreement relates, then the number of shares of our common stock to which such agreement relates will'bereduced to the • ••• • number that the forward purchaser (or its affiliate) can so borrow and deliver. If the forward purchaser(6r an'affiliate thereof) under the forward sale agreement is unable to borrow, or unable to borrow at a cost not greater than a specified threshold, and deliver for sale on the anticipated closing date of the offering any shares of our common stock, then such agreement will be terminated in its entirety. In the event that the number of shares relating to the forward sale agreement is so reduced, or the forward sale agreement is so terminated, we will issue

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directly to the underwriters in accordance with the underwriting agreement a number of shares of our common stock equal to the number of shares not borrowed and delivered by the forward purchaser (or an affiliate thereof), so that the total number of shares offered in this offering is not reduced. In such event, the underwriters will have the right to postpone the closing date for one day to effect any necessary changes to any documents or arrangements in connection with such closing.

The forward sale agreement provides for settlement on a settlement date or dates to be specified at our discretion no later than August 1, 2008 (such date subject to deferral in certain limited circumstances) at an initial forward sale price of $21.857 per share, which is the public offering price of our shares of common stock less underwriting discounts and commissions. The forward sale agreement provides that the initial forward sale price will be subject to adjustment based on the federal funds rate less a spread, and subject to decrease by $0.115 on each of August 18, 2006, November 17,2006, February 15, 2007 and May 18, 2007 and by $0,125 on each of August 17, 2007, November 16, 2007, February 15, 2008 and May 16, 2008.

Subject to the provisions of the forward sale agreement, we will receive an amount equal to the net proceeds from the sale of the borrowed shares of our common stock sold in this offering, plus interest based on the federal funds rate less a spread, less a reduction of $0.115. on each

' of August 18, 2006, November 17,'200'6, February ,15, 2007 and May 18, 2007'and $0:125 on each of-August 17, 2007,; November 16,2007, * February TS. bOS and May! 6, 2008^ respectively; from'the fomard'purchaser upon settlement of the.forwar'd:saIe;ag'reeriienf if we elect to' " '•'

'physically settle the fom^d'saleagre'ement'eritirely with our common stock. ' ' \ -' " - ' ; "

The forward purchaser will have the right to accelerate the respective forward sale agreement and require us to physically settle such forward sale agreement on a date specified by die forward purchaser in certain events, including (a) if the average of the closing bid and offer price or, if available, the closing sale price of our common stock is less than or equal to $10.00 per share on any trading day, (b) if our board of directors votes to approve, or there is a public announcement of, in either case, an action that, if consummated, would result in a merger or other takeover event of our company, (c) if we declare any cash dividend or distribution above a specified threshold or any non-cash dividend or distribution (other than a dividend or distribution of shares of our common stock), in either case, on shares of our common stock and set a record date for payment for such dividend or distribution on or prior to the final settlement date, (d) if such forward purchaser (or an affiliate thereof) is unable to continue to borrow a number of shares of our common stock equal to the number of shares underlying the forward sale

Sient, (e) i f the cost of borrowing the common stock has increased above a specified amount, (f) i f a nationalization, deiisting or change in curs, each as defined in the forward sale agreement, or (g) in connection with certain events of default and termination: events under the d master agreement governing such forward sale agreement. In the event that early settlement of the forward sale agreement occurs as a

result of any of the foregoing events, we will be required to physically settle the forward sale agreement by delivering shares of our common stock.

In addition, upon certain events of bankruptcy, insolvency or reorganization relating to us, the forward sale agreement wiU'terminate without " fiiftlier liability of eitherparty! Following any such termination, we would'not issue any shares, and we would.not-receive any proceeds •

'pursuant to the forward sale agreement. "•''• ! . • . •.• v ' '• ' • "••/r • • : :•; '.a'- •r-ry • »•-•"'• - =•

• Except as described above, in addition to physical settlement, we also generally have the right,to electxash or net stock settlement under the forward sale agreement. If we elect cash or net stock settlement, the forward purchaser or an affiliate thereof will purchase shares of our common stock in secondary market transactions over a period of time for delivery to stock lenders in order to unwind its hedge and, if applicable in connection with net stock settlement, to deliver shares to us. In the event that we S-10

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elect to cash or net stock settle, and if the price of our common stock at which the forward purchaser (or its affiliate) unwinds its hedge exceeds the forward sale price at the time, we will pay the forward purchaser under the forward sale agreement an amount in cash, i f we cash settle, equal to such difference, or deliver a number of shares of our common stock, if we net stock settle, having a market value equal to such difference. Conversely, i f we elect to cash or net stock settle and the price of our common stock at which the forward purchaser (or its affiliate) unwinds its hedge is below the forward sale price at the time, the forward purchaser (or its affiliate) under the forward sale agreement will pay to us an amount in cash, i f we cash settle, equal to such difference, or deliver a number of shares of our common stock, i f we net stock settle, having a market value equal to such difference.

Before the issuance of our common stock upon settlement of the forward sale agreement, the forward sale agreement will be reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares that would be issued upon physical settlement of the forward sale agreement over the number of shares that could be purchased by ,us in the market (based on the average market price during the period) using the proceeds receivable upon settlement (based on the adjusted forward sale price at the end of the repqrtihg'period). Consequently,we "anticipate, there will be ho dilutive.effect on our earnings per shace, except during periods vwhen the.average

"market price of pun is initially $21.857'(which,is_die public o^ price less me Wderwriting discounts and commissionsshown.oii' the cover page ofthis prospectus supplement); subject to adjustment based on the federarfiinds rate.less a spread, and subject to decrease by $0.115 oh each of August 18, 2006, November 17,.20Q6,• February 15,.2007 and May 18,2007 and by $0,125 on each of August 17, 2007, November 16, 2007, February 15, 2008 and May 16, 2008.

DISCOUNTS AND COMMISSIONS

The underwriters have'advised us and the forward purchaser that they propose initially to offer the shares of common stock to the public at the public offering price specified on the cover page of this prospectus supplement and to selling group members at that price less a selling concession not in excess of $0,470 per share. The underwriters may allow, and such selling group members may reallow, a discount not in excess of $0.10 per share to certain other dealers. After the offering, the public offering price and concession and discount terms may be changed.

uWBni flowing table summarizes the public offering price, underwriting compensation, estimated expenses and proceeds, after expenses, to us

Ihnectibn with this offering:

Per share Total Without Over-

altotment With Over-

allotment Without Over-

allotment With Over-

allotment

Public offering price •: :• V- .< Uhderwriting-discounts and commissions -Expenses payableby us Proceeds,'; after expenses, to us

22.650 0.793

- 0.069 21.788

22,650 -0.793. 0.060

21.797 '

, .. 79i275;000,-2,775,500-

242,000 ' 76,257,-500'

91,166,250i .3;191;825

242,000 87'i732;425

The information assumes (a) either no exercise or full exercise by the underwriters of the over-allotment option, and (b) that the forward sale agreement is physically settled based upon the aggregate initial forward sale price and by the delivery of 3,000,000 shares of our common stock. We will receive approximately $10,686,500 in net proceeds from the sale of the common stock we are offering pursuant to this prospectus supplement, after deducting underwriting discounts and commissions and our estimated offering expenses. With respect to the common stock being offered by

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the.forward purchaser (or an affiliate thereof) in this offering, if we physically settle the forward sale agreement, we expect to receive proceeds of approximately $65,571,000, net of underwriting discounts and commissions and offering expenses, subject to certain adjustments as described above. Settlement must occur no later than August 1,2008 (such date subject to deferral in certain limited circumstances).

OVER-ALLOTMENT OPTION

The forward purchaser has granted the underwriters an option to purchase up to an aggregate of 525,000 additional shares of common stock, exercisable solely to cover over-allotments, at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus supplement. The underwriters may exercise this option at any time, and from time to time, until 30 days after the date of this prospectus supplement. I f the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares proportionate to that underwriter's initial allocation reflected in the above table. If, in connection with the exercise of such option, the forward purchaser (or an affiliate thereof) is unable to borrow, or unable to borrow at a cost not greater than a specified threshold, and deliver for sale on the anticipated closing date for the exercise of such option all or a portion of the

; shares of our conrnon"''stock, with respect.to .which such, option-has been exercised,,wewill sell, the shares of common; stock-that theforward >. ,-'purchaser (or its;affiiiate) does hptôrrow'andJsell; In such.event, the imdenvriters will-Have ttie.rightitbLpostporie the closing date;for the1-

exercise .of such op'tion-fpr one day to effect anyihecessary changes to any documents or arrangements inxonnection with such dosing; '

RESTRICTIONS ON SALE OF SIMILAR SECURITIES

Each of our executive officers and directors has agreed with the underwriters not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or Hedge any shares of our common stock or securities convertible into or exchangeable or exercisable for shares of our common stock or publicly disclose the intention to make any such offer, sale, pledge, disposition, or hedge or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of), directly or indirectly, except with the prior written consent of UBS Securities LLC at its sole discretion, for a period of 90 days after the date of this prospectus supplement. This

.•consent may be given at any time without public notice. This agreement does not apply to sales by our executive officers and directors of up to •,5^000 shares of our common stock in the aggregate that occur more than 30 days after the date of this prospectus supplement, which sales ave

kved in writing by us, sales to us in connection with the cash-less exercise of options, sales under existing trading plans in accordance with Sidelines specified in Rule 10b5-l of the Securities Exchange Act of 1934, or the entry into a stock trading plan in accordance with the

guidelines specified in Rule 10b5-l of the Securities Exchange Act of 1934 as long as sales of shares under any such newly-entered plan are . .subject to the foregoing restrictions.

i.-v Weihave agreed that we will not issue, offer, sell, contract to sell, pledge or otherwise dispose of,.directly .orindirectly, hedge or file with the .'. Securities and Exchangeômmis'sioâ registration statement under the Securities Act of 1933 relating to; any shares of our.cqmmon stock or.,, -

.securities-convertible ihto-or-exchangeable pr, exercisable for any shares of pur common, stock,, or publicly, disclose the intention^tomake 'any • - offer, sale, pledge, disposition, hedge or filing, or grant any options in respect of our shares of common stock" without the prior- written consent •>

• of UBS Securities-LLC at its sole discretion, for a period of 60 days after theidate of this;prospectus supplement. .This agreement does not apply to any shares issued in this offering, any issuance of shares to the forward purchaser under the forward sale agreement, grants of stock options or restricted stock pursuant to the terms of S-I2

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jrwriting

an equity compensation or similar plan in effect on the date of the underwriting agreement, up to 50,000 shares of common stock issued under our acquisition shelf registration statement in connection with acquisitions or the issuance of an unlimited amount of shares of.our common stock pursuant to the terms of our dividend reinvestment and direct stock purchase plan and our employee stock purchase plan.

NEW YORK STOCK EXCHANGE AND PHILADELPHIA STOCK EXCHANGE LISTING

The shares of common stock are listed on the New York Stock Exchange and Philadelphia Stock Exchange under the symbol "WTR."

OTHER RELATIONSHIPS The underwriters and their respective affiliates have from time to time performed and may in the future perform various financial advisory, investment banking and commercial banking services for us and our affiliates, for which they received or will receive reasonable and customary fees and commissions. In particular, as discussed above, an affiliate of UBS Securities LLC intends to enter into a forward sale agreement on or about^ugust.-10,.2p06 in connection-with the proposed forward sale.described in this prospectus supplement .;;;; ;. . ./ .

.'•This affiliate is expected :t6 receiVe.certain rfet proceeds of Ihe offering as;arresuit;6f short'sales totheiu^^^ "V-: 'agreemeritVBecaiise c'ertain!het proceeds ofthis offering are1 expected.to be paid to" an affiliate of one'ofthe underwriters,- the offering-is'being £•. conducted in accordance with Rule 2710(h) and Rule 2720 of the Conduct Rules of the National Association of Securities Dealers,1 Inc.

PRICE STABILIZATION AND SHORT POSITIONS

In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act.

• Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

• Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, ^•|uch creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered ^ ^ B t position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase pursuant ^Whe over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares covered by the

"" over-allotment option-. The underwriters may close out any covered short position by either exercising their over-allotment option1 and/or purchasing shares in the open market.

: Syndicate covering'transactions involve purchases of the common stock in the open market after the distribution has been completed in order . to cover syhdicate.'short positions": In detbririiningithe source of shares to close out.the' short pbsition,tthe underwriters1 will-consider/ among ' - * ' bthefthihgs, 'the: finceof shares apilableforpur^ in the bpen market1 as compared to the price at which ihey'mayp'urc^^

the bvef'-dlibtment option. I f die underwriters "self more shares than could be covered by the over-allotment option, a nakecTshoit position, 'the position can only be" closed out by" buying shares in the open'market. A naked short position is more likely to be created if the uriderwriters'are" concerned that thete could be downward pressure on the price of the shares in the open market after pricing that could'adversely affect investors who purchase in the offering.

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• Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. The transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time.

ELECTRONIC DISTRIBUTION

This prospectus supplement and the accompanying prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters, or selling group members, i f any, participating in this offering and one or more of the underwriters participating in this offering may distribute this prospectus supplement and the accompanying prospectus electronically. The representative may agree to

r allocate a number-bf 'shares to underwriters and selling group members for.sale-to their online brokerage account hblders^lnternet distributions . ' » will be allocated by*the underwriters and selling group members that willmake internet distributions:6n the same!basis?as'OtheivalloGations..:r. .•'Other thanthe prosp'ecms:supplement.and>the":accompanying prospectustin'electr6nic'forinat,the information :on (any of .these' websites and any.i ;

other information contained on a'website maintained by an underwriter or selling group member is not part of this prospectus supplement or the accompanying prospectus. • -S-14

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ft al matters Certain legal matters relating to the common stock offered hereby will be passed upon for us by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.

Experts The consolidated financial statements and management's assessment of the effectiveness of internal control over financial reporting (which is included in Management's Report on Internal Control over Financial Reporting) incorporated in this prospectus supplement by reference to the Annual Report on Form 10-K for the year ended December 31,2005 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. . , . . . . . . ,


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iPECTUS

AQUA AMERICA, INC.

Common Stock Preferred Stock Common Stock Purchase Contracts Common Stock Purchase Units Depositary Shares Debt Securities V ^ : - - '' ; ' - V K : - •:

This prospectus relates to common stock, preferred stock, common stock purchase contracts, common stock purchase units, depositary shares and debt securities that Aqua America, Inc. may sell from time to time in one or more offerings. This prospectus will allow us to issue securities over time. We will provide a prospectus supplement each time we issue securities, which will inform you about the specific terms of that offering and may also supplement, update or amend information contained in this document. You should read this prospectus and each applicable prospectus supplement carefully before you invest.

Our common stock is listed on the New York Stock Exchange and the Philadelphia Stock Exchange under the symbol "WTR." The last reported sale price of our common stock on the New York Stock Exchange on December 15, 2005 was $28.09 per share. We have not yet determined whether any of the other securities that may be offered by this prospectus will be listed on any exchange, inter-dealer quotation system or over-the-counter market. I f we decide to seek listing of any such securities upon issuance, the prospectus supplement relating to j^^Kecurities will disclose the exchange, quotation system or market on which the securities will be listed.

Investing in our securities involves risk. See "Risk Factors" beginning on page 5 of this prospectus. You should read carefully this document and any applicable prospectus supplement before you invest.

Neither the Securities' and Exchange Commission nor any state securities commission has approved or. disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is December 16, 2005.


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About this prospectus 1 Forward-looking statements 2 A.qua America, Inc. 4 Risk factors S Use of proceeds 8 "ertain- ratios 8 Description of capital stock 9 Description of depository shares 12 Description of debt securities 12 Description of common stock purchase contracts and common stock purchase units 21 Where you can find more information 22 iLegalmatters. • ; ^o 'V^ ' i - ; .v.v *• . • ^ " .• * '"'^ ' •• - . .- ' i i . . ' ^ : - ' : ' ; ; ^ -^ , / , ; T' •• _ •.. *;". 23 Experts-r:'' •«' !. ^ - • -• ' -'• -•< - • •••• • ... ^ .^; • .. >-•• 1 i / ' > : . f . : : . - . : • -23

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out this prospectus This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission (SEC) using a "shelf* registration process. Under this shelf process, we may, from time to time, sell common stock, preferred stock, common stock purchase contracts, common stock purchase units, depositary shares and debt securities in one or more offerings. This prospectus provides you with a general description of the securities we may offer. Each time we sell any securities under this prospectus, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement also may add, update or change information contained in this prospectus. You should read this prospectus and the applicable prospectus supplement together with the additional information described below under the heading "Where You Can Find More Information" before you decide whether to invest in the securities.

The registration statement (including the exhibits) of which this prospectus is a part contains additional information about us and the securities we may offer by this prospectus. Specifically, we have filed certain legal documents that control the terms of the securities offered by this prospectusias exhibits to die registration statement. We will file certain other legal documents that will control the terms of the i securities we

^may offer by this prospectus as exhibits to the registration statement or to reports we file with the SEC. The registration statement and the :rep6rts cain Be read at the'SEC Web "site or at die SEC offices mentioned uiider the heading "Where YouiCairFind Moire Inforiiiatiom"'. ,

Ypii 'sho'iild feiy only updrii the ihfdrmatibn'cohtaihed in, or incorporated into, this'prospectus and the' applicable prpspectus "supplement that * . > • contains specific informatiori about the securities.we are offering., We have not authorized any other person to provide you with different information. I f anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this document is accurate only as of the date on the front cover of this document. Our business, financial condition, results of operations and prospects may have changed since that date.

Except as otherwise provided in this prospectus, unless the context otherwise requires, references in this prospectus to "we," "us" and "our" refer to Aqua America, Inc. and its direct and indirect subsidiaries. In addition, references to Aqua Pennsylvania refer to our wholly-owned subsidiary, Aqua Pennsylvania, Inc., and its subsidiaries. To understand our offering of these securities fully, you should read this entire document carefully, including particularly the "Risk Factors" section and the documents identified in the section titled "Where You Can Find

LInformation," as well as the applicable prospectus supplement that contains specific information about the securities we are offering.


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torward-looking statements Certain statements in this prospectus, or incorporated by reference into this prospectus, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control, 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" or the negative of such terms or similar expressions. Forward-looking statements in this prospectus, or incorporated by reference into this prospectus, include, but are not limited to, statements regarding:

• projected capital expenditures and related funding requirements;

; .developments,,trends and.consolii^tionyin the water and wastewater utili^, industries; . - - . • ( . -•. > .•• ,

• diyiderid jiaymeht projectibris;. •. " ''*' . • . ' •. ' - • ' T1,v. H £ '•'••'.) .

• opportunities for future acquisitions, the success of pending acquisitions and the impact of future acquisitions;'

• the capacity of our water supplies, water facilities and wastewater facilities;

• the impact of geographic diversity on our exposure to unusual weather;

• our-capability to pursue timely rate increase requests;

• our authority to cany on our business without unduly burdensome restricdons;

• our ability to obtain fair market value for condemned assets;

*

pact of fines and penalties; . . . .

velopmeht of new services and technologies by us or our competitors;

• the availability of qualified personnel;

• the condition of our assets;

•.the impact of legal proceedings; - i > • - •'•'.;•

• general economic conditions;

• acquisition-related costs and synergies; and

• the forward-looking statements contained under the heading "Forward-Looking Statements" in the section entitled "Management's Discussion and Analysis" from the portion of our 2004 Annual Report to Shareholders incorporated by reference herein and made a part hereof.

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:

• changes in general economic, business and financial market conditions;

» changes in govenunent regulations and policies, including environmental and public utility regulations and policies; 2


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• changes in environmental conditions, including those that result in water use restrictions;

• abnormal weather conditions;

• changes in capital requirements;

• changes in our credit rating;

• our ability to integrate businesses, technologies or services which we may acquire;

• our ability to manage the expansion of our business;

• the extent to which we are able to develop and market new and improved services;

• the effect of the loss of major customers; _ ( , ,

•ioiir ability to retain the services of key personnel and to hire qualified personnel as we expand;."" • r-...;-. v- ,. .•. . \ . . V . ,

• unanticipated capital requirements; ' ^ ' ' •

• increasing difficulties in obtaining insurance and increased cost of insurance;

• cost overruns relating to improvements or the expansion of our operations; and

• civil disturbance or terroristic threats or acts.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this.prospectus, the documents, that we incorporate by reference into this prospectus and any applicable prospectus supplement completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements represent our

•

tes and assumptions only as of the date ofthis prospectus, Except for our ongoing obligations to disclose material information under the 1 securities-laws, we are not obligated to update these forward-looking statements, even though our situation may change in the future. lalify .all of our forward-looking statements by these cautionary statements. . . .


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Aqua America, Inc. Aqua America, Inc. (referred to as "Aqua America", "we" or "us") is the holding company for regulated utilities providing water or wastewater services to-approximately 2.5 million people in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Florida, Indiana, Virginia, Maine; Missouri, New York and South Carolina. Our customer base is diversified among residential, commercial, industrial, other water, wastewater customers and operating contracts and other customers. Residential customers make up the largest component of our customer base, with these customers representing 60% of our total water revenues.

Our largest operating subsidiary, Aqua Pennsylvania, Inc., accounts for approximately 55% of our operating revenues and provides water or wastewater services to approximately one-half of the total number of people we serve, located in the suburban areas north and west of the City of Philadelphia and in 21 other counties in Pennsylvania. Our other subsidiaries provide similar services in 12 other states. In addition, we provide water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to our operating companies' service territories. We are the largest U.S.-based publicly-traded water utility based on number of people served.

;We believe that acquisitions will continue to be an important.source of growth for.us. We have completed 129 acquisitions or otherigrowth . ventufes.during the five years ended Noverbber^O, 2005 adding approximately;250,000 customers to oiirxustomerbase. We are,actively .' ' exploring other opportunities to expand "our utility operations through acquisitions arid otherwise. : '•• • -- t ' - ' - i . • •

• With more than 50,000 community water systems and approximately 16,000 wastewater systems in the United States, the water industry is the most fragmented of the major utility industries (i.e., the telephone, natural gas, electric and water industries). We believe that there are many potential water and wastewater system acquisition candidates. We believe the factors driving consolidation of these systems are:

• the benefits of economies of scale;

• increasingly stringent environmental regulations;

• the need for capital investment; and

• theneed for technological and managerial expertise.

^^Hincipal executive office is located at 762 W: Lancaster Avenue, Bryn Mawr, Pennsylvania 19010-3489, arid our telephone number is 61(7-527-8000. Our Web site may be accessed at www.aquaamerica.com. Neither the contents of our Web site, nor any other Web site that may be accessed from our Web site, is incorporated in or'otherwise considered a part of this prospectus.

http://vmw.sec.gov/Archives/edgar/data/78128/000089322006001827/w23768b5e424b5.htm 11/6/2007

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Risk factors You should carefully consider the following risk factors and the section entitled "Forward-Looking Statements" before you decide to buy our securities.

Our business requires significant capital expenditures and the rates we charge our customers are subject to regulation. I f we are unable to obtain government approval of our requests for rate increases, or i f approved rate increases are untimely or inadequate to cover our investments, our profitability may suffer.

The water utility business is capital intensive. On an annual basis, we spend significant sums for additions to or replacement of property, plant and equipment. Our ability to maintain and meet our financial objectives is dependent upon the rates we charge our customers. These rates are subject to approval by the public utility commissions or similar regulatory bodies in the states in which we operate. We file rate increase requests, from time to time, to recover our investments in utility plant and expenses. Once a rate increase petition is filed with a public utility

..-commission, the ensuing, administrative, and hearing process, may be lengthy andcpstly-.-The timing of,our rate increase-requests are therefore ., ..-partially dependent-.upon the'estimated cost-of the administrative-process, in reIation:tb the inyestmentsand-expenses thatwe hope, to .recover: : •.'•through the rate-increase to the extent approved. We can.proyide no assurances.-that any .future rateiincrease request will be. appro ved by the : ,

appropriate state public utility commission; and, if approved, we cannot guarantee that these rate increases will be granted in a timely .br sufficient^manner to cover the investments and expenses for which we initially sought the fate increase.

Our operating costs could be significantly increased in order to comply with new or stricter regulatory standards imposed by federal and state environmental agencies.

Our. water and wastewater services are governed by various federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act and similar state laws, and federal and state regulations issued under these laws by the United States Environmental Protection Agency and state environmental regulatory agencies. These laws and

. regulations establish, among other things, criteria and standards for drinking water and for discharges into the waters of the United States and »Pursuant to these laws, we are required to obtain various environmental permits from environmental regulatory agencies for our ions. We cannot assure you that we have been or will be at all times in total compliance with these laws, regulations and permits.' If we : or fail to' comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. Environmental laws

• and regulations are complex and change frequently. These laws, and the enforcement thereof, have tended to become more stringent over time; While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, i t is possible that new or stricter standards could be imposed that will raise our operating costs. Although these costs may be recovered in the form of higher rates, there can bCino assurance that the various state public utility commissions or similar regulatory bodies that govem our business would-approve rate,increases to enable us to recover such costs. In summary, we cannot assure you that our posts of coniplying .with; or discharging . liability under, current and future environmental and health and safety laws will not adversely affect our business;.results of operations or •- : financial condition. • .• • -.


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^

Our business is subject to seasonal fluctuations, which could affect demand for our water service and our revenues.

Demand for our water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with irrigation systems, swimming pools, cooling systems and other outside water use. Throughout the year, and particularly during typically warmer months, demand will vary with temperature and rainfall levels. In the event that temperatures during the typically warmer months are cooler than normal, or if there is more rainfall than normal, the demand for our water may decrease and adversely affect our revenues.

Drought conditions may impact our ability to serve our current and future customers, and may impact our customers' use of our water, which may adversely affect our financial condition and results of operations.

We depend on an adequate water supply to meet the present and future demands of our customers. Drought conditions could interfere with our • sourcesjof water supply.and could adversely-affect our ability, to supply-water, insufficient quantities to our.existing and future.customers. An -%temipti6n i6 burwatersu^ adverse effecton-our financial cpriditidh.'and:resUlts':bf PperatiohsV Moreover, •' ' .• goverhmehtal restrictiohs'Oh water usage during drought conditions may result in'a^decreased demand for our-water^eveh1 i f our+waterreserves • are sufficientto sei^e:bur'customers'during'these drought conditions, which may adversely affect our revenues d earim " ; • . « • • • .

An important element of our growth strategy is the acquisition of water and wastewater systems. Any pending or future acquisitions we decide to undertake may involve risks.

An important element of our growth strategy is the acquisition and integration of water and wastewater systems in order to broaden our current, and move into new, service areas. We will not be able to acquire other businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with acquisition candidates. It is our intent, when practical, to integrate any businesses we acquire with our existing operations. The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management's time and resources. Future acquisitions by us could result in:

five issuances of our equity securities; -

• incurrence of debt and contingent liabilities; . '

'• failure to have effective internal.control over financial reporting;

• fluctuations'in.quaiierl^ results;.and... . ' • r

;

• other acquisition"-related expenses/ ' •-' -' ' ; i. ••"

Some or all of these items could have a material adverse effect on our business and our ability to finance our business.and comply with regulatory requirements. The businesses we acquire in the future may not achieve sales and profitability that would justify our investment and any difficulties we encounter in the integration process, including in the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. In addition, as consolidation becomes more prevalent in the water and wastewater industries, the prices for suitable acquisition candidates may increase to unacceptable levels and limit our ability to grow through acquisitions.


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j ^ ^ a c t o r s •

Contamination to our water supply may result in disruption in our services and litigation which could adversely affect our business, operating results and financial condition.

Our water supplies are subject to contamination, including contamination from the development of naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-made sources, such as MtBE, and possible terrorist attacks. In the event that our water supply is contaminated, we may have to interrupt the use of that water supply until we are able to substitute the flow of water from an uncontaminated water source. In addition, we may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities, or development of new treatment methods. If we are unable to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, there may be an adverse effect on our revenues, operating results and financial condition. The costs we incur to decontaminate a water source or an underground water system could be significant and could adversely affect our business, operating results and financial condition and may not be recoverable in rates. We could also be held liable for consequences arising out of human exposure to hazardous substances in our water supplies or other environmental damage.

Tor example',", private plaint right to bring personal injury or" other tbxic tort claims arising'from.the presenceof;hazardous'; •" .. 'substances in bur drinking'water supplies. Our insurance policies may not be sufficierit'to cover He'costs of mese claims; ' . '^ . ,

In 'addition to the potentiaKpollutiortof our water supply as described above, in the wake of the September 11, 200 Merrorist attacks and;the • • ensuing threats to the nation's health and security, we have taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply. We have also tightened our security measures regarding the delivery and handling of certain chemicals used in our business. We have and will continue to bear increased costs for security precautions to protect our facilities, operations and supplies. These costs may be significant. We are currently not aware of any specific threats to our facilities, operations or supplies; however, it is possible that we would not be in a position to control the outcome of terrorist events should they occur.

We depend significantly on the services of the members of our senior management team, and the departure ofany of those persons could cause our operating results to suffer.

ccess depends significantly on the continued individual and collective contributions of our management team. The loss of the services of ember of our management team or the inability to hire and retain experienced management personnel could harm our operating results.


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Use of proceeds Unless we otherwise specify in the applicable prospectus supplement, we intend to use the net proceeds from the sale of the securities we may offer by this prospectus to fiind our capital expenditures, to fund future acquisitions of municipally owned and investor-owned water and wastewater systems, to integrate any businesses that we acquire into our existing business, to purchase and maintain plant equipment, as well as for working capital and other general corporate purposes. Our management will have broad discretion in the allocation of net proceeds from the sale of any securities sold by us.

Certain ratios Our ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the periods indicated below were as follows:

'?•)'•' : ; L!I '" v"-; Scv/'V. -V.A ' .'"T

' . 'Nine Months Ended;'- .

: •T-• Year • Ended December 31; '] :

September 30, '• ... . • ''J '2005 : '" 2004 ' " 2003 ! 2002 ' "' 2001 ' 2000

Ratio of earnings to fixed charges"J; 3.81 : ' ' 3.57' •' • 3.46 "-. 3.56 ' 3.36 ^ '3.02 Ratio of earnings to combined fixed charges and preferred

stock dividends 3.81 3.57 3.46 3.56- 3.36 3.02

The ratios of earnings to fixed charges and the ratios of earnings to combined fixed charges and preferred stock dividends were computed by dividing earnings by fixed charges and by combined fixed charges and preferred stock dividends, respectively. For the purpose of these computations, earnings have been calculated by adding fixed charges (excluding capitalized interest) to income before income taxes and minority interest. Fixed charges consist of interest cost, whether expensed br capitalized, amortization of deferred financing costs and the estimated interest portion of rental expense charged to income.


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Description of capital stock The following description of our capital stock sets forth material terms and provisions of our common stock and preferred stock. You should read our current amended and restated articles of incorporation for more detailed terms of our capital stock.

As of December 8, 2005, our authorized capital stock was 301,738,619 shares, consisting of:

• 300,000,000 shares of common stock, par value $0.50 per share, of which 128,846,270 shares were outstanding; and

• 1,738,619 shares of preferred stock, par value $1.00 per share, of which 100,000 shares have been designated as Series A Junior Participating Preferred Stock and reserved for future issuance in connection with our shareholder rights plan and no shares of preferred stock were outstanding.

COMMON STOCK

^ o t i n g rights-> i :;^ j ; j i . - . . . • . , .' * *-^:; - 'V '^^ / t ' ^ ' - •'"^'"V -•' V. • '•

;Hblders'of'our common stock are entitled to one vote for each share held by them at all meetings of the shareholders and are.not entitled'.to ^ -cumulate their votes' for the election of-directors. . ' '• ' •' '• 'x'•" '•' ' "' • • : ' -.'v

Dividend rights and limitations

Holders of our common stock may receive dividends when declared by our board of directors. Because we are a holding company, the funds we use to pay any dividends on our common stock are derived predominantly from the dividends that we receive from our subsidiaries and the dividends they receive from their subsidiaries. Therefore, our ability to pay dividends to holders of our common stock depends upon our subsidiaries' earnings, financial condition and ability to pay dividends. Most of our subsidiaries are subject to regulation by state utility commissions and the amounts of their earnings and dividends are affected by the manner in which they are regulated. In addition, they are subject to restrictions on the payment of dividends contained in their various debt agreements. Under our most restrictive debt agreements, the

•

it available for payment of dividends to us as of September 30, 2005 was approximately $280 million of Aqua Pennsylvania's retained gs and $66 million of the retained earnings of certain other subsidiaries. Payment of dividends on our common stock is also subject to the

preferential rights of the holders of any outstanding preferred stock.

Liquidation rights ,

In the event that we liquidate, dissolve or wind-up, the holders of our common stock are entitled to share ratably an. all of the assets that remain after we pay our liabilities. This right is subject, however, to the prior distribution rights of any outstandingtpieferred stock. ; •, .'

PREFERRED STOCK

Under our certificate of incorporation, we are authorized to issue up to 1,738,619 shares of preferred stock of which 100,000 shares have been designated and reserved for issuance as Series A Junior Participating Preferred Stock, $ 1.00 par value per share, in connection with our shareholder rights plan. As of December 8, 2005, no shares of preferred stock were outstanding.

Our board of directors has the authority, from time to time and without further action by our shareholders, to divide our unissued capital stock into one or more classes and one or more series within any class and to make determinations of the designation and number of shares of any class or series and determinations of the voting rights, preferences, limitations and special rights, if any, of the


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shares of any class or series. The rights, preferences, limitations and special rights of different classes of capital stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The rights, preferences, privileges and restrictions of each series may be fixed by the designations of that series set forth in either a restated version of the certificate of incorporation or a certificate of designations relating to that series.

The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of us without further action by our shareholders. The issuance of preferred stock with voting and conversion rights may also adversely affect the voting power of the holders of our common stock. In certain circumstances, an issuance of preferred stock could have the effect of decreasing the market price of our common stock.

Whenever preferred stock is to be sold pursuant to this prospectus, we will file a prospectus supplement relating to that sale which will specify:

• the number of shares in the series of preferred stock;

• the designation for the series of preferred stock by number, letter or title that will distinguish the series from any other series of preferred ;stpck; \ t i \ . .-; • - • , . . • ' . [ ' - • ' . . , • .v-:^-^ • • \ •• •-; ' '

.j.'\r, the dividend rate, if any, and .whether dividends on that series of preferred stock willbe cumulative^honcumulatiye s?.r'P,art!ally; 'Cumulative;, ,, thevoting fights of that series of preferred'stock/if any; ' ' " * . •. • •"' • • •

• any conversion provisions applicable to that series of preferred stock;

• any redemption or sinking fund provisions applicable to that series of preferred stock;

• the liquidation preference per share of that series of preferred stock; and

• the terms of any other preferences or rights, if any, applicable to that series of preferred stock.

Shareholder rights plan

Pursuant to our shareholders rights plan, current or future holders of our common stock have the right to purchase a fraction ofa share of our S^^s A Junior Participating Preferred Stock for each of outstanding share of common stock held by them. Upon the occurrence of certain ^ ^ A , each right would entitle the holder to purchase from us one one-thousandth ofa share of Series A Junior Participating Preferred Stock at a^Rfercise price of $90 per one-thousandth of a share, subject to adjustment. The rights are exercisable in certain circumstances, such as when a person or group acquires 20% or more of our common stock or if the holder of 20% or more of our common stock engages in certain transactions with us. In the latter case, the right to purchase Series A Junior Participating Preferred Stock would be exercisable by each holder,

^ but not the acquiring person, to purchase shares of our common stock at a substantial discount from the market price: Additionally, pursuant to our shareholders rights plan, if; after the;date that a person has become the holder of 20% or more of our common, stock, any person or.group

. merges with us:or engages in certain other transactions with us, each holder of a right,-other than the-acquirer, will havetthe right to purchase ' . • common stock of the surviving corporation at a substantial discount from the market price. These rights are;subject td redemption by us in certain circumstances..These rights have no voting or dividend rights and, until exercisable, cannot trade separately.from our common stock and have no dilutive effect on our earnings. This plan expires on March 1, 2008.

Anti-takeover provisions Pennsylvania State Law Provisions

We are subject to various anti-takeover provisions of the Pennsylvania Business Corporation Law of 1988, as amended. Generally, these provisions are triggered if any person or group acquires, or 10


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discloses an intent to acquire, 20% or more ofa corporation's voting power, unless the acquisition is under a registered firm commitment underwriting or, in certain cases, approved by the board of directors. These provisions:

• provide the other shareholders of the corporation with certain rights against the acquiring group or person;

• prohibit the corporation from engaging in a broad range of business combinations with the acquiring group or person; and

• restrict the voting and other rights of the acquiring group or person.

In addition, as permitted by Pennsylvania law, an amendment to our articles of incorporation or other corporate action that is approved by shareholders may provide mandatory special treatment for specified groups of nonconsenting shareholders of the same class. For example, an amendment to our articles of incorporation or other corporate action may provide that shares of common stock held by designated shareholders of record must be cashed out at a price determined by the corporation, subject to applicable dissenters' rights.

Articles of Incorporation and Bylaw Provisions

-Certain' provisions of ounarticles of incorporation and bylaws may have the effect of discouraging unilateral tender offers.; on other attempts to .•take oyer and acquire piir business. These provisions.might discourage some potentially' interested purchaser from attempting a unilateral, •thiceWerrbi'dTor'us:bri'ferim which•'sonVe sharfihoiders nught favor! Oiif: articles of mcb^ofafidn require.tliaVcertain furidamentaiitfansactiohs must be approved by the holders of 75% of the outstanding shares of our capital stock entitled to vote on the matter uhless'at least 50% of-the members of the board of directors has approved the transaction, in which case the required shareholder approval will be the minimum approval required by applicable law. The fundamental transactions that are subject to this provision are those transactions that require approval by shareholders under applicable law or the articles of incorporation. These transactions include certain amendments of our articles of incorporation or bylaws, certain sales or other dispositions of our assets, certain issuances of our capital stock, or certain transactions involving our merger, consolidation, division, reorganization, dissolution, liquidation or winding up. Our articles of incorporation and bylaws provide that:

• a special meeting of shareholders may only be called by the chairman, the president, the board of directors or shareholders entitled to cast a majority of the votes which all shareholders are entitled to cast at the particular meeting;

•nations for election of directors may be made by any shareholder entitled to vote for election of directors if the name of the nominee and in information relating to the nominee is filed with our corporate secretary not less than 14 days nor more than 50 days before any

meeting of shareholders to elect directors; and . . .

• certain advance notice procedures must be met for shareholder proposals to be made at annual meetings of shareholders. These advance notice , .procedures .generally, require a notice to be delivered.not less than^O days nor more<than-120 days before the anniversary,date of the * mimediately.preceding annual meeting of shareholders. , . ; .. • . , . . ;. • .:. „•_'., ,;•

Transfer agent and registrar . .o. - . ••. .. .•*, v :'<•/ - v

The transfer agent arid "registrar for our co'mmbh stock is Computershare, Ltd. " ; | •• ' '• •""


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Description of depository shares We may, at our option, offer fractional shares of our preferred stock, rather than whole shares of our preferred stock. In the event we do so, we will issue receipts for depositary shares, each of which will represent a fraction (to be set forth in the prospectus supplement relating to offering of the depositary shares) of a share of the related series of preferred stock.

The shares of our preferred stock represented by depositary shares will be deposited under a deposit agreement between us and a bank or trust company selected by us having its principal office in the United States and having a combined capital and surplus of at least $50,000,000. Subject to the terms of the deposit agreement, each owner ofa depositary share will be entitled, in proportion to the applicable fraction ofa share of preferred stock, represented by the depositary share to all of the rights and preferences of the preferred stock represented by the depositary shares (including dividend, voting, redemption, conversion and liquidation rights).

The above description of depositary shares is only a summary, is not complete and is subject to, and is qualified in its entirety by the description in the applicable prospectus supplement and the provisions of the deposit agreement, which will contain the form of depository

i-reiceipt/Avcqpy'of tjiedeppsit agreement willbe filed with the'SEG as an'exhibit to or incorporated by reference in.the'registration^statement of' /whiCnthis'pfbspectus i s ' a ' - p ' d ' r t : ' ' - j ' ' : ' • • : ' - ^vVN^^.:-. :-:v:-i •:? r !-• ;

Description of debt securities Please note that in this section entitled Description of Debt Securities, references to "we," "us," "ours" or "our" refer only to Aqua America, Inc. and not to its consolidated subsidiaries. Also, in this section, references to holders mean those who own debt securities registered in their own names, on the books that we maintain or the trustee maintains for this purpose, and not those who own beneficial interests in debt securities registered in street name or in debt securities issued in book-entry form through one or more depositaries. Owners of beneficial interests in the debt securities should read the section below entitled "—Book-Entry Procedures and Settlement."

ERAL

febt securities offered by this prospectus will be our unsecured obligations, except as otherwise set forth in an accompanying prospectus-supplement, and will be either senior or subordinated debt. We will issue senior debt under a senior debt .indenture, and we will issue . , subordinated debt under a subordinated debt indenture. We sometimes refer to the senior debt indenture and the subordinated debt indenture individually as an indenture and collectively as the indentures. We have filed forms of the indentures with the SEC as exhibits to the • registration statement of which this prospectus forms a part. You can obtain copies of the indentures by. following the directions outlined in .

""Where You Can Find More Information," or by contacting the applicable'indenture trustee. ' "-' •. :v

A form of each debt security, reflecting the particular terms'and provisions of a-, series of offered debtsecurities/willbe.filed with the SEG at the time of the offering and incorporated by reference as exhibits to the registration statement of which this.prospectus forms a part. •

The following briefly summarizes certain material provisions that may be included in the indentures. Other terms, including pricing and related terms, will be disclosed for a particular issuance in an accompanying prospectus supplement. You should read the more detailed provisions of the applicable indenture, including the defined terms, for provisions that may be important to you, You should also read the particular terms of a series of debt securities, which will be described in more detail in an 12


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accompanying prospectus supplement. So that you may easily locate the more detailed provisions, the numbers in parentheses below refer to sections in the applicable indenture or, i f no indenture is specified, to sections in each of the indentures. Wherever particular sections or defined terms of the applicable indenture are referred to, such sections or defined terms are incorporated into this prospectus by reference, and the statement in this prospectus is qualified by that reference.

The trustee under each indenture will be determined at the time of issuance of debt securities, and the name of the trustee will be provided in an accompanying prospectus supplement.

The indentures provide that our senior or subordinated debt securities may be issued in one or more series, with different terms, in each case as we authorize from time to time. We also have the right to "reopen" a previous issue of a series of debt securities by issuing additional debt securities of such series without the consent of the holders of debt securities of the series being reopened or any other series. Any additional debt securities of the series being reopened will have the same ranking, interest rate, maturity and other terms as the previously issued debt securities of that series. These additional debt securities, together with the previously issued debt securities of that series, will constitute a single series ofde^t securities under Ae^erms of .the applicable indentu^ > ; „ .->>-•.•,•. -.. . - •,„,,;.-;„„,•

-TYPES OF DEBT. siECUWTIRS .,: ' . v ' : v - •. • V; - ' - ^ • - - ; ' • ::vVv-" : r>V--~A / i ^ V f j ; ^ ' . 'V v

We may issue fixed or floating rate debt securities. Fixed rate debt securities will bear interest at a fixed rate described in the prospectus supplement. This type includes zero coupon debt securities, which bear no interest and are often issued at a price lower than the principal amount. United States federal income tax consequences and other special considerations applicable to any debt securities issued at a discount will be described in the applicable prospectus supplement.

Upon the request of the holder of any floating rate debt security, the calculation agent will provide the interest rate then in effect for that debt • security, and, i f determined, the interest rate that will become effective on the next interest reset date. The calculation agent's determination of any interest rate, and its calculation of the amount of interest for any interest period, will be final and binding in the absence of manifest error.

1 All percentages resulting from any interest rate calculation relating to a debt security-will be rounded upward or downward, as appropriate, to

•

xt higher or lower one hundred-thousandth of a percentage point. All amounts used in or resulting from any calculation relating to a debt ty will be rounded upward or downward, as appropriate, to the nearest cent,- in the case of U.S. dollars, or to the nearest corresponding

/hundredth of a unit, in the case of a currency other than U.S. dollars, with one-half cent or one-half of a corresponding hundredth of a unit or 1 more being rounded upward.

-^In determihihg the base.rate that applies to a floating rate debt security during a particular interest period;;the calculation:agenMnay obtain rate '.'{iquotes from various .bahks1 or dealers active in the relevant market; as described in the prospectus supplement. Those reference banks and

dealers may include the calculation agent itself and its affiliates, as well as any .underwriter, dealer or agent participating in the distribution1 of:. . •.y:the relevantfloating rate debt securities andjts affiliates., , . . , , . . . - •. v. .iv,

INFORMATION IN THE PROSPECTUS StPPLEMtNT

The prospectus supplement for any offered series of debt securities will describe the following terms, as applicable:

• the title;

• whether the debt is senior or subordinated;

• whether the debt securities are secured or unsecured and, if secured, the collateral securing the debt; 13


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• the total principal amount offered;

• the percentage of the principal amount at which the debt securities will be sold and, i f applicable, the method of determining the price;

• the maturity date or dates;

• whether the debt securities are fixed rate debt securities or floating rate debt securities;

• i f the debt securities are fixed rate debt securities, the yearly rate at which the debt security will bear interest, i f any, and the interest payment dates;

• i f the debt security is an original issue discount debt security, the yield to maturity;

• i f the debt securities are floating rate debt securities, the interest rate basis; any applicable index currency or maturity, spread or spread multiplier or initial, maximum or minimum rate;-the interest reset, detennination, .calculation, and payment.da tes, and.the.day count used to,,,.., calculate interest parents for any period;. • . . •. : :.-

• die date or dates from which any interest will accrue, or how such date or dates willbe determined, and the interest.payment dates'and any : relatedVecbrd dates;" ' •' . . . . . • < . . . . . . . .

• if other than in U.S. dollars, the currency or currency unit in which payment will be made;

• the denominations in which the currency or currency unit of the securities will be issuable if other than denominations of $1,000 and integral multiples thereof;

• the terms and conditions on which the debt securities may be redeemed at our option;

• any obligation we may have to redeem, purchase or repay the debt securities at the option of a holder upon the happening ofany event and the «s and conditions of redemption, purchase or repayment;

ames and duties of the trustee and any co-trustees, depositaries, authenticating agents, calculation agents, paying agents, transfer agents

or registrars for the debt securities;

• any material provisions of the applicable indenture described in this prospectus that do not apply to the debt securities;

• .a discussion of United States federal income tax, accounting,and special considerations, procedures and limitations with respect to the debt ,, 'securities; . .,. , . ; ' . . . , .. . .•••1'>-V - . -, ..

•whether and under .what circumstances we willpay additional amounts to holders.in,respect.of any tajcassessment or government charge, and, if so, whether we will have the option to redeem the debt securities rather than pay such additional amounts; and

• any other specific terms of the debt securities that are consistent with the provisions of the indenture.

The terms on which a series of debt securities may be convertible into or exchangeable for other of our securities or any other entity will be set forth in the prospectus supplement relating to such series. Such terms will include provisions as to whether conversion or exchange is mandatory, at the option of the holder or at our option. The terms may include provisions pursuant to which the number of other securities to be received by the holders of such series of debt securities may be adjusted.

We will issue the debt securiries only in registered form. As currently anticipated, debt securities of a series will trade in book-entry form, and global notes will be issued in physical (paper) form, as described below under "—Book-Entry Procedures and Settlement." Unless otherwise provided in the 14


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^ ^ ^ i p t i o n of debt securities

accompanying prospectus supplement, we will issue debt securities denominated in U.S. dollars and only in denominations of $1,000 and integral multiples thereof.

The prospectus supplement relating to offered debt securities denominated in a foreign or composite currency will specify the denomination of the offered debt securities.

The debt securities may be presented for exchange, and debt securities other than a global security may be presented for registration of transfer, at the principal corporate trust office of the trustee named in the applicable prospectus supplement. Holders will not have to pay any service charge for any registration of transfer or exchange of debt securities, but we may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection with such registration of transfer (Section 3.05).

PAYMENT AND PAYING AGENTS

Distributions on the debt securities other than those represented by global notes will be made in the designated currency against surrender of the debt securities at t h ^ the trustee named in die 'applicable prospectus Supplement! Paymeht.'wilfbe madeto/' the registered holder at die close", of business on the "record.date for such payment. Interest payments wiU;be>made at.the principals corporate ... ' trust office of the trustee named in the applicable prospectus supplement, or by a check mailed to the holder at his registered address. Payments , in any other manner will be specified in the applicable prospectus supplement. ' '

CALCULATION AGENTS

Calculations relating to floating rate debt securities and indexed debt securities will be made by the calculation agent, an institution that we appoint as our agent for this purpose. We may appoint one of our affiliates as calculation agent. We may appoint a different institution to serve as calculation agent from time to time after the original issue date of the debt security without your consent and without notifying you of the change. The initial calculation agent will be identified in the applicable prospectus supplement.

SENIOR DEBT SENP

w fay issue senior debt securities under the senior debt indenture. Senior debt will rank on a basis equal in priority with all our other debt except our subordinated debt.

s SUBORDINATED DEBT . . .

•ji We may issue subordinatedclefcit securities under the subordinated debt indenture. Subordinated debt will rank" subordinated.and junior in right 'df paymentj1 to the extent set forth in the subordinated debt indenture, to all our senior debt: - :' :-• .- ,• ••, ' •!• .

I f we'defauifin the payment of any pfincipafof, or premium, if any, of interest on any senior debt when it becomes due and payable after any applicable grace period, then, unless and until the default is cured or waived or cease's to exist, we cannot riiake a payment on'account of or

- redeem or otherwise acquire the subordinated debt securities.

If there is any insolvency, bankruptcy, liquidation or other similar proceeding relating to us or our property, then all senior debt must be paid in full before any payment may be made to any holders of subordinated debt securities.

Furthermore, i f we default in the payment of the principal of and accrued interest on any subordinated debt securities that is declared due and payable upon an event of default under the subordinated debt

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^ ^ ^ i p t i o n of debt securities

indenture, holders of all our senior debt will first be entitled to receive payment in full in cash before holders of such subordinated debt can receive any payments.

Except as may be otherwise set forth in an accompanying prospectus supplement, senior debt means:

• the principal, premium, if any, and interest in respect of indebtedness for money borrowed and indebtedness evidenced by securities, notes, debentures, bonds or other similar instruments issued, including, as to us, the senior debt securities;

• all capitalized lease obligations;

• all obligations representing the deferred purchase price of property; and

• all deferrals, renewals, extensions and refiindings of obligations of the type referred to above.

However, senior debt does not include:

•tKe subordinated debt securities;^ ' ^ ' . f . y / ' " , ' , '[.'Z'1 ''. '•'>'''. •:':;.'':-'T

: -'any indebtedness that .by its terms-is subordinated to, or ranks-in priority on ah equal basis with, subordihated.debt: securities;-, and .

• items of indebtedness (other than capitalized lease obligations) that would not appear as liabilities on a balance sheet prepared in accordance with accounting principles generally accepted in the United States of America.

COVENANTS

The accompanying prospectus supplement will contain any covenants applicable to the debt securities.

MODIFICATION OF THE INDENTURES indentures will provide that we and the relevant trustee may enter into supplemental indentures to establish the form and terms of any new

of debt securities without obtaining the consent of any holder of debt securities.

We and the trustee may, with the consent of the holders of at least a majority in aggregate outstanding principal amount of the debt securiries of a series, modify the applicable indenture or the rights of the holders of the securities of such series.

No such modification may, without the consent of each holder of ah affected security: .. • - - '

•..extend the.fixed maturity of any such security; •- ••^ -,.

• reduce the rate or change the time of payment'of interest on such security; ' • - •'• -• >•'•• •> • • • • -A.'

• reduce the principal amount of such securities or the premium, if any, on such security;

• change any obligation of ours to pay additional amounts with respect to such security;

• reduce the amount of the principal payable on acceleration of such security if issued originally at a discount;

• adversely affect the right of repayment or repurchase of such security at the option of the holder;

• reduce or postpone any sinking fund or similar provision with respect to such security;

• change the currency or currency unit in which such security is payable or the right of selection thereof; 16


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^^^ ip t ion of debt securities

• impair the right to sue for the enforcement ofany payment with respect to such security on or after the maturity of such security;

• reduce the percentage of the aggregate outstanding principal amount of debt securities of the series referred to above whose holders need to consent to the modification or a waiver without the consent of such holders; or

• change any obligation of ours with respect to such security to maintain an office or agency.

DEFAULTS

Except as may be otherwise set forth in an accompanying prospectus supplement, each indenture will provide that events of default regarding any series of debt securities will be:

• our failure to pay for 30 days required interest on any debt security of such series;

'.'.••our failure to^ayiprincipal or premium/if any;ron any debt security of such series when.due; •:-:':••,,:<. ^v^---;'\•" -.

bur failure to make'any required scheduled instaiiment payment Tor 3^ ; - . - - . ' , . ' . ; - , i t , " v ' " '

• bur failure to perform for 90 days after notice any other covenant in the relevant indenture other than a covenant included in the relevant indenture solely for the benefit ofa series of debt securities other than such series; and

• certain events of bankruptcy or insolvency, whether voluntary or not (Section 5.01).

Except as may be otherwise set forth in an accompanying prospectus supplement, if an event of default regarding debt securities ofany series issued under the indentures should occur and be continuing, either the trustee or the holders of 25% in the principal amount of outstanding debt securities of such series may declare each debt security of that series due and payable (Section 5.02). We may be required to file annually with the trustee a statement of an officer as to the fulfillment by us of our obligations under the indenture during the preceding year.

^ent of default regarding one series of debt securities issued under an indenture is necessarily an event of default regarding any other series t securities.

Holders of a majority in aggregate principal amount of the outstanding debt securities of any series will be entitled.to control certain actions.of. * the trustee under the indentures and to waive past defaults regarding such series (Sections 5.12 and 5.13). The holders of debt securities ^generally will not be able to-require the trustee to take any action, unless crae or more of such holders provides to the trustee reasonable security

or indemnity (Section 6.02). <. .' . •• "' '

If an' event of default occurs and is" continuing regarding a series of debt securities, the trustee may use any sums ithat it .holds under the relevant " : indenture for its o,wn reasonable compensation and expenseslincurred prior to paying the holders ofdebtsecurities.of such series.:- . "• •.,.....

(Section 5.06). ., , ....

Before any holder of any series of debt securities may institute action for any remedy, except payment on such holder's debt security when due, the holders of not less than 25% in principal amount of the debt securities of that series outstanding must request the trustee to take action. Holders must also offer and give the satisfactory security and indemnity against liabilities incurred by the trustee for taking such action (Sections 5.07 and 5.08).

DEFEASANCE

Except as may otherwise be set forth in an accompanying prospectus supplement, after we have deposited with the trustee, cash or government securities, in trust for the benefit of the holders .

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^ J ^ i p t i o n of debt securities

sufficient to pay the principal of, premium, i f any, and interest on the debt securities of such series when due, and satisfied certain other conditions, including receipt of an opinion of counsel that holders will not recognize taxable gain or loss for United States federal income tax purposes, then:

• we will be deemed to have paid and satisfied our obligations on all outstanding debt securities of such series, which is known as defeasance and discharge (Section 14.02); or

• we will cease to be under any obligation, other than to pay when due the principal of, premium, if any, and interest on such debt securities, relating to the debt securities of such series, which is known as covenant defeasance (Section 14.03).

When there is a defeasance and discharge, the applicable indenture will no longer govern the debt securities of such series, we will no longer be liable for payments required by the terms of the debt securities of such series and the holders of such debt securities will be entitled only to the deposited funds. When there is a covenant defeasance, however, we will continue to be obligated to make payments when due if the deposited funds are not sufficient.

; GOVEIWING.LAW - ". . v *:r,''i-^J^'y \ ::

Unless otherwise stated in the prospectus supplement, the debt securities and the indentures will be governed by Pennsylvania law.

CONCERNING THE TRUSTEE UNDER THE INDENTURES

We may have banking and other business relationships with the trustee named in the prospectus supplement, or any subsequent trustee, in the ordinary course of business.

FORM, EXCHANGE AND TRANSFER

We will issue debt securities only in registered form; no debt securities will be issued in bearer form. We will issue each debt security in book-eni^fonn only, unless otherwise specified in the applicable prospectus supplement. We wiil issue any common stock issuable upon i^^Hsion of any debt security being offered in both certificated and book-entry form, unless otherwise specified in the applicable prospectus sifflement. Debt securities in book-entry form will be represented by a global security registered in the name ofa depositary, which will be the holder of all the debt'securities represented by the global security. Those who own beneficial interests in a global security will dp so through participants in the depositary's system, and the rights of these indirect owners will be governed solely by the applicable procedures of

¥:'.the depositary and its'participants.'bniy the depositary will be entitled to transfer or exchange a debt;security in global form,1 since it will be the •p'Csole-holder of the debt "security. These book-entry securities are described below under "Book-Entry. Procedures and:Settlement." . '. •

t 'Hf any dett securities are issued in ndiiTglbbai.fdrm or cease to be book-entry securities' (in the circumstances described in the 'next section),.the . ''following will apply to them:'' '

• The debt securities will be issued in fully registered form in denominations stated in the prospectus supplement. You may exchange debt securities for debt securities of the same series in smaller denominations or combined into fewer debt securities of the same series of larger denominations, as long as the total amount is not changed.

• You may exchange, transfer, present for payment or exercise debt securities at the office of the relevant trustee or agent indicated in the prospectus supplement. You may also replace lost, stolen, destroyed or mutilated debt securities at that office. We may appoint another entity to perform these functions or may perform them.

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ription of debt securities

• You will riot be required to pay a service charge to transfer or exchange the debt securities, but you may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange, and any replacement, will be made only i f our transfer agent is satisfied with your proof of legal ownership. The transfer agent may also require an indemnity before replacing any debt securities.

• If we have the right to redeem, accelerate or settle any debt securities before their maturity or expiration, and we exercise that fight as to less than all those debt securities, we may block the transfer or exchange of those debt securities during the period beginning 15 days before the day we mail the notice of exercise and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers of or exchange any debt security selected for early settlement, except that we will continue to permit transfers and exchanges of the unsettled portion of any debt security being partially settled.

• If fewer than all of the debt securities represented by a certificate that are payable or exercisable in part are presented for payment or exercise, a new certificate will be issued for the remaining amount of securities.

; BOOK-ENTRY PROCEDURES AND SETTLEMENT : , O ^ w : ^ - •-- V . . ''^ V

i . Most offered debt securities will be book-entry (global) securities. Upon issuance, all book-entry securities will'be represented by one or more fully registered global securities, without coupons. Each global security will be deposited with, or on behalf of, The Depository Trust Company, or DTC, a securities depository, and will be registered in the name of DTC or a nominee of DTC. DTC will thus be the only registered holder of these debt securities.

Purchasers of debt securities may only hold interests in the global notes through DTC if they are participants in the DTC system. Purchasers may also hold interests through a securities intermediary — banks, brokerage houses and other institutions that maintain securities accounts for customers — that has an account with DTC or its nominee. DTC will maintain accounts showing the security holdings of its participants, and these participants will in tum maintain accounts showing the security holdings of their customers. Some of these customers may themselves be -securities intermediaries holding securities for their customers. Thus, each beneficial owner of a book-entry security will hold that debt security

•

ctly through a hierarchy of intermediaries, with DTC at the top and the beneficial owner's own securities intermediary at the bottom, ebt securities of each beneficial owner of a book-entry security will be evidenced solely by entries on the books of the beneficial owner's

. securities intermediary. The actual purchaser of the debt securities will generally not be entitled to have the debt securities represented by the • global securities registered in its name and .will not be considered the owner under the declaration. In most cases, a beneficial owner will also ,;vfnot be able to,obtain a paper certificate evidencing the holder's ownership.of debt securities/The book-entry systerii for holding securities : -ieliminates the need for physicabmovement of certificates and is the system, through which most publicly traded common stock is held in the /'^United States. However, the laws of some jurisdictions require some purchasers ofsecurities to take:physical delivery>oftheir.securities in' • '^definitive'form. These laws Wy iriipaif the'ability to transfef;book-entry securities. . ,-'.-X. "• - - 'J. : V ". •.

A beneficial owner of book-entry securities represented by a global security may exchange the securities for definitive (paper) securities only if:

• DTC is unwilling or unable to continue as depositary for such global security and we do not appoint a qualified replacement for DTC within 90 days; or

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^^•iption of debt securities

• We in our sole discretion decide to allow some or all book-entry securities to be exchangeable for definitive securities in registered form.

Unless we indicate otherwise, any global security that is exchangeable will be exchangeable in whole for definitive securities in registered form, with the same terms and of an equal aggregate principal amount. Definitive securities will be registered in the name or names of the person or persons specified by DTC in a written instruction to the registrar of the securities. DTC may base its written instruction upon directions that it receives from its participants.

In this prospectus, for book-entry securities, references to actions taken by security holders will mean actions taken by DTC upon instructions from its participants, and references to payments and notices of redemption to security holders will mean payments and notices of redemption to DTC as the registered holder of the securities for distribution to participants in accordance with DTC's procedures.

DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code and a clearing agency registered under section 17A of the Securities Exchange Act of 1934. The rules applicable to DTC and its participants are on file with the SEC

"We'will'not'have any responsibility, or liability for any aspectofthe records relating to, or payments made, on; account of; beneficial.ownership interest in the book-entry securities or for maintaining, supervising or reviewing any records relating-to the beneficial ownership interests: 20 . - . , . . v - . . . . . , .

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cription of common stock purchase contracts and common stock purchase units We may issue stock purchase contracts, representing contracts entitling or obligating holders to purchase from us, and us to sell to the holders, a specified number of shares or amount of common stock at a future date or dates. The price per share of common stock may be fixed at the time each contract is issued or may be determined by reference to a specific formula set forth in the contract. Each common stock purchase contract may be issued separately or as a part of a unit, which is referred to in this prospectus as a "common stock purchase unit," each consisting of a common stock purchase contract and, as security for the holder's obligation to purchase the common stock under the contract, the following:

• our senior debt securities or subordinated debt securities described under "Description of Debt Securities;"

• debt obligations of third parties, including U.S. Treasury securities;

• any other asset.as security described in the applicable prospectus supplement; or

• any combination of the foregoing.

Each commpn stock purchase contract may require us to make periodic payments td the holder of the:cbmmon stock.purchase unit.or vice ••'versa, "atid such paymi2%ts[may be unsecured or pfefunded'on some basis discussed in the applicable prospectus supplement:.Each c»mmoh . stock piirclias'e contract may require holders to.secure their obligations, thereunder in a "specified mamief and; .in.certain1 circuihstances, we;rhay ,. deliver a newly issued prepaid common stock purchase contract, which is referred to as a "prepaid security," upon release to a holder ofany collateral securing such holder's obligations under the original contract.

The applicable prospectus supplement will describe the terms of any common stock purchase contract or common stock purchase unit and, if applicable, prepaid security. The description in the prospectus supplement will not purport to be complete and will be qualified in its entirety by reference to the contracts, units, the collateral arrangements and depositary arrangements, if applicable, relating to such contracts or units and, if applicable, the prepaid securities and the documents pursuant to which such prepaid securities will be issued. The applicable prospectus supplement will also describe the material United States federal income tax considerations applicable to the common stock purchase contracts and common stock purchase units.

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Where you can find more information We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC's public reference room at 100 F. Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further infonnation on the public reference room. You may also obtain our SEC filings from the SEC's Web site at http://www.sec.gov.

We have filed with the SEC a "shelf registration statement on Form S-3 under the Securities Act of 1933 relating to the securities that may be offered by this prospectus. This prospectus is a part of that registration statement, but does not contain all of the information in the registration statement. We have omitted certain parts of the registration statement in accordance with niles and regulations of the SEC. Statements made in this prospectus as to the contents ofany contract, agreement or other documents are not necessarily complete, and, in each instance, we refer-you to a copy of such document filed as an exhibit to the registration statement, of which this prospectus is a part, or otherwise filed with the SEC. For more detail about us and any securities that may be offered by this prospectus, you may examine the registration statement on Form S-3 and the exhibits filed with it at the locations listed in the previous paragraph.

The SEC allows'.us to "incorporate by;reference" the .information we .file with' thein, #hich .means .t|wt!\ê;can:disclpse;,inôrt^t information :to. '. ^yoii ty.'refejnrmg-you tojliose^ciq^ incorporated by^refeferice is considered, to bk p.artpf this,prospectus.-^JMhenê-file,> ^ • iôr rna^ update and supersede tlus;infdrmatibri.'iWe;inc'p^

'ffieWcuments listed below ami any future-filings we wiil make with the SEC under Sections 13(a); 13(c), .14.or i5(d) of the Securities Exchange Act of 1934 until we sell all of the securities covered by this prospectus; provided, however, that we are not incorporating, in each case, any documents or information deemed to have been furnished and not filed in accordance with SEC rules:

•. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, including portions of our 2004 Annual Report to Shareholders and our definitive Proxy Statement for the 2005 Annual Meeting of Shareholders incorporated therein by reference;

• Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005;

• • Our Current Reports on Form 8-K filed on January 21, 2005, March 7, 2005, May 25, 2005, October 7,2005, December 12, 2005 and

•

ember 16, 2005; and

description of our common stock set forth in our Registration Statement on Form 8-A, including any amendments or reports filed for the

purpose of updating such description.

[ You may request a copy of any documents that we incorporate by reference at no cost, by writing or telephoning us at:

Aqua America, Inc. fir 762 W. Lancaster Avenue ' , , . ' •: ' ' ' Bryn Mawr, PA 19010-3489 ' • " Telephone: 610-527-8000 ' * v ., ., ... , .

Attention:.Roy H. Stahl, Corporate Secretary

You should rely only on the information contained in or incorporated by reference in this prospectus and any supplements to this prospectus. We have not authorized.anyone to provide you with different infonnation. I f anyone provides you with different or inconsistent infonnation, you should not rely on 22


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you can find more information

it. You should not assume that the information provided in this prospectus or incorporated by reference in this prospectus is accurate as of any date other than the date on the front of this prospectus or the date of those documents. Our business, financial condition, results of operations and1 prospects may have changed since those dates.

Legal matters The validity of the securities that may be offered hereby will be passed upon for us by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.

Experts . .,The corisdlidatedifinancial, statements, arid management's assessment of the effectiveness of intemafc'ontrql oVer-ifinancial; reporting (which: is . ^included i n M .rReport onFbnn.f^ December 31- 2004 have been so incorporated.in_reliance,6ri the,report'(whicli coritame'd:ari - . ' : : •" '.: .>.

explahatbry paragraph indicating that management has excluded from its "assessnierit of and PricewaterhduseGbopersiLLP has,excluded froin its audit of internal control over financial reporting Heater Utilities, Inc. as it was acquirecl by Aqua America in a purchase business combination during 2004) of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

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AOUA America.


AQUA PENNSYLVANIA, INC. Regular Meeting of the Board of Directors

762 West Lancaster Avenue, Bryn Mawr, PA 19010 Friday. November 30, 2007 at 8:30 a.m.

STAFF AGE NDA (11/6/07)

1. Approval of Minutes of the Board of Directors Meetings held September 28, 2007

2. Action Items from September 28, 2007 meeting (Kyriss)

3. Report on Operations (Kyriss) Operational issues Water Quality Issues (Luitweiler) Employee/labor issues Public Notification Procedures

• ••- - Other Issues - •*

4'. ' Financial Report (Chain/Smeltzer)' ! . ;

Operating results through October Unbilled revenue Key financial ratios Capitalized labor ratio Collection activities/Results v. bad debt

5. 2008 Operating Budget (Chain/Smeltzer)

6. Treasurer's Report (Smeltzer) PA Rate Case Management Audit Financing (Re-fmancing) Results to date/ Rate Case - Clean up from 2007; DSIC

2008 Needs plans; 2008 - 2009 rate case plans PennVest Plans

7. Capital Program Analysis (Riegler/Kyriss) 2007 Spending v. 2007 Budget DSIC Expenditures 2008 DSlC/Non-DSIC Spending Plan Status of Major Projects

8. Status of Acquisitions (Kropilak/Kyriss) Schedule of Pending Acquisitions and Opportunities

9. Wastewater (Donatoni) 2008 Operating Budget Operations Plan Acquisitions Capital Plans Financial Results Rate case plans-wastewater

10. Septage Business Financial Results Organizational Issues Fleet Issues

11. Report on Customer Service/Collections/Meritage (Franklin)1

Call Center Performance Collections/AR/Bad Debt Expense Billing Update Meter Reading Estimate Rate Service Orders Outstanding/Backlogged Active/Inactive Accounts Customer Issues

12. Security Precautions (Kyriss/Stahl)

G;yi«grp\CORPAFF*J of Dii. & CoouoWgcndiMqui PA BdofDii Mig 12-1-06 doc

13. Other Matters

14. Next meeting of the Board of Directors - Friday, February 9, 2007 at 8:30 a.m.

G:\lj*^ip\CORPAFFJSdorDii-*Ckxnm^g™dis'A£|ijiPA BdofDii Mlg 12.1.06 doc

•


FILING REQUIREMENTS

G. Rate of Return

RR3. Supply projected capital requirements and sources of Company, Parent and System (Consolidated) for the historic test year and each of three (3) comparable future years.

A. Please see attached. Refer to RR26 for Company's Five Year Capital Plan.

AQUA PENNSYLVANIA, I N G (a wholly-owned subsidiaiy of Aqua America, Inc.)

Consolidated Statements of Gash Flow (In thousands of dollars)

Yeais ended December 31,2006 and 2005

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flows

provided by operating activities: Depreciation and amorcization Deferred income taxes and income tax credits Stock based compensation Gain on sale of other assets Changes tn current assets and current liabilities

Receivables, unbilled revenue, inventory and prepayments Payables, accrued taxes and other accrued liabilities

Accrued interest Other

Net cash provided by operating activities Cash flows from investing activities: Construction expenditures Allowance for funds used during construction Addition to funds restricted for construction activity Release of funds previously restricted for construction activity Acquisitions of water and wastewater systems Net proceeds on sale of other assets Other

Net cash used in investing activities Cash flows from financing activities:

Qistomers' advances and contributions in aid of construction

Repayments of customers' advances Net borrowings (repayments) of loans payable Proceeds from long-term debt Debt issuance costs paid Repayments of long-term debt Change in overdraft position Capital contribution from Aqua America, Inc. Dividends paid - common stock

Net cash (used in) provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end ot year

Cash paid for interest on all borrowings, net of amounts capitalized, was $29,051 and $29,445 in 2006 and 2005, respectively. Cash paid for.income taxes was $24,521 and $26,533 in 2006 and 2005, respectively.

2006 2005

$ 62,376 $ 61,544

46,459 42,169 8,632 21,719 1,020 (166) (99)

(491) 5,061 526 1,419 908 239

8,832 192 128,096 132,244

(158,474) (126,938) (1,585) (25) (1,460) (97,228) 52,824 54,384 (2,465) (2,305)

184 103 129 103

(110,847) (171,906)

1,383 1,567 (1,419) (1,684)

(62,000) 46,000 67,279 100,199

(403) (3,247) (22,126) (64,015)

(284) (6,927) 17,000 -

(18,014) (30,963) (18,584) 40,930 (1,335) 1,268 3,133 1,865

$ l,79if S 3,133


FILING REQUIREMENTS

G. Rate of Return

RR4. Provide a schedule of debt and preferred stock of Company, Parent and System (consolidated) as of historic test year-end and latest date, detailing for each issue (if applicable):

a. Date of issue

b. Date of maturity

c. Amount issued

d. Amount outstanding

e. Amount retired

f. Amount required

g. Gain on reacquisition

h. Coupon rate

i. Discount or premium at issuance

j . Issuance expenses

k. Net proceeds

I. Sinking Fund requirements

m. Effective interest rate

n. Dividend rate

o. Effective cost rate

p. Total average weighted effective Cost Rate

A. There is no preferred stock for the Company, Parent or System (consolidated). The schedule of debt for the Company may be found in Schedule 6 of Exhibit 4-A. Debt for the Parent as of June 30, 2007 and September 30, 2007 is attached.

Aqua America, Inc. (Parent) Long-Term Debt As of June 30, 2007

Exhibit RR4 Page 1 of 2

Que.

07/01/07 Issue Maturity Original LT (excl. CP) (0 LT {incl. CP) Weighted Average LT (excl. CP)

Balance @ Subsidiary Structure Holder Rate Date Date Amount Balance @ 6/30/07 06/30/08 6/30/07 Interest Rate

Aqua America, Inc. Note D. Ericson 6.05% 12/01/02 12/01/07 644,000 0 644.000 644,000 38,962 Aqua America, Inc. Note D. Ericson 6.05% 12/01/03 12/01/08 172,000 172,000 0 172,000 10,406 Aqua America, Inc. Unsecured Note - Series A TIAA-CREF 5.01% 02/03/05 02/03/15 18.000.000 18,000,000 0 18,000,000 901,800 Aqua America, Inc. Unsecured Note - Series B TIAA-CREF 5.20% 02/03/05 02/03/20 12,000,000 12,000,000 0 12,000,000 624,000 Aqua America, Inc. Senior Unsecured Notes Various(A) 4.37% 07/31/03 07/31/10 27,000,000 27,000,000 0 27,000,000 1.314,900 Aqua America, Inc. Senior Unsecured Notes Various fA) 4.87% 07/31/03 07/31/13 21,600,000 21,600,000 0 21,600.000 1.051,920 Aqua America, Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/14 27,000,000 27,000,000 p 27.000.000 1.314,900 Aqua America. Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/16 lO.SDD.DQO 10,800.000 0 10.800,000 525.960 Aqua America. Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/17 10,800,000 10,800,000 0 10,800,000 525,960 Aqua'America. Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/18 10,800.000 10,800.000 0 10.800,000 525,980 Aqua America, Inc. Senior Unsecured Notes Various (A) 4.67% 07/31/03 07/31/20 16,200.000 16,200,000 0 16,200.000 788.940 Aqua America, Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/23 10.800,000 10,800,000 0 10,800,000 525,960 Aqua America, Inc. Senior Unsecured Notes Northwestern Mutual Capital 5.54% 12/27/06 12/31/13 10,000,000 10,000.000 0 .10.000,000 554,000 Aqua America, Inc. Senior Unsecured Notes Northwestern Mutual Capital 5.54% 12/27/06 12/31/17 10,000.000 10,000,000 0' 10.000.000 554.000 Aqua America, Inc. Senior Unsecured Notes Northwestern Mutual Capital 5.54% 12/27/06 12/31/18 10,000,000 10.000,000 0 10,000,000 554.000 Aqua America. Inc. Senior Unsecured Notes Northwestern Mutual Capital 5.63% 02/28/07 02/28/22 15.000.000 15,000,000 0 15,000,000 844,500 Aqua America. Inc. Senior Unsecured Notes Northwestern Mutual Capital 5.83% 02/28/07 02/28/37 15.000.000 15,000,000 0 15,000,000 874.500

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

(A) Purchaser

The Baltimore Life Insurance Company

The Equitable Life Assurance Society

Nationwide Lite Insurance Company


MONY Life Insurance Company

Nationwide Life Insurance Company

Teachers Insurance & Annuity Assoc.

Amount

$ 2.000.000

3,500.000

7.000,000

12,000,000

15.000.000

20,500,000

75,000,000

'$ 135,000,000

Aqua America, Inc. (Parent) Long-Term Debt As of September 30, 2007

Exhibit RR4 Page 2 of 2

Due

10/01/07

issue ' Maturity Original • LT (exd. CP) to LT(fr7d. CP) Weighted Average • LT (exd. CP)

Balance @ Subsidiary Structure Holder Rate Date Date Amount Balance @ 9/30/07 09/30/08 9/30/07 Interest Rate

Aqua America, Inc. Note D. Ericson 6.05% 12/01/02 12/01/07 644,000 0 644,000 644,000 38,962 Aqua America. Inc. Note D. Ericson 6.05% 12/01/03 12/01/08 172,000 172.000 0 172,000 10.406 Aqua America. Inc. Unsecured Note - Series A TiAA-CREF 5.01% 02/03/05 02/03/15 18.000,000 18,000,000 0 18,000,000 901.800 Aqua America. Inc. Unsecured Note - Series B TIAA-CREF 5.20% 02/03/05 02/03/20 .12,000,000 12,000.000 0 12,000,000 824,000 Aqua America, Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/10 27,000,000 27,000,000 0 27,000,000 1,314.900 Aqua America. Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/13 21,600,000 21,600,000 0 21,600.000 1,051,920 Aqua America. Inc. Senior Unsecured Notes Various (A). 4.87% 07/31/03 07/31/14 27,000,000 27,000,000 ,0 27,000.000 1,314,900 Aqua America. Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/16 10,800,000 10,800,000 0 10,800.000 525,960 Aqua America, Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/17 10,800,000 10,800,000 0 10,800,000 525,960 Aqua America, inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/18 10,800,000 10,800,000 0 10,800.000 525.960 Aqua America. Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/20 16,200,000 16,200,000 0 16,200,000 788.940 Aqua America, Inc. Senior Unsecured Notes Various (A) 4.87% 07/31/03 07/31/23 10,800,000 10,800,000 0 10.800,000 525,960 Aqua America, Inc. Senior Unsecured Notes Northwestern Mutual Capital 5.54% 12/27/06 12/31/13 10,000,000 10,000,000 0 10,000,000 554,000 Aqua America. Inc. Senior Unsecured Notes Northwestern Mutual Capilal 5.54% 12/27/06 12/31/17 10.000,000 10.000,000 0 10.000,000 554.000 Aqua America, Inc. Senior Unsecured Notes Northwestern Mutual Capital 5.54% 12/27/06 12/31/18 10,000.000 10.000,000 0 10,000,000 554,000 Aqua America. Inc. Senior Unsecured Notes Northwestern Mutual Capital 5.63% 02/28/07 02/28/22 15,000,000 15.000,000 0 15.000,000 844,500 Aqua America. Inc. Senior Unsecured Notes Northwestern Mutual Capital 5.83% 02/28/07 02/28/37 15,000,000 15.000,000 0 15,000,000 874,500

•slTatal -Aqu a rAm e r i o a ^ ^ ^ S ^ S ;226;i72,t)00j| B 4 4 , 0 0 0 : [ ^ 2 2 S , 8 1 6 ; O 0 0 j | ^ ^ l i y 6 3 0 ; 6 6 8 ; | ^ B 6 r i 1 % |

(A) Purchaser

The Baltimore Life Insurance Company




MONY Life Insurance Company


Teachers Insurance fi Annuity Assoc.

Amount

S 2.000,000

3.500,000

7,000,000

12.000.000

15,000.000

20,500,000

75,000,000

$ 135,000,000


FILING REQUIREMENTS

G. Rate of Return

RR5. Supply financial data of Company and/or Parent for last five years:

a. Earnings-price ratio (average)

b. Earnings-book value ratio (per share basis) (avg. book value)

c. Dividend yield (average)

d. Earnings per share (dollar)

e. Dividends per share (dollars)

f. Average book value per share yearly

g. Average yearly market price per share (monthly high-low basis)

h. Pre-tax funded debt interest coverage

i. Post-tax funded debt interest coverage

j . Market price-book value ratio

A. Refer to Exhibit 4-A, Schedule 2.


FIUNG REQUIREMENTS

G. Rate of Return

RR6. Provide AFUDC charged by company at historic test year-end and latest date, explain method by which rate was calculated and provide workpaper showing derivation of the Company's current AFUDC rate.

A. Twelve months ended June 30, 2007 - $1,189,610

The Company utilizes a blended rate for cost of capital used during construction to reflect the various types of financing for capita! projects eligible for AFUDC.


FILING REQUIREMENTS

G. Rate of Return

RR7. Set forth provisions of Company's and Parent's charter and indentures (if "applicable) which describe coverage requirements, limits on proportions of types of capital outstanding, and restrictions on dividend payouts.

A. Please see attached.

Prepared by and Return to: Mary T. Tomich, Esq. Dilworth Paxson LLP 1735 Market Street Philadelphia, PA 19103 215-575-7000

FORTY-FIRST SUPPLEMENTAL

INDENTURE

DATED AS OF JANUARY 1, 2007

TO

INDENTURE OF MORTGAGE

DATED AS OF JANUARY 1, 1941

AQUA PENNSYLVANIA, INC.

TO

J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION

666985 5

SECTION 3. All cash deposited with the Trustee as part ofany Maintenance or Improvement Deposit provided for in Section 1 of this Article, may, at the option of the Company, be applied to the purchase of bonds under the provisions of Section 2 of Article X of. the Original Indenture or to the redemption of bonds under the provisions of Section 3 of Article X of the Original Indenture or may be withdrawn by the Company at any time to reimburse the Company for the cost of a Net Amount of Available Permanent Additions (excluding, however, from any such Available Permanent Additions all Permanent Additions included in any certificate delivered to the Trustee for the purpose of obtaining a credit against any Maintenance or Improvement Deposit provided for in Section 1 of this Article to the extent that such Permanent Additions have been used for any such credit). The Trustee shall pay to or upon the written order of the Company all or any part of such cash upon the receipt by the Trustee of:

(a) A Resolution requesting such payment; and

(b) The documents specified in paragraphs 2, 5, 6 and 7 of subdivision (B) of Section 3 of Article IV of the Original Indenture, with such modifications, additions and omissions as may be appropriate in the light of the purposes for which they are used.

ARTICLE III . Covenants of the Company.

SECTION 1. The Company hereby covenants and agrees with the Trustee, for the benefit of the Trustee and all the present and future holders of the Bonds, that the Company will pay the principal of, and premium, i f any, and interest on, all bonds issued or to be issued as aforesaid under and secured by the Original indenture as hereby supplemented, as well as all bonds which may be hereafter issued in exchange or substitution therefor, and will perform and fulf i l l all of the terms, covenants and conditions of the Original Indenture and ofthis Forty-first Supplemental Indenture with respect to the additional bonds to be issued under the Original Indenture as hereby supplemented.

SECTION 2. The Company covenants and agrees that so long as any of the Bonds are outstanding (a) the Company will not make any Stock Payment if, after giving effect thereto, its retained earnings, computed in accordance with generally accepted accounting principles consistently applied, will be less than the sum of (i) Excluded Earnings, i f any, since December 31, 2006, and (ii) $20,000,000; (b) Stock Payments made more than 40 days after the commencement, and prior to the expiration, ofany Restricted Period shall not exceed 65% of the Company's Net Income during such Restricted Period; and (c) the Company will not authorize a Stock Payment if there has occurred and is continuing an event of default under subsections (a) and (b) of Section 1 of Article XI of the Original Indenture.

For the purposes of this Section 2 the following terms shall have the following meanings:

"Capitalization" shall mean the sum of (i) the aggregate principal amount of all Debt at the time outstanding, (ii) the aggregate par or stated value of all capital stock of the Company of all classes at the time outstanding, (iii) premium on capital stock, (iv) capital surplus, and (v) retained earnings.

25

666985 5

'"Debt" means (i) all indebtedness, whether or not represented by bonds, debentures, notes or other securities, for (he repayment of money borrowed, (ii) all deferred indebtedness for the payment of the purchase price of property or assets purchased (but Debt shall not be deemed to include customer advances for construction or any bonds issued under the Indenture which are not Outstanding Bonds), (iii) leases which have been or, in accordance with generally accepted accounting principles, should be recorded as capital leases and (iv) guarantees of the obligations of another of the nature described in clauses (i), (ii) or (iii) which have been or, in accordance with generally accepted accounting principles, should be recorded as debt.

"Determination Date" shall mean the last day of each calendar quarter. Any calculation with respect to any Determination Date shall be based on the Company's balance sheet as of such date.

"Excluded Earnings" shall mean 35% of the Company's Net Income during any Restricted Period.

"Net Income" for any particular Restricted Period shall mean the amount of net income properly attributable to the conduct of the business of the Company for such period, as determined in accordance with generally accepted accounting principles consistently applied, after payment of or provision for taxes on income for such period.

"Outstanding Bonds" shall mean bonds which are outstanding within the meaning indicated in Section 20 of Article I of the Original Indenture except that, in addition to the bonds referred to in clauses (a), (b) and (c) of said Section 20, said term shall not include bonds for the retirement of which sufficient funds have been deposited with the Trustee with irrevocable instructions to apply such funds to the retirement of such bonds at a specified time, which may be either the maturity thereof or a specified redemption date, whether or not notice of redemption shall have been given.

"Restricted Period" shall mean a period commencing on any Detennination Date on which the total Debt of the Company is, or as the result of any Stock Payment then declared or set aside and to be made thereafter will be, more than 70% of Capitalization, and continuing until the third consecutive Detennination Date on which the total Debt of the Company does not exceed 70% of Capitalization.

"Stock Payment" shall mean any payment in cash or property (other than stock of the Company) to any holder of shares of any class of capital stock of the Company as such holder, whether by dividend or upon the purchase, redemption, conversion or other acquisition of such shares, or otherwise.

SECTION 3. The Company covenants and agrees that so long as any of the Bonds are outstanding, neither the Company nor any subsidiary of the Company will, directly or indirectly, lend or in any manner extend its credit to, or indemnify, or make any donation or capita] contribution to, or purchase any security of, any corporation which directly or indirectly controls the Company, or any subsidiary or affiliate (other than an affiliate which is a subsidiary of the Company) of any such corporation.

26

666985 5

AN ADAPTATION OF SECTION 3A OF ARTICLE IV OF THE INDENTURE OF MORTGAGE

SECIJOF 3, (A) Subject to the provisions of Section 2 of this Article bonds in addition to those provided for in any other Section hereof may from time to time be oxfKntted by the Company and deliveml to the Trnstee

and shall be authenticated and delivered by the Trustee upon the basis of Available Fermnnent -Additions, subject to the condition^ provisions andlimitationa set forth in this Section. The aggegate principal amount of bonds that may be authenticated and delivered from time to time under the provisions of this Section is limited to seventy per cent (70%) of the Net Amount of Available Permanent Additions, made the basis of the authentication and delivery thereof certified or provided in subdivision (B) of this Section.

No bonds shall be authenticated and delivered under this Section unless the Net Earnings of the Company as shown by a Net Earnings Certificate for a period of twelve (12) consecutive calenrinr months "within the fifteen (15) <*ttl«ndttT mouths next preceding the application for authentication and delivery of bondst shall have been not leas than one and three-quarters (1%) times the interest requirements for a period of one year upon (a) the bonds applied for, (b) allhonds outstanding, as herein defined, on the date of such application, and (c) all indebtedness outstanding on the date of such application "which is secured by any lien for the payment of money or its equivalent prior to or on a parity Trith the lien of this Indenture other than Pennitted Liens, as herein defined.

AKTICLE X H .

Covenants of the Company.

SECTXOH 1. The Company hereby covenants and agrees with the Trustee, for the benefit of the Trufltae and a l l the present and future holders of the Bonds, that the Ccnpany v i l l pay the principal of and preaiua, i f any, and interest on a l l honds issued or to bo issued as aforesaid under and secured by the Original Indenture as hereby supplemented, as vei l as a l l bonds vhich oay be hereafter issued in exchange or substitution therefor, and v i l l perform and f u l f i l l a l l of the terms, covenants and conditions of the Original Indenture and of this Twenty-Seventh" Supplemental Indontnre vi th respect to the additional bonds to be issued under the Original Indenture as hereby supplemented.

SECTION 2. The Company covenants and agrees that so long as any of the Bonds are outstanding (a) the Company v i l l not make any Stock Payment i f , after giving effect thereto, i t s retained earnings, computed in accordance with generally accepted accounting principles consistently applied, v i l l be less than the sum of ( i) Excluded Earnings, i f any, since December 31, 1991, and (11) $20,000,000; (b) Stock Payments made more than 40 days after the commencement, and prior to the expiration, of any Restricted Period shall not exceed 65% of the Company's Ket Income during such Restricted Period? and (c) the Company v i l l not authorize a Stock Payment i f there has occurred and i s continuing an event, of default under subsections (a) and (b) of Section 1 of Article XI of the "Original Indenture,

For the purposes of this Section- 2 the following terms shall have the following meanings:

"Stock Payment* shall mean any payment in cash or property (other than stock of the Company) to any holder of shares of any class of capital stock of the Company as such holder, whether by dividend or upon the purchase, redemption, conversion or other acquisition of Buch shares, or otherwise.

"Excluded Earnings* shal l mean 35% of the Company's Net Income during any Restricted Period.

"Restricted Period , , shall mean a period commencing on any Determination Date on vhich the total Debt of the company i s , or as the result of any Stock Payment then declared or set aside and to be made thereafter v i l l be, more than 70% of Capitalization, and continuing unt i l the third consecutive Determination Date on vhich the total Debt of the Company does not exceed 70% of Capitalization.

"Net Income" tor any particular Restricted period shall mean the amount o£ net income properly attributable to the conduct of the business of the Company for such Period, ac determined in accordance vith generally accepted accounting principles consistently applied, after payment of or provision for taxes on income for such Period.

"Determination Date* shall mean the last day of each calendar quarter. Any calculation vith respect to any Determination Date shall be based on the company's balance sheet as of such date.

"Debt" means (i) a l l indebtedness, vhether or-not represented by bonds, debentures, notes or other securities, for the repayment of money borrowed, ( i i ) a l l deferred indebtedness for the payment of the purchase price of property or assets purchased (but Debt shall not be deemed to include Customer Advances for Construction or any bonds issued under the Indenture vhich are not Outstanding Bonds), ( i i i ) leases vhich have been or, in accordance vith generally accepted accounting principles, should be recorded as capital leases and (iv). guarantees of the obligations of another of the nature described in clauses ( i ) , ( i i ) or ( i i i ) vhich have been or, in accordance vith generally accepted accounting principles, should be recorded as debt.

"Outstanding Bonds" shall moon bonds vhich are outstanding vithin the meaning indicated in Section 20 of Article I of the original Indenture except that, in .addition to the bonds referred to in clauses (a), (b) and (c) of said Section 20, said term shall not include bonds for the retirement of vhich sufficient funds have been deposited with the Trustee vith irrevocable instructions to apply such funds to the retirement of such bonds at a specified time, vhich may be either the maturity thereof or a specified redemption date, vhether or not notice of redemption shall have been given.

"Capitalization" shall mean the sum of (i) the aggregate principal amount of a l l Debt at the time outstanding, ( i i ) the aggregate par or stated value of a l l capital stock of the Company of a l l classes at the time outstanding, ( i i i ) premium on capital stock, (iv) capital surplus, and (v) retained earnings.

SECTION 3. The Company covenants and agrees that ao long as any of the Bonds are outstanding neither the company nor any subsidiary of the Company v i l l , directly or indirectly, lend or in any manner extend i t s credit to, or indemnify, or make any donation or capital contribution to, or purchase any security of, any corporation vhich directly or indirectly controls the Company, or any subsidiary or a f f i l i a t e (other than an a f f i l i a te vhich i s a subsidiary of the Company) of any such corporation.

0»\Wll-lC\t>**!»0W\llll?.3 — 2 8 -

ROARING CREEK WATER COMPANY Indenture Requirements

Indenture of Mortgage and Deed of Trust Dated November 1, 1964

Section 12. Issuance of Additional Funded DebL

12.1 The Company will not, and will not permit any Subsidiary to, create, incur, assume, guarantee, agree to purchase or repurchase or provide funds in respect of, or otherwise become liable with respect to Funded Debt other than the Notes unless:

(a) immediately after such event the total of all Funded Debt of the Company and its Subsidiaries shall be not more than 70% of the Net Capital Properties of the Company and its Subsidiaries; and

(b) Consolidated Net Income of the Company and its Subsidiaries Available for the Payment of Interest in any consecutive 12 of the preceding 15 calendar months shall have equaled at least 200% of the annual interest on Funded' Debt to be outstanding after giving effect to such event.

12.2 Nothing herein shall prohibit the creation or assumption of Funded Debt for the renewal, extension or refunding of Funded Debt permitted under this Agreement in an amount not exceeding the amount thereof remaining unpaid immediately prior to the renewal, extension or refunding.

Amended with Note Agreement Dated 9/1/72

13. Limitation on Short-Term Debt.

The Company will not, and will not permit any Subsidiary to, incur Short-Term Debt unless:

(a) such Short-Term Debt, by its terms, is subordinate to the Series B Notes; and

(b) after giving effect to the transaction, the sum of the Short-Term Debt and all Funded Debt will not. exceed 75% of the sum of all Shon-Term Debt, all Funded Debt and the Capital Accounts of the Company.

The limitation in this Section 13 shall not apply to Short-Term Debt incurred as renewal or ejetension of Short-Term Debt existing as of September 1, 1972, so long as no increase in the principal amount thereof is involved.



(continued)

Section 14. Restricted Stock Payments and Restricted Stock Acquisitions.

The Company will not directly or indirectly declare, order, pay or make any Restricted Stock Payments or Restricted Stock Acquisitions, or set apart any sum or propeny for the foregoing, unless immediately after grvrng effect to the proposed action, the aggregate amount of Restricted Stock Payments and Restricted Stock Acquisitions directly or indirectly declared, ordered, paid or made by the Company during the period from December 31, 1963, to and including the date of the proposed action,-would not exceed the sum of (i) the consolidated net income of the Company and its Subsidiaries accrued during such period, (ii) $94,122, and (iii) the net proceeds to the Company from the sale of any shares of stock of the Company.

Amended with Note Agreement Dated 9/1/72 also

The Company will not, directly or indirectly, declare, order, pay or make any Restricted Stock Payments or Restricted Stock Acquisitions, or set apart any sum or property for the foregoing purposes, if, immediately after giving effect to the proposed action, the total amount recorded on the books of the Company, in the common capital stock account and all surplus accounts in accordance with Required Accounting Practice, would be less than $1,250,000. In making the detennination of such total amount, any entries in the common capital stock account or in a surplus account shall be disregarded which shall result from an adjustment after December 31, 1971, other than an adjustment resulting from a depreciation accrual, of valuation of property.

The amount of any dividend or distribution or payment in property shall be deemed to be the greater of the fair market value thereof at the time of distribution or payment or the book value thereof on the books of the Company at such time. The Company will not declare any Restricted Stock Payments payable more than 60 days after the date of such declaration. The Company will not permit any Subsidiary directly or indirectly to order, make or pay any Restricted Stock Payments of the Company or Restricted Stock Acquisition except Restricted Stock Payments to the Company or Restricted Stock Acquisitions from the Company.

If and so long as there shall exist an Event of Default, or any condition or event which, after notice or lapse of time or both, would constitute an Event of Default, the Company will not directly or indirectly declare, order, pay or make any Restricted Stock Payment or. Restricted Stock Acquisitions.



(continued)

Sixth Supplemental Indenture dated as of October 15, 1993

Section 3.03 Amendments

(a) During the Coustruction Period, as hereinafter defined, at least thirty percent (3 0%) of the sum of (i) the increase from December 31, 1992 in the Total Capitalization of the Company as of the last day of each fiscal-quarter of the Company during the Construction Period, as shown on the balance sheet of the Company, less (ii) monies then held by the IDA Trustee in the Bond Fund or Construction Fund under the IDA Indenture (the "Escrowed Monies"), shall be represented by an increase from December 31, 1992 in Shareholder Investment, as shown on such balance sheet. For the purposes ofthis subparagraph (a) "Total Capitalization" shall mean the sum of short-term debt, long-term debt, and Shareholder Investment; "Shareholder Investment"; shall mean the sum of stated capital, amounts in excess of par value and reinvested earnings; and the "Construction Period" shall mcau the period commencing upon the issuance ofthc Series E Notes and ending upon the date as to which substantial completion of the Project, as defined in the IDA Indenture, as certified by an officer of the Company to the IDA Trustee pursuant to Section 4.05 of the IDA Indenture, but in no event later than December 31, 1995; and

(b) During the Construction Period and thereafter until the dale which is six (6) months after the end of the Construction Period (the "First Test Period"), the Company's ConsoUdated Net Income'Available For The Payment of Interest in any consecutive twelve (12) months of the preceding fifteen (IS) calendar months, including interest earned on the Escrowed Monies, shall equal at least One Hundred Twenty-Five Percent (125%) of the annual interest on Funded Debt (as defined in the Indenture, as previously supplemented and amended) of the Company then outstanding. During the period commencing at the end of the first test period and ending on the date which is eighteen (18) months after the end of the Construction Period (the "Second test Period") (the Company's ConsoUdated Net Income Available For The Payment of Interest (as defined in the Indenture, as previously supplemented and amended) in any consecutive twelve (12) months of the preceding fifteen (15) calendar months, including interest earned on the Escrowed Monies, shall-equal at least One Hundred Fifty Percent (150%) of the annual interest on Funded Debt of the Company then outstanding.


Indenture of Mortgage and Deed of Trust Dated November I , 1964

(continued)

(c) Within thirty (30) days of the first day of each calendar quarterduring the Construction Period, the Company will provide the holders of the Series D Notes information, in reasonable detail, with respect to its compliance with the test described in subparagraph (a) above, including without limitation, the certification of the President or Treasurer of the Company as to such compliance. Within thirty (30) days of the first day of each calendar quarter during the First Test Period and the Second Test Period, the Company will provide to the holders of the Series D Notes information, in reasonable detail, with respect to its compliance with the tests described in subparagraph (b) above, including, without limitation, the certification ofthc President or Treasurer as to such compliance. The holders of the Series D Notes shall also be entitled to receive such information upon request, as of the last day of the month preceding the month in . which such request is made, at any other time prior to the termination of the First Test Period or Second Test Period, as the case may be. Notwithstanding anything in the Indenture or the Agreements to the contrary, failure by the Company to comply with the above subparagraphs (a) and (b), shall not constitute a default or an event of default under the Indenture or the Agreements unless the Company shall have failed to cure any such noncompliance within thirty (30) days after receiving notice of such noncompliance from any holder of the Series D Notes.

(d) Upon termination of the Construction Period, the Company shall certify to the holders of the Series D Notes that it may then issue $1.00 of additional funded debt under the •tests provided in Section 12.1 (a) of the Note Agreements (without regard to the test provided in Section 12.1 (b) thereof).. In the event that the Company cannot so certify, and remains unable to so certify within thirty (30) days after notice from any holder of the Series D Notes requiring it to so certify, such failure shall constitute an event of default under the Indenture. Upon termination of the Second Test Period, the Company shall certify to the holders of the Series D Notes that it may then issue $1.00 of additional Funded Debt pursuantto Section 12.1 (b) of the Note Agreements (without regard to the test provided in Section 12.1 (a) thereof), in the event that the Company cannot so certify, and remains unable to so cenify within thirty (30) days after notice from any holder of the Series D Notes requiring it to so certify, such failure shall constitute an event of default under the Indenture.

CONSUMERS PENNSYLVANIA WATER COMPANY SHENANGO VALLEY DIVISION

Indenture Requirements Indenture of Mortgage and Deed of Trust

Dated October 1, 1926

Condition of Debt Issuance

Section 3

(A) From time to time hereafter the Company, in addidon to the bonds authorized to be issued pursuant to other provisions ofthis Article II , may execute and deliver to the Trustee,, and the Trustee, upon, compliance by the Company with the provisions of subdivision (B) of this Section 3 ( but subject to the limitations of Section 23 of Article I I I hereof, shall thereupon authenticate and deliver to or upon the written order of the Company, bonds hereby secured for an aggregate principal amount not exceeding the amount which when added to the aggregate unpaid principal amount of previously issued bonds still outstanding hereunder and other outstaading long-term debt of the Company does not exceed sixty-five percent (65%) of net utility plant, determined as provided in this subdivision (A), provided, however that the principal amount ofany (i) such bonds or other long-term debt of the Company which will be paid out of the proceeds of the.sale of bonds authorized under this Article I I , (ii) such bonds held uncancelled in any sinking fund created under this Indenture, and (iii) such bonds issued under Section 10 of this Article I I against the deposit and pledge of Masury Bonds with the Trustee, shall not be deemed to be outstanding for purposes of the foregoing test.

Dividend Restrictions

Section 20

That it will not declaxe or pay any dividends on its common stock or directly or indirectly or through any subsidiary, purchase or retire any of its common stock, or make any distribution in respect of its common stock (other than, dividends, purchases, . retirements or distributions payable solely in common stock of the Company) unless after giving effect thereto the sum of the following clauses (i) and (ii), viz:

(i) the aggregate amount of all such dividends declared or paid upon all stock of the Company during the period from December 31,1978, to and including the date of the proposed payment, plus

(ii) the amount, i f any, by which the aggregate amount of purchases, redemptions, and retirements of stock of the Company and distributions in respect of the Companyvs stock not reflected in the foregoing clause (i)

during said period exceeds the proceeds ofthc issue of additional shares of stock of the Company received after December 31, 1978,

va\{ not exceed Four Hundred Fifty Thousand Dollars (S450,0O0.00) plus consolidated net earnings (or minus consolidated net deficit) of the Company and its subsidiaries for the period from December 31,1978, to and including the date of the proposed payment. Consolidated net earnings shall be computed in accordance with generally accepted accounting practices and shall be after taxes of any nature; PROVIDED, HOWEVER, that there shall be excluded profits realized and losses sustained from the sale or other disposition of capital assets including stock in or securities of subsidiaries and any profit arising from acquisition by the Company or any subsidiary of the Company of securities issued by the Company or such subsidiary; and PROVIDED FURTHER, that consolidated net earnings shall not reflect as earnings or as a deduction from earnings any adjustment made during such period, whether through surplus or income accounts, properly attributable to operations prior to December 31,1978.

Condition of Debt Issuance

Section 23

Tbe Company will not incur, assume or guarantee any long-term debt (as defined in paragraph 5 of subdivision (A) of Section 3 or Article I I hereof) unless, after giving effect thereto and to the application of the proceeds thereof (i) the aggregate principal amount of (a) all bonds outstanding under this Indenture at the date ofa such determination excluding such bonds held uncancelled in any sinking fund created under this Indenture, and excluding such bonds issued under Section 10 of Article I I hereof against the deposit and pledge of Masury Bonds with the Trustee and (b) other long-term debt (as defined in paragraph 5 of subdivision (A) of Section 3 of Article II) of the Company outstanding at such time does not exceed sixty-five percent (65%) of net utility plant, determined as provided in subdivision (A) of Section 3 of Article I I hereof; and (ii) the consolidated net earnings of the Company and its said subsidiaiy, Masury Water Company, calculated as provided in paragraph I of subdivision (B) of Section 3 of Article I I hereof, have been equal to at least one and three-quarters (1 %) times the annual interest charges on (a) all bonds outstanding under this Indenture at the date of such determination, (b) other long-term debt of the Company outstanding at such time, and (c) all other indebtedness outstanding at such time and secured by a lien prior to, or on a parity with, the lien ofthis Indenture on property subject to the Iten hereof (other than (i) liens of taxes or assessments for the current year and taxes or assessments not yet due, (ii) liens of taxes, assessments, charges and liens, the validity of which the Company is contesting or causing to be contested in good faith and which the Company is not at the time required to pay or satisfy under the provisions of Section 5 of Article HI hereof, and (iii) liens securing indebtedness which has neither been assumed by the Company nor upon which it customarily pays interest charges, existing solely upon real property, or rights in or relating thereto, which real property or rights were acquired (for right-of-way purposes); and excepting, however, from such outstanding bonds or indebtedness, bonds

or indebtedness for the payment or redemption of which moneys in the necessary amounts have been deposited with the Trustee or with the trustee or other holder of the mortgage or other liens securing such indebtedness or which will be retired prior to or simultaneously with tbe iocurrence of the long-term debt; and a certificate to the foregoing effect signed by the President or any Vice President and by the Treasurer or any Assistant Treasurer is delivered to the Trustee.

Indebtedness Limits

Section 24

That the Company will at all times maintain the sum of the-amounts carried on its balance sheet as or in respect of (i) indebtedness represented by the bonds issued and outstanding under this Indenture, exduding such bonds held uncancelled in any sinking fund created under this Indenture, and excluding such bonds issued under Section 10 of Article I I hereof against the deposit and pledge of Masury Bonds with the Trustee, (ii) other long-term debt (as defined in paragraph. 5 of subdivision (A) of Section 3 or Article I I hereof), and (iii) short-tenn debt in an amount not exceeding 75% of net utility plant (determined as provided in subdivision (A) of Section 3 of Article I I hereof); provided, however, that the sum of the amounts carried on the balance sheet of the Company as or in respect of (i) indebtedness represented by the bonds issued and outstanding under this Indenture, excluding such bonds held uncancelled in any sinking fund created under this Indenture, and excluding such bonds issued under Section 10 of Article I I hereof against the deposit and pledge of Masury Bonds with the Trustee, (ii) other long-term debt (as so defined) and (iii) short-term debt shall not exceed 70% of net utility plant (determined as provided in subdivision (A) of Section 3 of Article 11 hereof) for more than 30 consecutive calendar months within any period of 36 consecutive months. For the purposes ofthis Section 24- "short-tenn debt" shall mean all indebtedness (as defined in paragraph 4 of subdivision (A) of Section 3 of Article I I hereof) which does not constitute "long-term debt" (as defined in paragraph 5 of subdivision (A) of Section 3. of Article I I hereof).


FILING REQUIREMENTS

G. Rate of Return

RR8. Attach copies of the summaries of the Company's projected revenues, expenses and capital budgets for the next two years.

A. The Company's projected revenues and expense budget is presented below. Refer to RR26 for a listing of the future test year capital expenditures.

Aqua Pennsylvania Projected Revenue and Expense Budgets (000) Omitted

2007 2008

Revenues $314,054 $331,802

Operating Expenses 104,327 107,394

Depreciation & Amortization 47,970 54,052

Other Taxes 10,885 9,883

Income Taxes 57.045 50,909

Utility Operating Income $93,827 $109,564

The 2008 projected revenue and expenses have not been approved by management and represents a draft at the present time.


FILING REQUIREMENTS

G. Rate of Return

RR9. Describe long-term debt reacquisitions by Company and Parent as follows:

a. Reacquisitions by issue by year.

b. Total gain on reacquisitions by issue by year.

c. Accounting of gain for income tax and book purposes.

A. The Company has called certain debt issuances in the past when the decision was to the benefit of the customer to do so.

a. Please see attached schedule.

b. None

c. None

Aqua Pennsylvania, Inc. 2007 Rate Case

Filing Requiremrnts

G. Rate of Return

RR9.

Long-term Debt Refunding

7,200,000 8.875% due 06/01/2010 called in 1992 3,150,000 9.200% due 12/15/2001 called in 1993 4,400,000 10.125% due 05/15/1995 called in 1993

10,000,000 12.450% due 08/01/2003 called in 1993 8,000,000 13.000% due 07/01/2005 called in 1995 5,000,000 7.875% due 12/01/1997 called in 1996 4,150,000 8.400% due 05/01/2002 called in 1996

10,000,000 10.650% due 04/01/2006 called in 1996 3,200,000 6.500% due 06/01/2010 called in 2002

14,000,000 6.375% due 10/15/2023 called in 2004 22,000,000 6.350% due 08/15/2025 called in 2005

2,132,180 9.220% due 11/15/2019 called in 2007


FILING REQUIREMENTS

G. Rate of Return

RR10. Provide the following information concerning compensating bank balance requirements for actual test year:

a. Name of each bank

b. Address of each bank

c. Type of accounts with each bank (checking, savings, escrow, other services, etc.)

d. Average Daily Balance in each account

e. Amount and'percentage requirements for compensating bank balances at each bank

f. Average daily compensating bank balance at each bank

g. Documents from each bank explaining compensating bank balance requirements

h. Interest earned on each type of account

A. None. Compensating bank balances are not required.


FILING REQUIREMENTS

G. Rate of Return

RR11. Provide the following information concerning bank notes payable for actual test year:

a. Line of Credit at each bank.

b. Average daily balances of notes payable to each bank, by name of bank.

c. Interest rate charged on each bank note (Prime rate, formula)

d. Purpose of each bank note (e.g., construction, fuel storage, working capital, debt retirement).

e. Prospective future need for this type of financing.

A. Please see attached.

Aqua Pennsylvania, Inc. 2007 Rate Case

Filing Requirements

G. Rate of Return

RR11.

Lines of Credit

Bank Name

PNC Bank Revolver PNC Bank Discretionary Line of Credit

Average Daily Balance for Test Year PNC Bank Revolver PNC Bank Discretionary Line of Credit

Formula Rate as follows: PNC Bank Revolver:

Amount

$70,000,000 (includes $5,000,000 Swing Line Loan) $10,000,000

$27,133,478 $4,663,014

PNC Bank Discretionary Line of Credit:

Euro-rate plus 25 basis points for 30, 60, 90, or 180 days, or LIBOR rate plus 25 basis points for 30, 60, 90, or 180 days, or PNC Bank prime rate, or Swing Line Loan: Federal Funds rate plus 75 basis points

Euro-rate plus 25 basis points for 30, 60, 90, or 180 days, or LIBOR rate plus 25 basis points for 30, 60, 90, or 180 days, or PNC Bank prime rate, or Federal Funds rate plus 75 basis points

The proceeds of the lines of credit are not segregated as to the purpose for which they are borrowed.

The Company anticipates that it will utilize bank loans in the future to provide interim funding for capital expenditures and acquisitions.

AQUA PENNSYLVANIA. INC. 2007 RATE C A S E

FIUNG REQUIREMENTS

G. Rate of Return

RR12. Submit details on Company or Parent common stock offerings (past five year to present) as follows:

a. Date of Prospectus.

b. Date of offering.

c. Record date.

d. Offering period-dates and number of days.

e. Amount and number of shares of offering.

f. Offering ratio (if rights offering).

g. Percent subscribed.

h. Offering price.

i. Gross proceeds per share,

j . Expenses per share.

k. Net proceeds per share (i-j).

I. Market price per share.

(1) At record date (2) At offering date

(3) One month after close of offering

m. Average market price during offering.

(1) Price per share

(2) Rights per share-average value of rights

n. Latest reported earnings per share at time of offering,

o. Latest reported dividends at time of offering.

A. Please see attached Schedule for the details of the stock offerings by Parent.

Aqua Pennsylvania, Inc. 2007 Rata Case

Filing Requirements

Attachment to RR12

a. Date of Prospectus

b. Date of Offering

c. Record Date

d. Offering Period

e. Amt & No. of Shares

f. Offering Ratio

g. % Subscribed

h. Offering Price

i. Gross Proceeds/Shr.

J. Expenses/Shr.

k. Net Proceeds/Shr.

1. Market Price/Shr.

m. Avg. Mkt. Price

n. Latest reported eps

o. Latest reported dps

At record date At offering date One month after

Price/Shr. Rlghts/Shr.

6/10/2006

8/10/2006

8/13/2006

8/10/2006

500.000 @ $22.65

N/A

100%

$22.65

$22.65

$0.79

$21.86

$22.36 $22.75 $22.03

$22.38 N/A

$0.70

$0.46

6/7/2006

6/7/2006

6/10/2006

6/7/2006

1,750,000® $22.31

N/A

100%

• $22.31

$22.31

$0.81

$21.50

$21.91 $22.31 $22.52

$22.25 N/A

$0.70

$0.46

11/9/2004

11/9/2004

11/12/2004

11/9/2004

1,955,000 @ $22.70

N/A

100%

$22.70

$22.70

$0.86

$21.84

$ 23.28 $ 22.84 $ 23.40

$ 21.89 N/A

$0.64

$0.37

8/18/2003

8/18/2003

8/21/2O03

8/18/2003

4.000.000 @ $23.40

N/A

100%

$23.40

$23.40

$0.82

$22.58

$23.49 $23.80 $24.31

$23.80 N/A

$0.60

$0.32

5/13/2003

5/13/2003

5/19/2003

5/13/2003

1,300.000 @ $23.08

HIA

100%

$23.08

$23.08

' $0.88

$22.20

$22.80 $23.08 $24.00

$23.08 N/A

$0.59

$0.32

9/19/2002

8/30/2002

9/25/2002

8/30/2002-9/19/2002

8,595,875© $18.75

N/A

100%

$18.75

$18.75

S0.78

$17.97

$19.85 $18.86 $20.30

$18.70 N/A

$0.38

$0,265

* Data not restated for subsequent stock splits

#


FILING REQUIREMENTS

G. Rate of Return

RR13. Attach chart explaining Company's corporate relationship to its affiliates showing system structure.

A. Please see attached agreement.

•

Service Company Agreement

AGREEMENT

Agreement dated as o f January 1, 2006, between Aqua Services, Inc., a coiporation organized and existing

under the laws of the Commonwealth of Pennsylvania, with its principal place of business located at 762 W.

Lancaster Avenue, Bryn Mawr, PA 19010 (hereinafter "Service Company"), and Aqua Pennsylvania, Inc., a

corporation organized and existing under the laws of the Commonwealth of Pennsylvania, with its principal

place of business located at 762 W. Lancaster Avenue, Bryn Mawr, PA 19101 (hereinafter "Water Gompan/')

and collectively hereinafter referred to jointly as the tcParties" or individually as a 'Tarty".

RECITALS

1. WHEREAS, both Service Company and the Water Company are direct or indirect subsidiaries o f

Aqua America, Inc., a Pennsylvania corporation (hereinafter "Aqua America"); and

2. WHEREAS, the Water Company has been organked for and are presendy engaged in the business of

providing potable water services as a public utility in the Commonwealth of Pennsylvania; and

3. WHEREAS, Service Company maintains an organization whose officers and employees are familiar

with the water and wastewater utility business, including the business and operations of the Water

Company, and have experience and expertise in management, financing, accounting, customer

services, legal affairs, engineering, rates and regulatory matters and the operation of water and

wastewater utilities. The officers and employees of Service Company are qualified to aid, assist and

advise the Water Company in their business operations through the services to be performed under

this Agreement; and

4. WHEREAS, the Water Company.are entering into this agreement with Service Company to

specifically define the types of services available to them as set forth in Exhibit A attached hereto and

made a part hereof; and

5. WHEREAS, Service Company has entered or proposes to enter into agreements similar to this

agreement with other affiliated water companies that are direct or indirect subsidiaries of Aqua

America (hereinafter collectively "Water Companies"); and

6. WHEREAS, Semce Company may engage or subcontract with other companies or persons,

including other affiliated companies, to provide portions of the services hereunder, and

7. WHEREAS, the services to be rendered under this Agreement are to be rendered by Service

Company to Water Company at their cost to Service Company, as hereinafter provided.

NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained.

Service Company and the Water Company agree as follows:

ARTICLE I . PERSONNEL AND SERVICES TO BE PROVIDED

1.1 During the term of this Agreement as set forth in Article V and upon the terms and conditions

hereinafter set forth. Service Company will provide corporate management services for the Water Company.

In addition to the management services provided by the officers and employees of Service Company, the

officers and employees of Service Company shall fumish to the Water Company the Accounting,

Administration, Communication, Corporate Secretarial, Customer Services, Engineering, Financial, Human

Resources, Information Systems, Operation, Rates and Regulatory Matters, Risk Management, Water

Quality, Legal, Purchasing and Fleet services as set forth on Exhibit A attached hereto, together with such

other services as the Water Company and Service Company may agree; provided, however, that the Water

Company may perform any such services with its own personnel or engage another company or person to

provide those services on its behalf. Service Company may engage or subcontract with another company or

person to provide such services on its behalf. I f Service Company engages other affiliates of Acjua America

to provide any of the services hereunder, such services shall be charged to the Water Company on the same

basis as the services provided by the Service Company.

1.2 Service Company shall employ qualified officers and employees to provide the services

hereunder and those persons shall be available to serve as officers of the Water Company.

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ARTICLE I I . PAYMENT FOR SERVICES

2.1 In consideration for the services to be rendered by Service Company as herein provided, the

Water Company agrees to pay to Service Company the cost of the services provided to it, determined as

provided in this Article I I and in Article H I .

• 2.2 The costs for service rendered by Service Company personnel directiy for the Water Company

shall be charged to the Water Company based on such personnel's time sheets. The costs for services to the

Water Company that are rendered in common with similar services to other Water Companies which cannot

be identified and related exclusively to services rendered to the Water Company, shall be allocated among all -

Water Companies so served, or, in the case of costs with respect to services rendered to a particular group

of Water Companies (including the Water Company), among the members of such group, based on the ratio

of the number of customers served at the immediately preceding year end by the Water Company to the

total number of customers served at the immediately preceding calendar year end by such Water Companies

or gtoup of Water Companies.

2.3 The amount for a Service Company employee's costs to be billed shall be computed on the

employee's total labor rate, including base pay and other compensation, payroll taxes and fringe benefits

(calculated on a per hour basis), plus a general overhead factor as set forth in Article I I I .

2.4 All direct expenses of Service Company incurred in connection with services rendered by

Service Company which can reasonably be identified and related exclusively to the Water Company, shall be

charged direcdy to the Water Company.

2.5 Services that are provided pursuant to a fixed or standard rate shall be billed to the Water

Company in accordance with such rate.

ARTICLE IH . ALLOWANCE FOR OVERHEAD

3.1 f n determining the cost for services rendered by the Service Company to the Water Company as

herein provided, there shall be added to the base pay rate of all officers and employees for whose services

charges are to be made, a percentage sufficient to cover the overhead of Service Company, as defined below,

allocable to each such officer or employee. The overhead shall be calculated each year and shall be based on

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the ratio of the total overhead of the Service Company for the year to the total salaries of the employees for

whose service charges are to be made to the Water Companies, including the Water Company. N o general

overhead or other markups by the Service Company shall be added to costs incurred for services of

consultants or other third parties employed by Service Company.

3.2 The term "overhead" shall include, but not be limited to:

(a) building costs, lease costs, depreciation, utilities, and olher costs associated with office

space and equipment, and

(b) taxes other than payroll taxes

ARTICLE I V BILLING PROCEDURES A N D BOOKS A N D RECORDS

4.1 As soon as practicable after the last day of each month. Service Company shall render a bill to

the Water Company for all amounts due from the Water Company for services and expenses for such

month, computed pursuant to Article I I and Article I I I . Alternatively, Service Company may require any

other affiliated company from which it procures services for the Water Company to bill the Water Company

for such services and related expenses on the same basis as set forth in Articles I t and Article H I . Such bills

shall be in sufficient detail to show the charge for each service rendered. All amounts shall be paid by the

Water Company within thirty (30) days after Water Company's receipt of the bill.

. 4.2 Service Company agrees to keep its books and records, and to require any other affiliated

company providing services to the Water Company hereunder to keep their books and records, available at

all times for inspection by representatives of the Water Company ot by regulatory bodies having judsdicdon

over the Water Company-during normal business hours and upon reasonable advance-notice.

4.3 Service Company shall at any time, upon request of the Water Company, fumish any and all

information required by the Water Company with respect to the services rendered by Service Company or

any affiliated companies hereunder, the costs thereof, and the allocation of such costs among the Water

Companies.

ARTICLE V TERM OF AGREEMENT

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5.1 This Agreement shall become effective as of the later of (a) the date first set forth above or (b)

the date the parties receive die last of any necessary approvals of governmental regulatory agencies having

jurisdiction over this agreement Upon becoming effective, this Agreement shall supersede all prior agreements,

written or oral, which shall tenninate on the date this Agreement becomes effective. This Agreement shall

continue in full force and effect until terminated by either of the parries hereto giving the other party hereto

thirty day's notice in writing; provided, however, that this Agreement shall terminate as of the date the Water

Company or Service Company ceases to be an affiliate of Aqua America.

5.2 Upon termination of the Agreement without cause by the Water Company, Service Company

shall continue to provide services to the Water Company at the Water Company's request for a period of no

more than sixty (60) days from and after the effective date of the terminadon to" facilitate the Water Company5s

transition to another service provider. Such transition shall be provided on the same terms and conditions as set

forth in this Agreement, including compensation.

ARTICLE V I BREACH

6.1 Either Party to the Agreement may terminate this Agreement upon material breach by the other

Party. The non-breaching Party shall provide written notice of such breach to the other Party by certified

mail, setting forth in detail the alleged failure and/or deficiency. I f such breach is not corrected by the

breaching Party within thirty (30) days from receipt of written notice by certified mail, this Agreement shall

thereupon terminate.

ARTICLE V I I OTHER AGREEMENTS

7.1 I t is understood by the Water Company that Service Company has entered or may enter into

similar agreements with other Water Companies that are affiliated with Aqua America to which similar

services are to be furnished. Service Company will not- enter into agreements to perform similar services for

other companies on terms more favorable than those provided herein.

ARTICLE V I I I INFORMATION EXCHANGE

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8.1 The Water Company shall provide such information as required by Service Company for

Service Company to perform is obligations hereunder. Service Company agrees on behalf of it and its

employees and contractors that it will maintain such information as confidential and not disclose such

information to third parties. Service Company's obligation of confidentiality will not apply to information

which (a) is or becomes available to the public other than as a result of a disclosure by Service Company or

its employees or contractors, (b) was in Service Company's possession and obtained on a non-confidential

basis prior to its disclosure by the Water Company or (c) becomes available to the Service Company on a

non-confidential basis from a person other than the Water Company who Service Company does not know

dr have reason to know is under an obligation of confidentiality to the Water Company.

ARTICLE DC GENERAL PROVISIONS

9.1 JOINT OBLIGATIONS OF THE PARTIES. Service Company and the Water Company

" agree to cooperate in all matters that are the subject of this Agreement.

9.2 ARBITRATION. I t is the stated purpose and goal of both Parties at all times to resolve any

. disputes and reach agreement by good faith negotiation between the Parties, without recourse to arbitration

or other legal actions. In the event, however, that any such dispute cannot be setded through negotiation,

either Party may request that the matter(s) in dispute be referred to arbitration. The demand for arbitration

must be submitted to the American Arbitration Association within sixty (60) calendar days after the date' of

such request, in'which case the arbitration shall be conducted at a mutually agreed upon location, in

accordance with the rules and procedures then existing under the Commercial Arbitration rules of the

American Arbitration Association, provided that notwithstanding anything to the contrary contained in such

. Rules the following shall apply: The arbitration board shall consist of a single arbitrator. The Parties shidl

endeavor to agree upon the single arbitrator. I f the Parties fail to agree on a single arbitrator within twenty

(20) business days, the arbitrator shall be selected by the American Arbitration Association or otherwise in

accordance with such Rules. After the appointment of the arbitrator, the arbitrator shall meet as necessary

for the purpose of reaching a determination in the dispute, and the decision of the arbitrator, submitted in

writing, to the Parties shall be final and binding upon both Parties. Judgment upon any decision rendered by

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arbitrator may be entered in any court having jurisdiction. Each Party shall bear the expense of its own

witnesses, and the expenses of the arbitrator and any general expenses, of the arbitration shall be borne

equally by the Parties.

9.3 FORCE MAJEURE. Neither Party will be in default or otherwise liable for any delay in or

failure of its performance hereunder due to any act of God, adverse weather condition, fire, flood, riot,

strike, terrorism, accident, war, governmental requirement, inability to secure materials, labor or

transportation, cable cut or other cause beyond the reasonable control o f the affected party.

9.4 STANDARD OF CARE. Service Company shall perform its services with that degree of

care, diligence and professional skill and judgment which is normally exerdsed by professionals in its

industry. Except as otherwise expressly set forth in this Agreement, Service Company makes no warranties,

representations or other agreements, expressed or implied with respect to this Agreement and the services

provided hereunder. Service Company's entire liability to the Water Company for any claim, loss, expense

or damage under this Agreement, induding any claims for special, incidental, consequential, indirect or

punitive damages shall in no event exceed the sums actually paid by the Water Company to Service

Company during the most recent calendar year.

9.5 ASSIGNMENT. Neither party may assign this Agreement without the prior written

consent of the other party, which consent shall not be unreasonably, withheld.

9.6 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of

the Commonwealth of Pennsylvania.'

9.7 INDEMNIFICATION:

9.7.1 To the extent allowed by law, Service Company shall defend, indemnify and hold

harmless the Water Company, its officers, directors, employees and agents from and against any and

all liability, including liability to third parties , for personal injury, including death, property damage,

or other actions, damages, fines, penalties, claims, demands, judgments, losses, costs, expenses, suite

and actions (including reasonable attorney's fees), for personal injury, including death, property

damage or other injury, to the extent caused by or arising out of negligence or wrongful or willful

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misconduct on the part of Service Company or its officers, employees, agents, contractors and

subcontractors in connection with services provided pursuant to the terms of this Agreement

9.7.2 To the extent allowed by law, the Water Company shall defend, indemnify and hold

harmless Service Company, its officers, directors, employees and agents from and against any and all

liability, including liability to third parties , for personal injury, including death, property damage, or

other actions, damages, fines, penalties, claims; demands, judgments, losses, costs, expenses, suite

and actions (including reasonable attorney's fees),-for personal injury, including death, property


misconduct on the part of the Water Company or its officers, employees, agents, contractors and

subcontractors in connection with services provided pursuant to the terms ofthis Agreement.

9.8 SEVERABILnY. Each provision of this Agreement is severable from the whole, and i f one

provision is declared invalid, the other provisions shall remain in effect.

-9.9 NO.WATVER. Failure by a party to enforce any provision of this Agreement, or the waiver

• thereof in any instance, shall not be construed as a general waiver of rights.

9.10 NOTICES. Any notice given or made pursuant to this Agreement will be effective only i f in

writing and delivered in person, by messenger, by overnight delivery, or by certified mail, return receipt

requested as follows:

IF TO AQUA SERVICES, INC. Aqua Services, Inc. 762 West Lancaster Avenue Bryn Mawr, PA 19010 Attention: President

IF TO AQUA PENNSYLVANIA, INC. Aqua Pennsylvania, Inc. 762 West Lancaster Avenue -Bryn Mawr, PA 19010

. Attention: President

9.11 COMPLETE AGREEMENT. The terms of this Agreement constitute the entire agreement

between the Parties concerning the subject matter hereof, and this Agreement may be modified only in a '

writing signed by both Parties.

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9.12 TITLES A N D HEADINGS. Titles and headings to sections or paragraphs herein are inserted

merely for convenience of reference and are not intended to be a part of or to affect the meaning or

interpretation of this Agreement

9.13 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of

which shall be deemed an original, but all o f which together shall constitute one and the same instrument.

I N WITNESS WHEREOF, Service Company and the Water Company have caused this Agreement

to be signed in their respective corporate names by their respective Presidents or Vice Presidents, as of the

day and year first above written.

AQUA- SERVICES, INC 4 AQUA. PENNSYLVANIA, INC.

By: / / - ^ ^ Z ^ c S - B y : _

Title: £ c ^ ^ f r . i . * r / Title: f / L ' t - Z j 0

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EXHIBIT A to

SERVICE AGREEMENT

Without limitation, services to be provided by the Service Company will include the following::

A. Accounting: Service Company will assist in the preparation and implementation of

accounting methods and procedures to determine that they conform fully to the requirements, rules and

regulation of governmental authorities having jurisdiction over the Water Company and will review the Water

Company's monthly financial reports, annual reports and other reports, including those to any governmental

authorities. The Service Company will advise and assist in the establishment and maintenance of current record

keeping techniques; review accounting procedures, methods and forms; and evaluate systems of internal control

for receipt and disbursement of funds, materials and supplies, and other assets. The Service Company will assist

in the maintenance of accounting records as required by the Water Company. When appropriate, Service

Company will cooperate and consult with the Water Company's independent certified public accountants.

Service Company will provide assistance to the Water Company in the preparation of all financial reports. The

Service Company will also provide services related to accounts payable, payroll, consolidation, SEC

rep or ting/filing, budgeting and long-range planning.

Service Company will assist in the preparation of operating and construction budgets and monitor the

control over such budgets by comparing experienced costs to the projections.

Service Company will prepare or assist in the preparation of federal, state and local tax returns for and

to the extent required by the Water Company.

B. Administration: Service Company will make qualified employees available to perform or

assist in the performance of the Water Company's corporate activities. Those employees will keep themselves

informed on the Water Company's operations. They will make recommendations to the Water Company for

operating expenditures and for additions to and improvements of property, plant and equipment. They will keep

abreast of economic, regulatory, governmental and operational developments and conditions tliat may affect the

CADocuments and SetingstoiixXdjU-ccal Settogjltempwary Intanel FiislOLK2B3\AjfiBate jyeeront Senjc^Company Aqua PA 9-11-OS .doc

Water Company; and advise the Water Company of such developments and conditions to the extent that they

may be important to the Water Company. Service Company wiU provide an internal audit staff for periodic

audits of accounts, records, policies and procedures of die Water Company and submit reports thereon.

C. Communications: Service Company will recommend procedures to promote satisfactory

relations with employees, customers; communities and the general public and assist in the preparation of

communication materials, (including press releases, brochures, audio visual presentations and speeches) plant

tours, public exhibits and displays and other related services to inform the public.

D . Coiporate Secretarial: Service Company will maintain, in such places and manner as may

be required by applicable law, documents of the Water Company, such as minute books, charters, by-laws,

contracts, deeds and other corporate records. I t will maintain, or arrange for the maintenance of, records of

stockholders of the Water Company and perform other corporate secretarial functions as required including

preparation of notices of stockholder and director meetings and the minutes thereof.

Service Company will review and may assist in the preparation of documents and reports required by

the Water Company such as deeds, easements, contracts, charters, franchises, trust indentures and regulatory

reports and filings.

E. Customer Service and Billing: Service Company may provide customer service and billing

services to the Water Company, including live and automated telephone service to customers, the rendering of

periodic bills to customers based on the Water Company's tariffs, collections, assisting customers with water

service changes, resolving customer disputes and remittance processing.

F. Engineering: Service Company may provide engineering consulting regarding, and provide

engineering services in connection with, the design, permitting and constructing of the Water Company's

facilities.

Service Company may conduct facility planning, hydraulic analyses and prepare or review maps,

charts, operating statistics, reports and other pertinent data, as needed to support these engineering services. It

may assist the Water Company in the protection of the Water Company's properties by periodic inspection of.

their structures, tanks reservoirs, dams, wells and electrical and mechanical equipment.

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The engineering services provided by Service Company may also include the conduct of field

investigations as necessary to obtain engineering information and, when required, the preparation of studies,

teports, designs, drawings, cost estimates, specifications, and contracts for the construction of additions to or

improvements of the Water Company's sources of supply, treatment plants, pumping stations, distribudon . . .

systems, and such other facilities as the Water Company may request. Service Company may provide a materials,

management program to arrange for the purchase of equipment, materials, and supplies in volume on a basis

advantageous to the Water Company and assist in the evaluation of new and existing products and application

procedures.

G. Financial: Service Company will assist in the development and implementation of

financing programs for the Water Company, including the furnishing of advice from time to time on securities

market conditions and the form and timing of financing; advice concerning arrangements for-the sale of

securities; and assistance in the preparation of necessary papers, documents, regis.tration statements,

prospectuses, petiuons, applications and declarations. Service Company will.prepare reports to be-filed with, and

reply to inquiries made by, security hoLders and bond and mortgage trustees.

Service Company will assist the Water Company in treasury and cash management functions,

including arrangements for bank credit lines, establishment of collection policies, and development of temporary

investment programs.. *

H. Fleet Services: - Service Company may provide various fleet management services, including

assistance with vehicle ordering and leasing, fuel-card management, vehicle maintenance support and oversight,

vehicle signage, vehicle tides and driver training.

1 Human Resources: Service Company will assist in obtaining qualified personnel for the

Water Company; in establishing appropriate rates of pay for those employees; and in negodadng with bargaining

units, i f any, representing the Water Company's employees. Service Company will recommend and/or carry out -

Training programs for the development of personnel and advise and assist the Water Company regarding

personnel. I t will also advise and assist the Water Company in regard to group employee insurance, pension and

benefit plans and in the drafting or revising of those plans when required. It will provide advice.regarding

employment laws and procedures and controls to for compliance with such laws.

C.U)«i^ntsandSefflng^iW^ot#Sc»ngs\T^^

J. Information Systems: Service Company will make available to the Water Company

electronic data processing systems, networks, applications and services. The Service Company will design,

implement and maintain a computer network, data communications system, database and applications services,

desktop and laptop computers, and peripheral equipment along with periodic upgrades, data backups and

recovery procedures for the benefit o f the Water Company.

K, Operation: Service .Company may develop and assist in the implementation of operating

procedures to promote the efficient and economic operation of the Water Company. Periodic operational

reviews may be performed by Service Company personnel and recommendations for improvements will be

reported to the Water Company.

L. . Rates and Regulatory: Service Company personnel will make recommendations for

changes in rates, tariffs, rules and regulations and will assist the Water Company in the conduct of proceedings'

before, and in their compliance with the rulings of, regulatory bodies having jurisdiction over the Water

Company's operation. These personnel will keep abreast o f economic and regulatory developments and

conditions that may affect the Water Company and advise the Water Company of developments and conditions

to the extent that they may be important to the Water Company. Service Company Rates and Regulatory

personnel will assist in the preparation of rate filings or applications and the supporting documents and exhibits

requested or required by the Water Company and their respective regulatory commissions. Service Company will

also provide qualified personnel to testify on behalf of the Water Company as required during any regulatory

proceedings.

M . Risk Management: .. Service Company will provide a risk management program to review

the exposures to accidental loss, recommend methods of protection, either through the purchase of insurance,

self-insurance or other risk management techniques and arrange for the purchase of insurance coverage. Service

Company will also supervise investigation procedures, review claims and negotiate and assist in, and evaluate

proposals for, settlement at the request o f the Water Company. I t will assist in the establishment of safety and

security programs for the Water Company.

N . . Water Quality Service Company will provide advice and consulting to assist the

Water Company in complying with water quality standards of governmental agencies. Jt will assist in providing

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design criteria for processes, coordinating with public agencies, developing approaches and solutions to water

quality problems, and providing technical assistance and general direction for the Water Compan/s personnel.

I t will also provide laboratory services for programmed analyses as required by drinking water

regulations, and special analyses as required by the Water Company.

O. Legal Service Company will provide legal services, including legal advice and

representation on legal matters/The Service Company will also provide oversight of outside council retained to

represent the Water Company.

P. Purchasing, Contracts and Sales Service Company will (a) act as purchasing agent for the

WarerCompan^sofaras it is feasible in the purchase of supplies, materials and equipment for which the Water

Company may make a requisition; (b) endeavor to secure prompt shipment and deliver thereof; (c) and give the

Water Company the full benefit of all cash, trade and quantity discounts obtained with respect to items ordered

for the Water Company; (d) keep id touch with market conditions and endeavor to recommend purchases at

advantageous times; (e) negotiate purchases and sales of real estate and the terms of leases; and (f) analyze

quotations or competitive bids of suppliers or contractors submitted to the Water Company and make .

recommendations relative thereto.

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Service Company Subcontract

Subcontract Agreement

Subcontract Agreement dated as of January 1, 2006 , between AQUA SERVICES, INC. , a

corporation organized and existing under tbe laws of the Commonwealth of Pennsylvania, with its principal

place of business located at 762 W. Lancaster Avenue, Bryn Mawr, PA 19010 (hereinafter "Service Company^,

and A Q U A PENNSYLVANIA, INC, a corporation organized and existing under the laws of the

Commonwealth of Pennsylvania, with its principal place of business located at 762 w. Lancaster Avenue. Bryn

Mawr, PA 19010, hereinafter referred to jointly as the "Patties" or individually as a 'Tart / ' .

RECITALS

1.. WHEREAS, both Service Company and Subcontractor are subsidiaries of Aqua America, Inc., a

Pennsylvania corporation (hereinafter "Aqua America1'); and

2. WHEREAS, Service Company maintains an organization whose officers and employees are familiar

with the water and wastewater utility business, and have experience and expertise in accounting,

administration, communication, corporate secretarial, customer services,, engineering, financial,

human resources, information systems, operation, rates and regulatory matters, risk management,

water quality, legal, purchasing and fleet services to water and wastewater utilities; and

3. WHEREAS, Service Company has entered into Agreements with water and wastewater utility

subsidiaries of Aqua America (hereinafter the "Water Companies") to provide accounting,

administration, communication, corporate secretarial, customer services, engineering, financial,

human resources, information systems, operation, rates and regulatory matters, risk management,

water quality, legal, purchasing and fleet services to such water and wastewater subsidiaries; and

4. WHEREAS, Subcontractor has been organized for and is presently engaged in the business of

providing potable water and wastewater services as a public utility in the Commonwealth of

Pennsylvania; and

5. WHEREAS, the officers and employees of Subcontractor are familiar with the water and wastewater

utility business and have experience and expertise in accounting, administration, corporate

secretarial, customer service, engineeang, fleet, information systems, operations, rates and

regulatory matters, risk management, water quality, purchasing and legal services ; and

6. WHEREAS, the Service Company has determined that it would be cost-effective to retain

Subcontractor to perform these services for Aqua Pennsylvania; and

7. WHEREAS, the Service Company and Subcontractor are entering into this Subcontract to

specifically define the types of services that Subcontractor may make available to the Pennsylvania

Water Companies as a subcontractor to Service Company as set forth in Exhibit A attached hereto

and made a part hereof; and

8. WHEREAS, the services to be rendered under this Subcontract are to be tendered by Subcontractor

at the request of Service Company to the Aqua Pennsylvania at their cost to Subcontractor, as

hereinafter provided.

NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained,

Subcontractor and Service Company agree that:

ARTICLE I . PERSONNEL A N D SERVICES TO BE PROVIDED -

1.1 During the term of this Subcontract as set forth in Article V and upon the terms and conditions

hereinafter set forth, Subcontractor will provide to Aqua Pennsylvaniaat the direction of Service Company,

the services as set forth on Exhibit A attached hereto, together with such other services as Subcontractor

and Service Company may agree; provided, however, that Service Company may perform any such services

with its own personnel or engage another company or person to provide those services on its behalf.

Service Company may engage or subcontract with another company or person to provide such services for

Aqua Pennsylvania.

1.2 Subcontractor shall employ qualified officers and employees to provide the services hereunder.

ARTICLE IL PAYMENT FOR SERVICES

2.1 In consideration for the services to be rendered by Subcontractor as herein provided.

Subcontractor will be paid the cost thereof determined as provided in this Article I I and in Article I I I .

3

2.2 The costs for service rendered by Subcontractor personnel direcdy for a particular Aqua

Pennsylvania shall be charged to Aqua Pennsylvania based on such personnel's time sheets. Ihe costs for

services to Aqua Pennsylvania that are rendered in common with similar services to other Water Companies

which cannot be identified and related exclusively to services rendered to Aqua Pennsylvania shall be

allocated among all Water Companies so served, or, in the case of costs with respect to services rendered to

a particular group of Water Companies, among the members of such group, based on the ratio of the

number of customers served at the immediately preceding year end by the Aqua Pennsylvania to the total

number of customers served at the immediately preceding calendar year end by such Water Companies or

group of Water Companies.

2.3 The amount for the Subcontractor personnel's costs to be billed shall be computed on the

employee's total labor rate, including base pay and other compensation, payroll taxes and fringe benefits

(calculated on a per hour basis), plus a general overhead factor as set forth in Article I I I .

2.4 All ditect expenses of Subcontractor incurred in connection with services rendered by

Subcontractor which can reasonably be identified and related exclusively to. a water company shall be

charged direcdy to that water company.

ARTICLE I I I • ALLOWANCE FOR OVERHEAD

3.1 In determining the cost for services rendered by the Subcontractor to a Aqua Pennsylvania as

herein provided, there shall be added to the base pay rate of all officers and employees for whose services

charges are to be made, a percentage sufficient to covet the overhead of Subcontractor, as defined below,

allocable to each such officer or employee. The overhead shall be calculated each year and shall be based on

the ratio of the total overhead of the Subcontractor for the year to the total salaries of the employees for

whose service charges are to be made to the Water Companies. No general overhead or other markups by

the Subcontractor shall be added to costs incurred for services of consultants or other third parties employed

by Subcontractor.

3.2 The term "overhead" shall include, but not be limited to:

(a) building costs, lease costs, depredation, utilities, and other costs assodated with office

space and equipment, and

(b) taxes other than payroll taxes

ARTICLE I V BILLING PROCEDURES A N D BOOKS A N D RECORDS

4.1 As soon as.practicable after, the last day of each month, Subcontractor shall render a bill to the

Aqua Pennsylvania with a copy to Service Company for all amounts due fiom Aqua Pennsylvania for

services and expenses for such month, computed pursuant to Artide I I and Artide IH. All amounts shall

be paid by Aqua Pennsylvania within thirty (30) days after the Aqua Pennsylvania receipt of the bill.

4.2 Subcontractor agrees to keep its books and records available at all times for inspection by

representatives of Service Company or Aqua Pennsylvania or by regulatory bodies having jurisdiction over

Aqua Pennsylvania during normal business hours and upon reasonable advance notice.

4.3 Subcontractor shall at any time, upon request of Service Company or Aqua Pennsylvania,

fumish any and all information required by Service Company or Aqua Pennsylvania with respect to die

services rendered by Subcontractor hereunder, the costs thereof, and the allocation of such costs among

Water Companies.

ARTICLE V TERM OF AGREEMENT

5.1 This Subcontract Agreement shall become effective as of the date first set forth above. Upon

becoming effective, this Agreement shall supersede all prior agreements, written or oral, which shall

terminate on the date this Agreement becomes effective. This Agreement shall continue in full force and

effect until terminated by either of the parties hereto giving the other party hereto thirty day's notice in

writing, provided, however, that this Agreement shall terminate as of the date Subcontractor or Service

Company ceases to be an affiliate of Aqua America.

5.2 Upon termination of the Agreement without cause by Services Company, Subcontractor shall

continue to provide services at Service Company's direction to Aqua Pennsylvania for a period of no more

5

than sixty (60) days from and after the effective date of the termination to facilitate Water Company's

transition to another service provider. Such transition shall be provided on the same terms and conditions as

set forth in this Agreement, including compensation.

ARTICLE V I BREACH

6.1 Either Party to the Agreement may terminate this Agreement upon material breach by the other

Party. The non-breaching Party shall provide written notice of such breach to the other Party by certified

mail, setting forth in detail the alleged failure and/or deficiency. I f such breach is not corrected by the

breaching Party within thirty (30) days from receipt of written notice by certified mail, this Agreement shall

thereupon terminate.

ARTICLE VH OTHER AGBRFMF.MTS

7.1 I t is understood by Subcontractor that Service Company has entered or may enter into similar

agreements with other Water Companies that are affiliated with Aqua America to which similar services are

to be furnished. Subcontractor will not enter into agreements to perform similar services for other

companies on terms more favorable than those provided herein.

ARTICLE V I I I INFORMATION EXCHANGE

8.1 Service Company shall provide such information as required by Subcontractor for

Subcontractor to perfotm its obligations hereunder. Subcontractor agrees on behalf of it and its employees

that it will maintain such information as confidential and not disclose such.information to third parties. •

Subcontractor's obligation of.confidentiality.will not apply to information which (a) is or becomes available

to the public other than as a result of a disclosure by Subcontractor or its employees, (b) was in

Subcontractor's possession and obtained on a non-confidential basis prior to its disclosure to Subcontractor

or (c) becomes available to the Subcontractor on a non-confidential basis from a person other than the

Water Company or Service Company who Subcontractor does not know or have reason to know is under an

obligation of confidentiality with respect to such information.

ARTICLE-IX GENERAL PROVISIONS

9.1 JOINT OBLIGATIONS OF THE PARTIES. Service Company and Subcontractor agree to

cooperate in all matters that are the subject of this Agreement.

9.2 ARBITRATION. I t is the stated purpose and goal of both Parties at all times to resolve any

disputes and reach agreement by good faith negotiation between the Parties, without recourse to arbitration

or other legal actions. I n the event, however, that any such dispute cannot be settled through negotiation,

either Party may request that the matter(s) in dispute be referred to arbitration. The demand for arbitration

• must be submitted to the American Arbitration Association within sixty (60) calendar days after the date of

such request, in which case the arbitration shall be conducted at a mutually agreed upon location, in

accordance with the rules and procedures then existing under the Commercial Arbitration rules of the

American Arbitration Association, provided that notwithstanding anything to the contrary contained in such

Rules the following shall apply: The arbitration board shall consist of a single arbitrator. Service Company

. and Subcontractor shall endeavor to agree upon the single arbitrator. I f the Parties fail to agree on a "single

arbitrator within twenty (20) business days, the arbitrator shall be selected by the American Arbitration

Association or otherwise in accordance with such Rules. After the appointment of the arbitrator, the

arbitrator shall meet as necessary for the purpose of reaching a determination in the dispute, and the decision

of the arbitrator, submitted in writing, to Service Company and Subcontractor shall be final and binding

upon both Parties. Judgment upon any decision rendered by arbitrator may be entered in any court having

jurisdiction. Each Party .shall bear the expense of its own witnesses, and the expenses of the arbitrator and

any general expenses of the arbitration shall be borne equally by the Parties.

9.3 FORCE MAJEURE. Neither Party will be in default or otherwise liable for any delay in or

failure o f its performance hereunder due to any act of God, adverse weather condition, fire, flood, riot,

strike, terrorism, accident, war, governmental requirement, inability to secure materials, labor or

transportationi cable cut or other cause beyond the reasonable control of the affected party.

9.4 STANDARD OF CARE. Subcontractor shall perform its services with that degree of care,

dihgence and professional skill and judgment which is normally exercised by professionals in its industry.

Except as otherwise expressly set forth in this Agreement, Subcontractor makes no warranties,

7

representations or other agreements, expressed or implied with respect to this Agreement and the services

provided hereunder. Subcontractor's entire liability for any claim, loss, expense or damage under this

Agreement, including any claims for spedal, incidental, consequential, indirect or punitive damages shall in

no event exceed the sums actually paid to Subcontractor during the most recent calendar year for the

services hereunder.

9.5 ASSIGNMENT. Neither party may assign this Agreement without the prior written consent of

the other party, which .consent shall not be unreasonably withheld.

9.6 • GOVERNING LAW. This Agreement shall be governed by and construed under the laws of •

the Commonwealth of Pennsylvania.

9.7 INDEMNIFICATION:

9.7.1 To the extent allowed by law, Subcontractor shall defend, indemnify and hold hannless

Service Company and any Water Company for which services are provided hereunder, its and their •

• officers, directors, employees and agents from and against any and all liability, including liability to

third parties , for personal injury, including death, property damage, or other acdons, damages, fines,

penalties, claims, demands, judgments, losses, costs, expenses, suits and actions (including

reasonable attorney's fees), for personal injury, including death, property damage or other injury, to

the extent caused by or arising out of negligence or wrongful or willful misconduct on the part of

Subcontractor or its officers, employees, agents, contractors and subcontractors in connection with

services provided pursuant to the terms of this Agreement. . . .

9.7.2 To the extent allowed by law, Service Company shall defend, indemnify and hold

harmless Subcontractor, its officers, directors, employees and agents from and against any and all

liability, including liability to third parties , for personal injury, including death, property damage, or

other actions, damages, fines, penalties, claims, demands, judgments, losses,- costs, expenses, suits

and actions (including reasonable attorney's fees), for personal injury, including death, property


misconduct on the part of Service Company or its officers, employees, agents, contractors and

subcontractors in connecdon with services provided pursuant to the terms of this Agreement.

9.8 SEVERABILITY. Each provision of this Agreement is severable from the whole, and i f one

provision is dedared invalid, the other provisions shall remain in effect.

9.9 N O WAIVER. Failure by a party to enforce any provision of this Agreement, or the waiver

thereof in any instance, shall not be construed as a general waiver of rights.

9.10 NOTICES. Any noticcgiven or made pursuant to this Agreement will be effective only i f in

writing and delivered in person, by messenger, by overnight delivery, or by.certified mail, return recdpt

requested, as follows:

IF TO AQUA SERVICES, INC. Aqua Services, Inc. 762 West Lancaster Avenue Bryn Mawr, PA 19010 Attention: President

I F TO PENNSYLVANIA - . • . Aqua Pennsylvania, Inc. 762 We^t Lancaster Avenue Bryn Mawr, PA 19010 Attention: President

9.11 COMPLETE AGREEMENT. The terms of this Agreement constitute the entire agreement

between the Parties concerning the subject matter hereof, and this Agreement may be modified only in a

writing signed by both Parties.

9.12 TITLES A N D HEADINGS. Titles and headings to sections or paragraphs herein are inserted

merely for convenience of reference and are not intended to be a part of or to affect the meaning or

interpretation o f this Agreement.

9.13. COUNTERPARTS. This Agreement may be executed in one or more counteiparts, each of

which shall be deemed an original, but all of which together shall constitute one and the same instrument.

I N WITNESS WHEREOF, Service Company and Subcontractor have caused this Agreement to be

signed in their respective corporate names by their respective Presidents or Vice Presidents, and attested by

their respective Secretaries or Assistant Secretaries, all as o f the day and year first above written.

AQUA SERVICES, INC.

Br-

Title: c /Z*.},

-AQUA PENNSYLVANIA, INC,

By:

Title: .f/t£Sl(pd<sT _

EXHIBIT A to SUBCONTRACT AGREEMENT

Aqua Services, Inc. and Aqua Pennsylvania, Inc.

Without limitation,, services to be provided by the Subcontractor will include the following::

A. Accounting and Financial Services: Subcontractor may assist in the preparation and

implementation of accounting methods and procedures to determine that they conform fully to the

requirements, rules and regulation of governmental authorities having jurisdiction over Aqua Pennsylvania and

may review Aqua Pennsylvania's monthly financial reports, annual reports and othet reports, induding those to

any governmental authorities. The Subcontractor may advise and assist in the establishment and maintenance of

current record keeping techniques; review accounting procedures, methods and forms; and evaluate systems of

internal control for receipt and disbursement of funds, materials and supplies, and other assets. The

Subcontractor may assist in the maintenance of accounting records as required by Aqua Pennsylvania. When

appropriate, Subcontractor will cooperate and consult with Aqua Pennsylvania's independent certified public

accountants. Subcontractor may provide assistance to Aqua Pennsylvania in the preparation of all finandal

reports. The Subcontractor may also provide services related to accounts payable, payroll, consolidation, SEC

reporting/ filing, budgeting and long-range planning. •

Subcontractor may assist in the preparation of operating and construction budgets and monitor the

control over such budgets by comparing experienced costs to the projections.

Subcontractor may prepare or assist in the preparation of federal, state and local tax returns for and to

the extent required by Aqua Pennsylvania.

B. Administration: Subcontractor will make qualified employees available to perform or assist

in the performance of Aqua Pennsylvania's corporate activities. Those employees will keep themselves informed

on Aqua Pennsylvania's operations. They may make recommendations to Aqua Pennsylvania for operating

expenditures and for additions to and improvements of property, plant and equipment. They will keep abreast

of economic, regulatory, governmental and operational developments and conditions that may affect Aqua

Pennsylvania; and.advise Aqua Pennsylvania of such developments and conditions to the extent that they may be

important to Aqua Pennsylvania. Subcontractor may provide an internal audit staff for periodic audits of

accounts, records, policies and procedures of Aqua Pennsylvania and submit reports thereon.

C. Corporate Secretarial: Subcontractor may maintain, in such places and manner as may be

requited by applicable law, documents o f Aqua Pennsylvania, such as minute books, charters; by-laws, contracts,

deeds and other corporate records. I t may maintain, or arrange for the maintenance of, records of stockholders

o f Aqua1 Pennsylvania and perform other, corporate secretarial functions as required including preparation of

notices of stockholder and director meetings and the minutes thereof.

Subcontractor may review and may assist in the preparation of documents and reports required by

Aqua Pennsylvania such as deeds, easements, contracts, charters, franchises, trust indentures and regulatory

reports and filings.

E>. Customer Service and Billing-. Subcontractor may provide customer service and billing

services to Aqua Pennsylvania, including live and automated telephone service to customers, the rendering of

periodic bills to customers based on Aqua Pennsylvanias' tariffs, collections, assisting customers with water

service changes, resolving customer disputes and remittance processing.

E,. Engineering: Subcontractor may provide engineering consulting regarding, and provide

engineering services in connection with, the design, permitting and constructing of Aqua Pennsylvania's facilities.

Subcontractor may conduct facility planning, hydraulic analyses and prepare or review maps, charts,

operating statistics, reports and other pertinent data, as needed to support these engineering services. I t may

assist Aqua Pennsylvania in the protection of Aqua Pennsylvania's properties by periodic inspection of their

structures, tanks reservoirs, dams, wells and electrical and mechanical equipment.

The engineering services provided by Subcontractor may also include the conduct of field

investigations as necessary to obtain engineering information and, when required, the preparation of studies,

reports, designs, drawings, cost estimates, specifications, and contracts for the construction of additions to or

improvements of Aqua Pennsylvania's sources of supply, treatment plants, pumping stations, distribution

systems, and such other facilities as Aqua Pennsylvania may request. Subcontractor may provide a materials

management program to arrange for the purchase of equipment, materials, and supplies in volume on a basis •

12

advantageous to the Aqua Pennsylvania and assist in the evaluation of new and existing products and application

procedures.

F. Fleet Services: Subcontractor may provide various fleet management services, including

assistance with vehicle ordering and leasing, fuel card management, vehicle maintenance support and oversight,

vehicle signage, vehicle titles and driver training.

G. Information Systems: Subcontractor may make available to Aqua Pennsylvania electronic

data processing systems, networks, applications and services. The Subcontractor may design, implement and

maintain a computer network, data communications system, database and applications services, desktop and

laptop computers, and peripheral equipment along with periodic upgrades, data backups and recovery

procedures for the benefit of Aqua Pennsylvania.

H . Operation: Subcontractor may develop and assist in the implementation of operating

procedures to promote the efficient and economic operation of Aqua Pennsylvania. Periodic operational reviews

may be performed by Subcontractor personnel and recommendations for improvements will be reported to

Aqua Pennsylvania.

I . Rates and Regulatory: Subcontractor personnel may make recommendations for changes in

rates, tariffs, rules and regulations and may assist Aqua Pennsylvania in the conduct of proceedings before, and in

their compliance with the rulings of, regulatory bodies having jurisdiction over Aqua Pennsylvania's operation.

These personnel will keep abreast of economic and regulatory developments and conditions that may affect

Aqua Pennsylvania and advise Aqua Pennsyvlania of developments and conditions to the extent that they may be

important to Aqua Pennsylvanias. Subcontractor Rates and Regulatory personnel may assise in the preparation

of rate filings or applications and the supporting documents and exhibits requested'or required by Aqua

Pennsylvania and their respective regulatory commissions. Subcontractor may also provide qualified personnel

to testify on behalf of Aqua Pennsylvania as required during any regulatory proceedings.

J- Rigk Management: Subcontractor may provide a risk management program to review

the exposures to accidental loss, recommend methods "of protection, either through the purchase of insurance,

self-insurance or other risk management techniques and arrange for the purchase of insurance coverage.

Subcontractor may also supervise investigation procedures, review claims and negotiate and assist in, and

13

evaluate proposals for, settlement at the request of Aqua Pennsylvania. I t may assist in the establishment of

safety and security programs for Aqua Pennsylvania.

K. Water Quality Subcontractor may provide advice and consulting to assist Aqua

Pennsylvania in complying with water quality standards of governmental agencies. It may assist in providing

design criteria for processes, coordinating with public agencies, developing approaches and solutions to water

quality problems, and providing technical assistance and general direction for Aqua Pennsylvania personnel.

I t may also provide laboratory services for programmed analyses as required by drinking water

regulations, and special analyses as required by Aqua Pennsylvania.

L. Legal Subcontractor may provide legal services, including legal advice and

representation on legal matters. The Subcontractor may also provide oversight of outside council retained to

represent Aqua Pennsylvania.

14

BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION

REQUEST OF AQUA PENNSYLVANIA, INC. UNDER SECTION 2102(B) OF THE PUBLIC UTILITY CODE FOR APPROVAL OF A CONTRACT WITH AN AFFILIATED CORPORATION

Docket No. 61- 0000? l\S

PETITION FOR APPROVAL OF AFFILIATE AGREEMENTS

Aqua Pennsylvania, Inc. ("Aqua PA" or the "Company") hereby

requests that the Commission approve, pursuant to and in accordance with

Section 2102(b) (hereinafter "Section 2102(b)"), the following contracts by and

between Aqua PA and Aqua Services, Inc. ("Aqua Services"), an affiliate: (1)

Service Company Agreement, and (2) Service Company Subcontract (together,

the "Agreements"). In support of its request, the Company states as follows:

INTRODUCTION

1. Aqua Pennsylvania is a regulated public utility engaged in.

the business of furnishing water and wastewater services to more than 400,000

customers located throughout 26 counties in Pennsylvania. Aqua PA is a wholly-

owned subsidiary of Aqua America, Inc. ("Aqua America"), with principal offices

located at 762 West Lancaster Avenue, Bryn Mawr, Pennsylvania 19010.

2. Aqua Services, a Pennsylvania corporation, is a wholly-

owned subsidiary of Aqua America. Aqua Services provides water and

wastewater related products and services to operating companies so that they

can reduce costs or achieve efficiencies in the areas of accounting and financial

services, administration, communications, corporate secretarial, engineering,

human resources, information systems, rates and regulatory compliance, risk

management, water quality, purchasing and legal services. Aqua Services, with

its principal offices located at 762 West Lancaster Avenue, Bryn Mawr,

Pennsylvania 19010, provides services to all of Aqua America's water and

wastewater utilities.

3. Aqua PA and Aqua Services propose to enter into the

following two agreements: (1) a Service Company Agreement (hereinafter the

"Service Company Agreement") providing, inter alia, that Aqua Services will

provide services to Aqua PA in the areas set forth above, as required and

requested by Aqua PA, and (2) a Service Company Subcontract,(the

"Subcontract Agreement") which enables Aqua Services to sub-contract services

requested by Aqua PA in the event that the services requested by Aqua PA can

be" provided more efficiently by another entity. Copies of the Agreements are

attached hereto as Exhibit A and Exhibit B, respectively.

4. This contractual structure provides Aqua PA with the

benefits of securing expert services at a reduced cost through the service

company, as well as permitting for the sub-contracting of services where said

services can be secured more effectively. These Agreements consequently

provide for material benefits to Pennsylvania customers in the form of cost

avoidance, cost savings and helping to streamline and improve operations. This

sharing of resources and services between and among companies will produce

measurable benefits to Aqua Pennsylvania's ratepayers.

SUMMARY OF MAJOR CONTRACT TERMS

5. Under the terms of the Agreements, Aqua Services will

provide support services to Aqua PA in the following areas, as more fully set forth

in the Service Company Agreement and Service Company Sub-Contract

attached hereto and made a part hereof as Exhibits A and B:

a. Accounting and Financial Services

b. Administration,

c. Communications,

d. Corporate Secretarial,

e. Engineering Services

f. Financial Services

g. Human Resources j j.

h. Information Systems \

i. Operations j

j . Rates & Regulatory Compliance ) i

k. Risk Management j I. Water Quality ;

j m. Legal Services, and

n. Purchasing, Contracts and Sales. i i

6. The services to be provided by-Aqua Services and any j

subcontractor to Aqua PA will be rendered at cost. The Agreements will benefit I j

Pennsylvania consumers insofar as Aqua PA can achieve cost avoidance and !

cost savings that can be passed on to customers. In addition, the Service \

Company Agreement makes available a pool of subject experts for use by the

Aqua PA, providing subject matter expertise and professional services when

needed by the companies, at cost.

7. The Agreements are in the public interest and should be

approved, insofar as it will provide substantial benefits to Pennsylvania

ratepayers in the form of cost avoidance, cost savings and/or enhanced

services. The terms of the Agreements are fair and reasonable, and assure that

charges for services will remain reasonable and not unduly burden ratepayers.

WHEREFORE, Aqua Pennsylvania hereby respectfully requests

this Commission's approval of the Service Company Agreement and the Service

Company Subcontract described in this Application and attached hereto pursuant

to and in accordance with Section 2102 of the Pennsylvania Public Utility Code,

and for such other or further relief as the Commission may deem necessary or

appropriate.

Respectfully submitted,

I SYLVAN I A, INC,

Kathy L. Pape, Rate Counsel v

Janet E. Arnold, Assistant Rate Counsel 762 West Lancaster Avenue Bryn Mawr, Pennsylvania 19010 (610) 645-1136

DATED: January 18, 2006

BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION

REQUEST OF AQUA PENNSYLVANIA, INC. UNDER SECTION 2102(B) OF THE PUBLIC UTILITY CODE FOR APPROVAL OF A CONTRACT WITH AN AFFILIATED CORPORATION

Docket No.

V E R I F I C A T I O N

I, Kathy L. Pape, hereby state that the facts above set forth are true

and correct (or are true and correct to the best of my knowledge, information and

belief) and that I expect to be able to prove the same at a haring held in this

matter. I understand that the statements herein are made subject to the

penalties of 18 Pa.C.S. §4904 (relating to unsworn falsification to authorities).

Dated: /J/g bfe

" " K a t h y l . Pape Vice-President, Treasurer & Rate Counsel AQUA PENNSYLVANIA, INC.


FILING REQUIREMENTS

G. Rate of Return

RRI 4. If the utility plans to make a formal claim for a specified allowable rate of return, provide the following data in statement or exhibit form:

a. Claimed capitalization and capitalization ratios with supporting data.

b. Claimed cost of long-term debt with supporting data.

c. Claimed cost of short-term debt with supporting data.

d. Claimed cost of total debt with supporting data.

e. Claimed cost of preferred stock with supporting data.

f. Claimed cost of common equity with supporting data.

A. The Company's claim for a specific allowable rate of return, including the details requested in items (a) through (f) may be found in Schedules 1, 5 and 6 of Exhibit 4-A.


FILING REQUIREMENTS

G. Rate of Return

RR15. Please supply copies of the following documents for the Company and, if applicable, its parent:

a. Most recent Annual Report to shareholders including any statistical supplements;

b. Most recent SEC Form 10K;

c. All SEC Form 10Q reports issued within the preceding 12 months, of the date of submittal of the rate increase request

A, See attached.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31,2006 Commission File number 1-6659

AQUA AMERICA. INC. (Exact name of registrant as specified in its charter)

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

762 W. Lancaster Avenue. Bryn Mawr. Pennsvlvania 19010-3489

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: f6J0) 527-8000

Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on

Title of each class which registereg Common stock, par value $.50 per share New York Stock Exchange, Inc.

Philadelphia Stock Exchange Inc. Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes N o ^

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part HI of this Form 10-K. or any amendment to this Form 10-K. . [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a nonaccelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12(b)-2 of the Exchange Act.: Large accelerated filer x Accelerated filer Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of tbe Act), Yes No _x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the reeistrant as.of JunelO, 2006: $2,973,777,262 . 6

For purposes of determining this amount only, registrant" has defined affiliates as including (a) the executive officers named in Part I of this 10-K report, (b) all directors of registrant, and (c) each shareholder that has informed registrant by June 30, 2006, that it has sole or shared voting power of 5% or more of the outstanding common stock of registrant.

The number of shares outstanding of the registrant's common stock as of February 9,2007: 132,344,394

DOCUMENTS INCORPORATED BY REFERENCE

. (1) Portions of registrant's 2006 Annual Report to Shareholders have been incorporated by reference into Parts I and H of this Form 10-K.

(2) Portions of the Proxy Statement, relative to the May 24, 2007 annual meeting of shareholders of registrant, to be filed within 120 days after the end of the fiscal year covered by this Form 10-K

, Report, have been incorporated by reference into Part HI of this Fonn 10-K.

TABLE OF CONTENTS

Parti Pafie

Item 1. Business 4 Item IA. Risk Factors 14 Item IB. Unresolved Staff Comments 17 Item 2. Properties 18 Item 3. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 19

Part II

Item 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Purchases of Equity Securities . 1 9

Item 6. Selected Financial Data 20 Item 7. Management's Discussion and Analysis of Financial Condition and

Results of Operations 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21 Item 8. Financial Statements and Supplementary Data 21 Item 9: Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure 21 Item 9A. Controls and Procedures 21 ltem9B. Other Information 22

Part III

Item 10- Directors, Executive Officers and Corporate Governance 22 Item 11,- Executive Compensation 24 Item 12. Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters 24 Item 13. Certain Relationships and Related Transactions, and Director Independence 24 Item 14. Principal Accountant Fees and Services 24

PartIV

Item 15. Exhibits and Financial Statement Schedules 25

Signatures 26 Exhibit Index 28

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Fonn 10-K (" 10-K"), or incorporated by reference into this 10-K, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control, that may cause our actual results, performance or achievements to be materially different from any fiiture 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," "probably," "predictions," "continue" or the negative of such terms or similar expressions. Forward-looking statements in this 10-K, or incorporated by reference into this 10-K, include, but are not limited to, statements regarding:

• projected capital expenditures and related fimding requirements;

• developments, trends and consolidation in the water and wastewater utility industries;

• dividend payment projections;

• opportunities for fnture acquisitions, the success of pending acquisitions and the impact of future acquisitions;


• the impact of geographic diversity on oqr exposure to unusual weather;

• our capability to pursue timely rate increase requests;

• our authority to carry on our business without unduly burdensome restrictions;

• our ability to obtain fair market value for condemned assets;

• the impact of fines and penalties;

• the development of new services and technologies by us or our competitors;


• the condition of our assets;

• the impact of legal proceedings;


• acquisition-related costs and synergies; and

• the forward-looking statements contained under the heading "Forward-Looking Statements" in the section entitled "Management's Discussion and Analysis" from the portion of our 2006 Annual Report to Shareholders incorporated by reference herein and made a part hereof.


" • changes in general economic, business and financial market conditions;

• changes in government regulations and policies, including environmental and public utility regulations and policies;

changes in environmental conditions, including those that result in water use restrictions;

abnormal weather conditions;

changes in, or unanticipated, capital requirements;

changes in our credit rating or the market price of our common stock;

our ability to integrate businesses, technologies or services which we may acquire;

our ability to manage the expansion of our business;

the extent to which we are able to develop and market new and improved services;

the effect of the loss of major customers;

our ability to retain the services of key personnel and to hire qualified personnel as we expand;

labor disputes;

increasing difficulties in obtaining insurance and increased cost of insurance;

cost overruns relating to improvements or the expansion of our operations;

increases in the costs of goods and services;

civil disturbance or terroristic threats or acts; and

changes in accounting policies.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this lO-K and the documents that we incorporate by reference into this 10-K completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements represent our estimates and assumptions only as of the date of this 10-K. Except for our ongoing obligations to disclose material information under the federal securities laws, we are not obligated, and assume no obligation, to update these forward-looking statements, even though our situation may change in the future. For further information or other factors which could affect our financial results and such forward-looking statements, see "Risk Factors.11 We qualify all of our forward-looking statements by these cautionary statements.

PARTI

Item 1. Business

The Company

Aqua America, Inc. (referred to as "Aqua America", "we" or "us") is the holding company for regulated utilities providing water or wastewater services to what we estimate to be approximately 2.8 million people in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, New York, Florida, Indiana, Virginia, Maine, Missouri and South Carolina. Our largest operating subsidiary, Aqua Pennsylvania, Inc., accounted for approximately 55% of our operating revenues for 2006 and as of December 31, 2006, provided water or wastewater services to approximately one-half of the total number of people we serve, and is located in the suburban areas north and west of the City of Philadelphia and in 23 other counties in Pennsylvania. Our other subsidiaries provide similar services in 12 other states. In addition, we provide water and wastewater services through operating and maintenance contracts with municipal authorities and other parties, and septage hauling services, close to our utility companies' service territories.

The following table reports our operating revenues by principal state for the year ended Deceniber 31, 2006:

Operating Operating Revenues Revenues

(OOP's) (%)

Pennsylvania $ 291,580 54.7% Texas 46,293 8.7% Ohio 39,670 7.4% Illinois 37,792 7.1% North Carolina 32,140 6.0% New Jersey 23,879 4.5% Florida l'61756 3.1% Indiana 16,640 3.1% Virginia 10,347 1.9% Maine 9,798 1.8% Other states 1,398 0.4% Regulated segment

total 526,293 98.7% Other 7,198 Consolidated $ 533,491

The following table summarizes our operating revenues, by utility customer class, for the year ended December 31, 2006:

Operating Operating Revenues Revenues (000's) (%)

Residential water $ 317,770 59.6% Commercial water 76,076 14.3% Fire protection 23,831 4.5% Industrial water 18,752 3.5% Other water 27,432 5.1% Water 463,861 87.0% Wastewater 48,907 9.2% Other 13,525 2.5% Regulated segment total 526,293 98.7% Other 7,198 1.3% Consolidated $ 533,491 100.0%

Our utility customer base is diversified among residential, commercial, fire protection, industrial, other water, wastewater customers and certain operating contracts that are integral and closely associated with the utility operations. Residential customers make up the largest component of our utility customer base, with these customers representing 69% of our water revenues. Substantially all of our water customers are metered, which allows us to measure and bill for our customers' water consumption. Water consumption per customer is affected by local weather conditions during the year, especially during the late spring and summer in our northern U.S. service territories. In general, during these seasons, an extended period of dry weather increases consumption, while above average rainfall decreases consumption. Also, an increase in the average temperature generally causes an increase in water consumption. On occasion, abnormally dry weather in our service areas can result in governmental authorities declaring drought warnings and water use restrictions in the affected areas, which could reduce water consumption. See "Water Supplies, Water Facilities and Wastewater Facilities" for a discussion of water use restrictions that may impact water consumption during abnormally dry weather. The geographic diversity of our utility' customer base reduces our exposure to extreme or unusual weather conditions in any one area of our service territory.

Our growth in revenues over the past three years is primarily a result of increases in our utility customer base and in water and wastewater rates. The majority of the increase in utility customer base is due to customers added through acquisitions. During the three-year period of 2000 through 2002, our utility customer base increased at an annual compound rate of 3.3%. The utility customer growth rate in 2003 was 23.8%, and reflects the additional customers obtained in the AquaSource acquisition on July 31, 2003. In 2004, the utility customer growth rate was 11.5% and reflects the additional customers added through the Heater and Florida Water Services acquisitions. In 2005, the utility customer growth rate was 3.5%. In 2006, the utility customer growth rate was 7.2%, including 44,792 customers associated with the New York Water Service Corporation acquisition which was completed on January 1, 2007. Overall, for the five-year period of 2002 through 2006, our utility customer base increased at an annual compound rate of 9.6% including the customers associated with the New York Water Service Corporation acquisition which was completed on January ] , 2007.

Acquisitions and Water Sale Agreements

With approximately 53,000 community water systems in the U.S. (84% 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). The nation's water systems range in size from large municipally-owned systems, such as the New York City water system that serves approximately 9 million people, to small systems, where a few customers share a common well. In the states where we operate, we believe there are approximately 22,000 public 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 publicly-owned (government-owned) wastewater treatment facilities in 2000, there are approximately 16,000 such facilities in the nation serving approximately 72% of the U.S. population. The remaining population represents individual homeowners with their own treatment facilities; for example, community on-lot disposal systems and septic tank systems. The vast majority of wastewater facilities are government-owned rather than privately-owned. The EPA survey also indicated that there are approximately 6,800 wastewater facilities in operation or planned in the 13 states where we operate. In. 2006 and 2005, we acquired six businesses providing on-site septic tank pumping and other waste water-related services. These businesses presently serve customers in eastern Pennsylvania, New Jersey, Delaware, New York and Maryland, and accounted for $5,424,000 of our operating revenues for the year ended December 31, 2006.

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 consolidation of these systems are:

« the benefits of economies of scale; * increasingly stringent environmental regulations; * the need for capital investment; and • the need for technological and managerial expertise.

We are actively exploring opportunities to expand our utility operations through acquisitions or other growth ventures. During the five-year period ended December 31, 2006, we completed 131 acquisitions or other growth ventures, including the New York Water Service Corporation acquisition.

We believe thai acquisitions will continue to be an important source of growth for us. We intend to continue to pursue acquisitions of municipally-owned and investor-owned water and wastewater systems that provide services in areas adjacent to our existing service territories or in new service areas. We engage in continuing activities with respect to potential acquisitions, including calling on prospective sellers, performing analyses and investigations of acquisition candidates, making preliminary acquisition proposals and negotiating the terms of potential acquisitions.

Water Supplies. Water Facilities and Wastewater Facilities

Our water utility operations obtain their water supplies from surface water sources such as reservoirs, lakes, ponds, rivers and streams, in addition to obtaining water from wells and purchasing water from other water suppliers. Less than 10% of our water sales are purchased from other suppliers. It is our policy to obtain and maintain the permits necessary to obtain the water we distribute. Our supplies by principal service area are as follows:

• Pennsylvania - The principal supply of water is surface water from streams, rivers and reservoirs. Wells and interconnections with adjacent municipal authorities supplement these surface supplies. There are 11 surface water treatment plants.

• Ohio - Water supply is obtained for customers in Lake County from Lake Erie. Customers in Mahoning County obtain their water from man-made lakes and the Ashtabula division is supplied by purchased water obtained through an interconnection with an adjacent water utility. Water supply is obtained for customers in Stark, Williams, Richland and Summit counties from wells. In Trumbull County, customers are served from surface water sources, including an interconnection from our Pennsylvania division.

• North Carolina - Water supply in approximately 700 non-contiguous divisions is obtained principally from wells, with several divisions purchasing water from neighboring municipalities.

• Illinois - Water supply is obtained for customers in Kankakee County from the Kankakee River and satellite wells, while customers in Vermilion County are supplied from Lake Vermilion and groundwater sources. In Will, Lee, Boone, Lake and Knox counties, our customers are served from wells. In some areas, water supply is supplemented with purchased water obtained through interconnections with adjacent water utilities.

• Texas - Water supply in 295 non-contiguous water systems is obtained principally from wells, supplemented in some cases by purchased water from adjacent water systems.

• Florida - Water supply in the majority of the 70 non-contiguous divisions is obtained principally from wells, supplemented in some cases by purchased water from adjacent water systems.

• New Jersey r- Water supply is obtained principally from wells and the supply is supplemented with purchased water obtained through interconnections with adjacent water systems.

• New York - Water supply for five systems is obtained from wells. • Indiana - Water supply in three water systems is obtained principally from wells. • Virginia - Water supply in 127 non-contiguous divisions is obtained from wells, one division's

supply is from surface water, and four divisions supplement their supply with purchased water from a nearby water system.'

• Maine - Eleven non-contiguous water systems obtain their water supply as follows: six systems use groundwater, four systems use surface-water and one system purchases water from a neighboring municipal district.

We believe that the capacities of our sources of supply, and our water treatment, pumping and distribution facilities are generally sufficient to meet the present requirements of our customers under normal conditions. We plan system improvements and additions to capacity in response to changing regulatory standards, changing patterns of consumption and increased demand from a growing number of customers.. The various state public utility commissions have generally recognized the operating and capital costs associated with these improvements in setting water rates.

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. The timing and duration of the warnings and restrictions can have an impact on our water revenues and net income, hi general, water consumption in the summer months is affected by drought warnings and restrictions to a higher degree because nonessential and recreational use of water is at its highest during the summer months. At other times of the year, warnings and restrictions generally have less of an effect on water consumption.

In 2006, portions of central and northern Texas experienced severe drought conditions. This necessitated the imposition of water use restrictions on approximately a dozen of our water systems "in Texas, and at times required supplemental water to be trucked into a small number of systems in the Fort Worth area. In other parts of the state, dry weather increased water sales.

We believe that our wastewater treatment facilities are generally adequate to meet the present requirements of our customers. In addition, we own several sewer collection systems where the wastewater is treated at a municipally-owned facility. Capital funds are included in our capital plans to address inflow and infiltration in the collection systems, wet weather flows at our lift stations and treatment plants, and other conditions and requirements that can affect compliance. Changes in regulator)' requirements may be reflected in revised permit limits and conditions when National Pollution

Discharge Elimination System ("NPDES") permits are renewed, typically on a five-year cycle. Capital improvements are planned and budgeted to meet anticipated changes in regulations and needs for increased capacity related to projected growth. The various state public utility commissions have generally recognized the. operating and capital costs associated with these improvements in setting wastewater rates for current customers and capacity charges for new customers.

Economic Regulation

Most of our water and wastewater utiJity 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 ofsecurities. The regulatory commissions also 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. A small number of our operations are subject to rate regulation by county or city governments. The profitability of our utiiiiy operations is influenced to a great extent by the timeliness and adequacy of rate allowances we are -granted by the respective regulatory commissions or authorities in the various states in which we operate.

Accordingly, we maintain a rate case management capability to provide that the tariffs of our utility operations reflect, to the extent practicable, the timely recovery of increases in costs of operations, capital, taxes, energy, materials and compliance with environmental regulations. We file rate increase requests to recover the capital investments that we make in improving or replacing our facilities and to recover expenses. In the states in which we operate, we are subject to economic regulation by the following state regulatory commissions:

State Regulatorv Commission Pennsylvania Pennsylvania Public Utility Commission Ohio The Public Utilities Commission of Ohio North Carolina North Carolina Utilities Commission Illinois Illinois Commerce Commission Texas Texas Commission on Environmental Quality New Jersey New Jersey Board of Public Utilities Florida Florida Public Service Commission Indiana Indiana Utility Regulatory Commission Virginia Virginia State Corporation Commission Maine Maine Public Utilities Commission Missouri Missouri Public Service Commission New York New York Public Service Commission South Carolina South Carolina Public Service Commission

All of the states in which we acquired operations in 2004 and 2003 permit some form of consolidated rates in varying degrees, but none currently permits us to fully consolidate rate filings state-wide. Between August 2003 and December 2006, we have filed rate filings for over 121 operating divisions. Due to the length of time since the last rate increase for some acquired systems and the large amount of capital improvements relative to the number of customers in some smaller systems, the proposed rate increase in some of these systems may be substantial. While each of these rate filings will proceed through the applicable regulatory process, we can provide no assurance that the rate increases will be granted in a timely or sutficient manner to cover the investments and expenses for which we initially sought the rate increases. Further, there remain 20 divisions within these acquired operations where we have not yet filed a rate request.

Six states in which we operate permit water utilities, and in two states wastewater utilities, to add a surcharge to their water or wastewater bills to offset the additional depreciation and capital costs associated with certain capital expenditures related to replacing and rehabilitating infrastructure systems. Prior to these

surcharge mechanisms being approved, water and wastewater utilities absorbed 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, whicli often acted as a disincentive to water and wastewater utilities to rehabilitate their infrastructure. In addition, our subsidiaries in certain states use a surcharge or credit on their bill to reflect changes in certain costs, such as changes in state tax rates, other taxes and purchased water, until such time as the costs are incorporated into base rates.

Currently, Pennsylvania, Illinois, Ohio, New York, Indiana and Missouri allow for the use of infrastructure rehabilitation surcharges. These mechanisms typically adjust periodically based on additional qualified capital expenditures completed or anticipated in a fiiture period. The infrastructure rehabilitation surcharge is capped at a percentage of base rates, generally at 5% to 9% 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 regulatoiy benchmark. Infrastructure rehabilitation surcharges provided revenues of $7,873,000 in 2006, $10,186,000 in 2005 and $7,817,000 in 2004.

In general, we believe that Aqua America, Inc. and its subsidiaries have valid authority, free from unduly burdensome restrictions, to enable us to carry on our business as presently conducted in the franchised or contracted areas we now serve. The rights to provide water or wastewater service to a particular franchised service territory are generally non-exclusive, although the applicable regulatory commissions usually allow only one regulated utility to provide service to a given area. In some instances, another water utility provides service to a separate area within the same political subdivision served by one of our subsidiaries.

In the states where our subsidiaries operate, it is possible that portions of our subsidiaries' operations could be acquired by municipal governments by one or more of the following methods:

• eminent domain; • the right of purchase given or reserved by a municipality or political subdivision when the original

franchise was granted;.and • the right of purchase given or reserved under the law of the state in which the subsidiary was

incorporated or from which it received its permit.

The price to be paid upon such an acquisition by the municipal government is usually determined in accordance with applicable law governing the taking of lands and other property under eminent domain. In other instances, the price may be negotiated, fixed by appraisers selected by the parties or computed in accordance with a formula prescribed in the law of the state or in the particular franchise or charter. We believe that our operating subsidiaries will be entitled to fair market value for any assets that are condemned, and we believe the fair market value will be in excess of the book value for such assets.

In December 2004, as a result of the settlement ofa condemnation action, our Ohio operating subsidiary sold its water utility assets within the municipal boundaries of the City of Geneva in Ashtabula County, Ohio for net proceeds of approximately $4,716,000, which was in excess of the book value for these assets. The sale resulted in the recognition in 2004 of a pre-tax gain on the sale of these assets, net of expenses, of $2,342,000. We continue to operate this water system for the City of Geneva under a multi-year operating contract that expires in December 2008. These water utility assets represented less than 1% of Aqua America's total assets, and the total number of customers included in the water system sold represented less than 1% of our total customer base. The increase in earnings associated with reinvesting the sale's proceeds and the operating income generated by the operating contract have offset the loss of this water system's historic contribution to income.

The City of Fort Wayne, Indiana has authorized the acquisition, by. eminent domain or otherwise, of a portion of the utility assets of one of the operating subsidiaries that we acquired in connection with the

AquaSource acquisition in 2003. We have challenged whether the City is following the correct legal procedures in connection with the City's attempted condemnation and we have challenged the City's valuation of this portion of our system. The portion of the system under consideration represents approximately 1% of our total customer, base. While we continue to discuss this matter with officials, from the City of Fort Wayne, we continue to legally protect our interests in this proceeding. . .

A sanitary district in Illinois and a city in Texas have also indicated interest in the acquisition, by eminent domain or otherwise, of all or a portion of the utility assets of two of our operations. Together, • the systems represent approximately 3,000 customers or less than 0.5% of our total customer base. We believe that our operating subsidiaries are entitled to fair market value for these assets.

Despite the sales and possible condemnations referred to above, our strategy continues to be to acquire additional water and wastewater systems, maintain our existing systems, and actively oppose efforts by

' municipal governments to acquire any of our operations, particularly for less than tiie fair market value of our operations or where the municipal government seeks to acquire more than it is entitled to under the applicable law or agreement.

Environmental. Health and Safety Regulation

Provision of water and wastewater services is subject to regulation under the federal Safe Drinking Water Act, the Clean Water Act and related state laws, and under federal and state regulations issued under these laws. These laws and regulations establish.criteria and standards for drinking water and for wastewater discharges. In addition, we are subject to federal and state laws and other regulations relating to solid waste disposal, dam safety and other operations. Capital expenditures and operating costs required as a result of water quality standards and environmental requirements have been traditionally recognized by state public utility commissions as appropriate for inclusion in establishing rates.

Environmental compliance issues remain at various water and wastewater facilities associated with acquired systems/including facilities acquired in connection with the AquaSource acquisition completed in 2003, the Heater and Florida Water Service acquisitions completed in 2004 and the acquisitions of small utilities in Northeastern Pennsylvania over the past several years. We believe that the capital expenditures required to address these compliance issues have been budgeted in our capital program and represent less than 10% of our expected total capital expenditures over the next five years. We are parties to agreements with regulatory agencies in Texas, Florida, Indiana, Virginia and North Carolina under which we have committed to make certain improvements for environmental compliance. These agreements are intended to provide the regulators with assurance that problems covered by these agreements will be addressed, and the agreements generally provide protection to us from fines, penalties and other actions while corrective measures are being implemented. We are actively working directly with state environmental officials to implement or amend these agreements as necessary.

Safe Drinking Water Act - The Safe Drinking Water Act establishes criteria and procedures for the U.S. Environmental Protection Agency to develop national quality standards for drinking water. Regulations issued pursuant to the Safe Drinking Water Act and its amendments set standards on the amount of certain microbial and chemical contaminants and radionuclides allowable in drinking water. Current requirements under the Safe Drinking Water Act are not expected to have a material impact on our operations or financial condition as we have made and are making investments to meet existing water quality standards. We may, in the future, be required to change our method of treating drinking water at certain sources of supply if additional regulations become effective.

The EPA's issuance ofa rule regulating radon in tap water has been postponed repeatedly since-originally proposed in 1991. Limits for radon in tap water, if promulgated, would probably become effective 4 or 5 years after promulgation. The most likely scenario is that the rule might contain two standards and states would be encouraged to adopt Multi-Media Mitigation radon reduction programs to achieve cost-effective reductions in indoor air radon levels to qualify for the higher drinking water

standard. Under this scenario, a small percentage of our wells, primarily in North Carolina, Pennsylvania and Virginia could require treatment, and the total cost of compliance could approximate $5,000,000 over a five year period. The likelihood of other scenarios developing-in the near term is remote, and it is not possible at this time to estimate the costs of compliance;

The Safe Drinking Water Act provides for the regulation of radionuclides other than radon, such as radium and uranium. The Radionuclides Rule that became effective in 2003 left unchanged the existing standards for gross alpha and radium, but changed the monitoring protocol. The rule also added a maximum contaminant level for uranium. Under the new testing protocols, some of our smaller groundwater facilities have exceeded one or more of the radionuclide standards and require treatment by January 2008. Treatment processes have already been installed at 27 facilities, and approximately 17 additional facilities will require the installation of a treatment process, replacement or modification of a well, or other remedy. In most cases where remedies are yet to be implemented, other wells supplying the systems are in compliance, and the wells that exceed a maximum contaminant level have either been temporarily taken out of service or their use has been minimized. The future capital cost of compliance is expected to be less than $5,000,000. The impact of the rulemaking is not expected to have a material impact on our results of operations or financial condition.

In order to remove or inactivate microbial organisms, rules were issued by the EPA to improve disinfection and filtration of potable water and reduce consumers' exposure to disinfectants and byproducts of the disinfection process. In the future, we may be required to install filtration or other treatment, for one currently unfiltered surface water supply. The cost ofthis treatment, should it be required, is not expected to exceed $6,000,000. Certain small groundwater systems could be reclassified as being influenced by surface water. This may require additional treatment or the development of replacement sources of supply over time, the cost for which is not expected to exceed a total of $ 1,000,000. In addition, four systems in Florida and potentially eight systems in North Carolina have levels of disinfection by-products above the current maximum contaminant level requiring a compliance response which possibly will.change the type of treatment. At least one-half of these systems purchase water from an adjacent supplier, and the resolution of the problem may depend upon supplier cooperation. Treatment modifications, ifinecessary, may require capital costs of approximately $1,500,000 over the next two years.

The EPA promulgated the Long Term 2 Enhanced Surface Water Treatment Rule and a Stage 2 Disinfection/Disinfection By-product Rule in January 2006. These rules will result in additional onetime special monitoring costs of approximately $600,000 over a four-year period from 2007 to 2011. Monitoring began for our larger systems in September 2006. The results of the monitoring might require modification of treatment, including capital improvements, in year 2008 and beyond. It is not possible at this time to reasonably project the potential impact on the capital budget, i f any, from these rules, but the effect is not expected to have a material impact on our results of operations or financial condition.

A rule lowering the limit on arsenic was promulgated in 2001 by the EPA and became effective in January 2006, with a provision for further time extensions for small systems. One well system in Pennsylvania was equipped with a treatment system in 2004, and one small system in Maine was equipped with a treatment system in 2005. An existing treatment system has been replaced at one system in Ohio, and possibly two very small systems in Texas will be treated in 2007 or 2008. One system in North Carolina will require a treatment system at a back-up well that is currently unused. The cost of these remaining capital improvements to fully achieve compliance with this regulation is not expected to exceed $500,000.

Clean Water Act - The Clean Water Act regulates discharges from drinking water and wastewater treatment facilities into lakes, rivers, streams, and groundwater. It is our.policy to obtain and maintain all required pennits and approvals for the discharges from our water and wastewater facilities, and to comply with all conditions of those permits and other regulatory requirements. A program is in place to monitor facilities for compliance with permitting, monitoring and reporting for wastewater discharges.

From time to time, discharge violations may occur which may result in fines. We are also parties to compliance agreements with regulatory agencies in several states where we-operate while improvements are being made to address wastewater discharge compliance issues. These fines and penalties, if any, are not expected to have a material impact on our results of operations or financial condition. The required costs to comply with the agreements previously cited are included in our capital program, are not expected to be significant, and are expected to be recoverable in rates.

Recent changes in wastewater regulations in the state of Missouri will require improvements at certain of the 52 small wastewater systems we operate in that state. We presently estimate the cost of these improvements to be approximately $ 1,500,000 over the next three years.

Solid Waste Disposal - The handling and disposal of residuals and solid waste generated from water and .wastewater, treatment facilities is governed by federal and state laws and regulations. A program is in place to monitor our facilities for compliance with regulatory requirements, and we are not aware of any significant environmental remediation costs necessary from our handling and disposal of waste material from our water and wastewater operations. However, we do anticipate capital expenditures, that have been included within our five-year capital budget, related to the expansion and/or replacement of some of our current waste disposal facilities in Pennsylvania and Ohio, to support our large surface water treatment facilities in these states.

Dam Safety - Our subsidiaries own seventeen major dams that are subject to the requirements of the Federal and state regulations related to dam safety. Ail major dams undergo an annual engineering inspection. We believe that all seventeen dams are structurally sound and well-maintained.

We continue to study our dams to detennine what improvements may be needed as a result of the adoption of revised formulas in Pennsylvania, by the Department of Environmental Protection, and in Ohio, by the Department ofNatural Resources, for determining the magnitude of a probable maximum flood. Studies of our dams identified two dams in Pennsylvania and three dams in Ohio that require capital improvements, which have been included in our capital budget, of approximately $17,500,000 in the aggregate during the four year period 2007 to 2010. Construction began in 2005 on one of these dams in Ohio, and one dam upgrade in Pennsylvania began in 2006 with $1,800,000 of capital expenditures incurred to date. Design is underway for improvements to the other dams.

Safety Standards - Our facilities and operations may be subject to inspections by representatives of the Occupational Safety and Health Administration from time to time. We maintain safety policies and procedures to comply with the Occupational Safety and Health Administration's rules and regulations, but violations may occur from time to time, which may result in fines and penalties, which are not expected to be material. We endeavor to correct such violations promptly after they are brought to our attention.

Security

In fight of concerns regarding security in the wake of the September 11, 2001 terrorist attacks, we have increased security measures at our facilities.-These increased security measures were not made in response to any specific threat. We are in contact with federal, state and local authorities and industry

• trade associations regarding infonnation on possible threats and security measures for water utility operations. The cost of the increased security measures, including capital expenditures, is expected to be recoverable in water rates and is not expected to have a material impact on our results of operations or financial condition.

Employee Relations

As of December 31,2006, we employed a total of 1,540 full-time employees. Our subsidiaries are parties to 11 agreements with labor unions covering 451 employees that expire at various times between August 2007 and December 2009. The employees in our New Jersey operation voted to be represented by a union. There are 33 employees in the bargaining unit in-New Jersey and negotiations with that union have been on-going since mid-2005. The employees represented by this union continue to work under their existing terms of employment while negotiations continue with the union.

Available Information

We file annual, quarterly and current reports, proxy statements and other infonnation with the Securities and Exchange Commission ("SEC"). You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F. Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further infonnation on the public reference room. You may also obtain our SEC filings from the SEC's Web site at www.sec.gov.

Our Internet Web site address is www.aquaamerica.com. We make available free of charge through our Web site's "Investor Relations" page all of our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information. These reports and information are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

Our Board of Directors has various committees including an audit committee, an executive compensation and employee benefits committee and a corporate governance committee. Each of these committees has a formal charter. We also have Corporate Governance Guidelines and a Code of Ethical Business Conduct. Copies of these charters, guidelines and'codes, and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, can be obtained free of charge from our Web site, www.aquaamerica.com. The references to our Web site and the SEC's Web site are intended to be inactive textual references only, and the contents of those Web sites are not incorporated by reference herein.

In addition, you may request a copy of the foregoing filings, charters, guidelines and codes, and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, at no cost by writing or telephoning us at the following address or telephone number:

Investor Relations Department Aqua America, Inc. 762 W. Lancaster Avenue Bryn Mawr, PA 19010-3489 Telephone: 610-527-8000

Item IA. Risk Factors

In addition to the other information included or incorporated by reference in this 10-K, the following factors should be considered in evaluating our business and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial position or results of operations. I f one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we projected. There may be additional risks about which we do not presently know or that we currently believe are immaterial which coujd also impair our business or financial position.

Our business requires significant capital expenditures and the rates we charge our customers are subject to regulation. If we are unable to obtain sufficient capital on reasonable terms or obtain government approval of our requests for rate increases, or if approved rate increases are untimely or inadequate to cover our capital investments and to recover expenses, our profitability may suffer.

The water utility business is capital intensive. In addition to the capital required to fund our growth through acquisition strategy, on an annual basis, we spend significant sums for additions to or replacement of property, plant and equipment. Our ability to maintain and meet our financial objectives is dependent upon the availability of adequate capital and the recovery of our capita! investments through the rates we charge our customers. There is no guarantee that we will be able to obtain sufficient capital in the future on reasonable terms and conditions for expansion, construction and maintenance. In the event we are unable to obtain sufficient capital, our expansion efforts could be curtailed, which may affect our growth and may affect our future results of operations. The rates we charge our customers are subject to approval by the public utility commissions or similar regulatory bodies in the states in which we operate. We file rate increase requests, from time to time, to recover our investments in utility plant and expenses. Once a rate increase petition is filed with a public utility commission, the.ensuing administrative and hearing process may be lengthy and costly. The timing of our rate increase requests are therefore partially dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase to the extent approved. We can provide no assurances that any future rate increase request will be approved by the appropriate state public utility commission; and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.

Federal and state environmental laws and regulations impose substantial compliance requirements on our operations. Our operating costs could be significantly increased in order to comply with new or stricter regulatory standards imposed by federal and state environmental agencies.

Our water and wastewater services are governed by various federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act and similar state laws, and federal and state regulations issued under these laws by the United States Environmental Protection Agency and state environmental regulatory agencies. These laws and regulations establish, among other things, criteria and standards for drinking water and for discharges into the waters of the United States and states. Pursuant to these laws, we are required to obtain various environmental pennits from environmental regulatory agencies for our operations. We cannot assure you that we have been or will be at all times in total compliance with these laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. Environmental laws and regulations are complex and change frequently. These laws, and the enforcement

. thereof, have tended to become more stringent over time. While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, it is possible that new or stricter standards could be imposed that will raise our operating costs. Although these costs may be recovered in the fonn of higher rates, there can be no assurance that the various state public utility commissions or similar regulatory bodies diat govern our business would approve rate increases to enable us to recover such costs. In summary, we cannot assure you that our costs of complying with, or discharging

liability under, current and future environmental and health and safety laws will not adversely affect our business, results of operations or financial condition.

Our business is impacted by weather conditions and is subject to seasonal Jluctuations, which could adversely affect demandfor our water service and our revenues.

Demand for our water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with irrigation systems, swimming pools, cooling systems and other outside water use. Throughout the year, and particularly during typically warmer months, demand wil! vary with temperature, rainfall levels and rainfall frequency. In the event that temperatures during the typically wanner months are cooler than normal, if there is more rainfall than normal, or rainfall is more frequent than normal, the demand for our water may decrease and adversely affect our revenues.

Drought conditions and government imposed water use restrictions may impact our ability to serve our current andfuture customers, and may impact our customers' use of our water, which may adversely affect our financial condition and results of operations.

We depend on an adequate water supply to meet the present and future demands of our customers. Drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers. An interruption in our water supply could have a material adverse effect on our financial condition and results of operations. Moreover, governmental restrictions on water usage during drought conditions may result in a decreased demand for our water, even if our water supplies are sufficient to serve our customers during these drought conditions, which may adversely affect our revenues and earnings.

An important element of our growth strategy is the acquisition of water and wastewater systems. Any future acquisitions we decide to undertake may involve risks.

An important element of our growth strategy is the acquisition and integration of water and wastewater systems in order to broaden our current, and move into new, service areas. We will not be able to acquire other businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with acquisition candidates. It is our intent, when practical, to integrate any businesses we acquire with our existing operations. The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management's time and resources. Future acquisitions by us could result in:

dilutive issuances of our equity securities; incurrence of debt and contingent liabilities; failure to have effective internal control over financial reporting; fluctuations in quarterly results; and other acquisition-related expenses.

Some or all of these items could have a material adverse effect on our business and our ability to finance our business and comply with regulatory requirements. The businesses we acquire in the future may not achieve sales and profitability that would justify our investment, and any difficulties we encounter in the integration process, including in the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. In addition, as consolidation becomes more prevalent in the water and wastewater industries, the prices for suitable acquisition candidates may increase to unacceptable levels and limit our ability to grow through acquisitions.

Contamination to our water supply may result in disruption in our services and litigation which could adversely affect our business, operating results and financial condition.

Our water supplies are subject to contamination, including contamination from naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-made sources, such as man-made organic chemicals, and possible terrorist attacks. In the event that a water supply is contaminated, we may have to interrupt the use of that water supply until we are able to substitute the flow of water from an uncontaminated water source. In addition, we may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities, or development of new treatment methods. If we are.unable to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, there may be an adverse effect on our revenues, operating results and financial condition. The costs we incur to decontaminate a water source or an

. underground water system could be significant and could adversely affect our business, operating results 'and financial condition and may not be recoverable in rates. We could also be held liable for consequences arising out of human exposure to hazardous substances in our water supplies or other environmental damage. For example, private plaintiffs have the right to bring personal injury or other toxic tort claims arising from the presence of hazardous substances in our drinking water supplies. Our insurance policies may not be sufficient to cover the costs of these claims.

In addition to the potential pollution of our water supply as described above, in the wake of the . September 11, 2001 terrorist attacks and the ensuing threats to the nation's health and security, we have

taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply. We have also tightened our security measures regarding the delivery and handling of certain chemicals used in our business. We have and will continue to bear increased costs for security precautions to protect our facilities, operations and supplies. These costs may be significant. Despite these tightened security measures, we may not be in a position to control the outcome of terrorist events should they occur.

- Wastewater operations may entail significant risks.

Wastewater collection and treatment and septage pumping and hauling involve various risks associated with damage to the surrounding environment. If collection or treatment systems fail or do not operate properly, or if there is a septage spill, untreated or partially treated wastewater could discharge'onto property or'into nearby streams and rivers, causing property or environmental damage. Liabilities resulting from such damage could materially and adversely affect the Company's results of operations and financial condition.

Work stoppages and other labor relations matters could adversely affect our operating results.

Approximately-30% of our workforce are unionized under 11 labor contracts (or contracts under negotiation) with labor unions, which expire over several years. We believe our labor relations are good, but in light of rising costs for healthcare and pensions, contract negotiations in the future may be difficult. We are subject to a risk of work stoppages and other labor relations matters as we negotiate with the unions to address these issues, which could affect our results of operations and financial condition. We cannot assure you that issues with our labor forces will be resolved favorably to us in the future or that we will not experience work stoppages. ,

We depend significantly on the services of the members of our management team, and the departure of any of those persons could cause our operating results to suffer.

Our success depends significantly on the continued individual and collective contributions of our management team. The loss of the services of any member of our management team or the inability to hire and retain experienced management personnel could harm our operating results.

Settlement provisions contained in theforward equity sale agreement between us and theforward purchaser subject us to certain risks.

In August 2006, we entered into a forward stock agreement for 3,525,000 shares of common stock with a third party (the "forward purchaser"). In connection with the forward equity sale agreement, the forward purchaser borrowed 3,525,000 shares of common stock from stock lenders and sold the borrowed shares to the public to meet its obligations under the forward equity sale agreement. The forward purchaser has the right to require us to physically settle the forward sale agreement on a date specified by the forward purchaser in certain events, including (a) if the average of the closing bid and offer price or, if available, the closing sale price of our common stock is less than or equal to $10.00 per share on any trading day, (b) if our board of directors votes to approve, or there is a public announcement of, in either case, an action that, if consummated, would result in a merger or other takeover event of our company, (c) if we declare any cash dividend or distribution above a specified threshold, or any non-cash dividend or distribution (other than a dividend or distribution of shares of our common stock), in either case, on shares of our common stock and set a record date for payment for such dividend or distribution on or prior to the final settlement date, (d) i f the forward purchaser is unable to continue to borrow a number of shares of our common stock equal to the number of shares underlying the forward sale agreement, (e) if the cost of borrowing the common stock has increased above a specified amount, (f) if a nationalization, delisting or change in law occurs, each as defined in the forward sale agreement or (g) in connection with certain events of default and termination events under the deemed master agreement governing such forward sale agreement. In the event that early settlement of the forward sale agreement occurs as a result of any of the foregoing events, we will be required to physically settle the forward sale agreement by delivering shares of our common stock and receiving applicable proceeds. The forward purchaser's decision to exercise its right to require us to settle the forward sale agreement will be made irrespective of our need for capital. In the event that we elect, or are required, to settle the forward sale agreement with shares of our common stock, delivery of such shares would likely result in dilution to our earnings per share and return on equity.

In addition, upon certain events of bankruptcy, insolvency or reorganization relating to us, the forward sale agreement will terminate without further liability of either party. Following any such termination, we would not issue any shares, and we would not receive any proceeds pursuant to the forward sale agreement.

Except under the circumstances described above, we have the right to elect physical, cash or net stock settlement under the forward sale agreement. If we elect cash or net stock settlement, we would expect the forward purchaser to purchase in the open market the applicable number of shares necessary, based upon the portion of the forward sale agreement that we have elected to so settle, to return to stock lenders the shares of our common stock that the forward purchaser has borrowed in connection with the sale of our common stock under the prospectus supplement and, if applicable in connection with net stock settlement, to deliver shares to us. I f the market value of our common stock at the time of these purchases is above the forward price at that time, we would pay, or deliver, as the case may be, to the forward purchaser under the forward sale agreement an amount of cash, or common stock with a value, equal to this difference. Any such difference could be significant. If the market value of our common stock at the time of these purchases is below the forward price at that time, we would be paid this difference in cash by, or we would receive the value ofthis difference in common stock from, the forward purchaser under the forward sale agreement, as the case may be.

Item IB. Unresolved Staff Comments.

None.

Item 2. Properties.

Our properties consist of transmission and distribution mains and conduits, water and wastewater treatment plants, pumping facilities, wells, tanks, meters, supply lines, dams, reservoirs, buildings, vehicles, land, easements, rights and other facilities and equipment used for the operation of our systems, including the collection, treatment, storage and distribution of water and the collection and treatment of wastewater. Substantially all of our properties are owned by our subsidiaries, and a substantial portion of our property is subject to liens of mortgage or indentures. These liens secure bonds, notes and other evidences of long-term indebtedness of our subsidiaries. For certain properties that we acquired through the exercise of the power of eminent domain and certain other properties we purchased, we hold title for water supply purposes only. We own, operate and maintain several thousand miles of transmission and distribution mains, surface water treatment plants, and many well treatment stations and wastewater treatment plants. Some properties are leased under long-term leases. The following table indicates our net property, plant and equipment, in thousands of dollars, as of December 31, 2006 in the principal states where "we operate:

Net Property, Plant and Equipment

Pennsylvania $ 1,447,590 Illinois 191,385 Ohio 190,347 North Carolina 164,463 Texas 159,685 New Jersey 132,331 Indiana 104,586 Florida 66,498 Virginia- 42,678 Maine 40,970 Inter-company eliminations

and other states (34,538)

We believe that our properties are generally maintained in good condition and in accordance with current standards of good waterworks industry practice. We believe that the facilities used in the operation of our business are in good condition in terms of suitability, adequacy and utilization.

Our corporate offices are leased from our subsidiary. Aqua Pennsylvania, Inc., and are located in Bryn Mawr, Pennsylvania.

Item 3. Legal Proceedings

There are various legal proceedings in which we are involved. Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our properties is the subject that are material or are expected to have a material effect on our financial position, results of operations or cash flows..

In May 2004, our subsidiaries in Texas filed an application with the Texas Commission on Environmental Quality to increase rates over a multi-year period, hi accordance with authorization from the Texas Commission on Envifonmental Quality, our subsidiaries commenced billing for the requested rates and deferred recognition of certain expenses for financial statement purposes. Several customers and municipalities have joined the proceeding and challenged the requested rate structure, including our request to regionalize rates, and the amount of our requested rate increase. In the event our request is denied completely or in part, we could be required to refund some or all of the revenue billed to-date, and writeoff some or all of the regulatory asset for the expense deferral. For more information, see the description

under the section captioned "Management's Discussion and Analysis" and refer to the footnote titled "Water and Wastewater Rates" in the "Notes to Consolidated Financial Statements" from the portions of our 2006 Annual Report to Shareholders filed as Exhibit 13.1 to this 10-K.

• Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of 2006.

PART D

Item 5. Market for the Registrant's Common Stock. Related Stockholder Matters and Purchases.of Equity Securities

Our common stock is traded on the New York Stock Exchange and the Philadelphia Stock Exchange under the ticker symbol WTR. As of February 9,2007, there were approximately 28,344 holders of record of our common stock.

The following table shows the high and low intraday sales prices for our common stock as reported on the New York Stock Exchange composite transactions reporting system and the cash dividends paid per share for the periods indicated .(all per share data as presented has been adjusted for the 2005 4-for-3 common stock split effected in the form ofa stock distribution):

First Second Third Fourdi Quarter Quarter Quarter Quarter Year

2006 Dividend paid per common share I 0.1069 $ 0.1069 0.115 0.115 $ 0.4438 Dividend declared per common share 0.1069 0.1069 0.230 - 0.4438 Price range o f common stock

- high 29.79 27.82 23.93 24.94 29.79 - low 26.50 20.13 21.13 21.54 20.13

2005 Dividend paid per common share $ 0.0975 S 0.0975 % 0.0975 $ 0.1069 : $ 0.3994 Dividend declared per common share 0.0975 0.0975 0.2044 - 0.3994 Price range o f common srock

- high 19.37 23.24 29.15 29.22 29.22 - low 17.49 18.03 21.61 22.88 17.49

We have paid common dividends consecutively for 62 years. Effective September 1, 2006, our Board of Directors authorized an increase of 7.6% in the dividend rate over the amount Aqua America, Inc. paid in the previous quarter. As a result ofthis authorization, beginning with the dividend payment in September 2006, the annualized dividend rate increased to S0.46 per share. This is the 16 dividend increase in the past 15 years and the eighth 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 57.8% of net income.

In August.2005, our Board of Directors declared a 4-for-3 common stock split effected in the form ofa 33 1/3 % stock distribution for all common shares outstanding, to shareholders of record on November 17,2005. The new shares were distributed on December 1,2005. All share and per share data for all periods presented have been restated to give effect to the stock split At the time, this was the 6a) stock split within the past nine years.

The following table summarizes the Company's purchases of its common stock for the quarter ending December 31,2006:

Issuer Purchases of Equity Securities

Total Maximum Number of Number of

Shares Shares Purchased that May as Part of Yet Be

Total Publicly Purchased Number Average Announced Under the

of Shares Price Paid Plans or Plan or Period Purchased (1) per Share Programs Programs (2)

October 1-31,2006 919 $ 22.08 - 548,278 November 1-30, 2006 4,390 $ 23.33 - 548,278 December 1-31,2006 1,877 $ 22.88 - 548,275 Total 7,186 $ 23.05 - 548,278

(1) These amounts consist of shares we purchased from our employees who elected to pay the exercise price of their stock options (and then hold shares of the stock) upon exercise by delivering to us (and, thus, selling) shares of Aqua America common stock in accordance with the terms of our equity' compensation plans that were previously approved by our shareholders and disclosed in our proxy statements. This feature of our equity compensation plan is available to all employees who receive option grants under the plan. We purchased these shares at their fair market value, as detennined by reference to the closing price of our common stock on the day prior to the option exercise.

(2) On August 5, 1997, our Board of Directors authorized a common stock repurchase program that was publicly announced on August 1, 1997, for up to 1,007,351 shares. No repurchases have been made under this program since 2000. The program has no fixed expiration date. The number of shares authorized for purchase was adjusted as a result of the stock splits effected in the fonn of stock distributions since the authorization date.

Item 6. Selected Financial Data

The information appearing in the section captioned "Summary of Selected Financial Data" from the portions of our 2006 Annual Report to Shareholders filed as-Exhibit 13.1 to this Form 10-K is incorporated by reference herein.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The infonnation appearing in the section captioned "Management's Discussion.and Analysis" from the portions of our 2006 Annual Report to Shareholders filed as Exhibit 13.1 to this Form 10-K is incorporated by reference herein.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks tn 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, since generally our rate increases include a revenue level to allow recoveiy 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 31,2006, the debt maturities by period, in thousands of dollars, and the weighted average interest rate for fixed-rate, long-term debt are as follows:

Fair 2007 2008 2009 201Q 2011 Thereafter Total Value

Long-term debt (fixed rate) $31,155 $23,961 $ 7,004 $ 54,192 $ 26,998 $ 839,505 $982,815 $986,487

Weighted average interest rate 5.10% 6.63% 4.81% 6.43% 6.42% 5.65% 5.72%

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 31,2006, our carrying value of certain investments was $499, which reflects the market value of such investments and is in excess of our original cost. As of December 31, 2005, we owned no marketable equity securities.

Item 8. Financial Statements and Supplementary Data

Information appearing under the captions "Consolidated Statements of Income and Comprehensive Income," "Consolidated Balance Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of Capitalization," "Consolidated Statements of Common Stockholders' Equity" and "Notes to Consolidated Financial Statements" from the portions of our 2006 Annual Report to Shareholders filed as Exhibit 13.1 to this Form 10-K is incorporated by reference herein. Also, the information appearing in the sections captioned "Management's Report on Internal Control Over Financial Reporting" and "Report of Independent Registered Public Accounting Firm" from the portions of our 2006 Annual Report to Shareholders filed as Exhibit 13.1 to this Form 10-K is incorporated by reference herein.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures - Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system

are met, and no evaluation of controls can provide absolute assurance that all control issues and instances • of fraud, i f any, within a company have been detected.

(b) Management's Report on Internal Control Over Financial Reporting - The information appearing in the section captioned "Management's Report on Internal Control Over Financial Reporting" from the portions of our 2006 Annual Report to Shareholders filed as Exhibit 13.1 to this Form 10-K is incorporated by reference herein.

(c) Changes in Internal Control Over Financial Reporting - No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART ID

Item 10. Directors, Executive Officers and Corporate Governance

We make available free of charge within the "Investor Relations / Corporate Governance" section of our Internet Web site, at www.aquaamerica.com. and in print to any shareholder who requests; our Corporate Governance Guidelines, the Charters of each Committee of our Board of Directors, and our Code of Ethical Business Conduct. Requests for copies may be directed to Investor Relations Department, Aqua America, Inc., 762 W. Lancaster Avenue, Bryn Mawr, PA 19010-3489. Amendments to the Code, and any grant ofa waiver from a provision of the Code requiring disclosure under applicable SEC rules will be disclosed on the Company's Web site. The information contained on our Web site is not incorporated by reference into this Form 10-K and should not be considered part ofthis or any other report that we file with or fumish to the SEC.

Directors of the Registrant. Audit Committee. Audit Committee Financial Expert and Filings under Section Ma)

The information appearing in the sections captioned "Infonnation Regarding Nominees and Directors," "Corporate Governance" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement relating to our May 24, 2007, annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by th is Form 10-K, is incorporated herein by reference.

Executive Officers of the Registrant

The following table and the notes thereto set forth information with respect to our executive.officers, including their names, ages, positions with Aqua America, Inc. and business experience during the last five years:

Name

Nicholas DeBenedictis

Roy H. Stahl

David P. Smeltzer

Richard R. Riegler

Position with Age Aqua America, Inc. (I)

61 Chairman, President and Chief Executive Officer (May 1993 to present); President and Chief Executive Officer (July 1992 to May 1993); Chairman and Chief Executive Officer, Aqua Pennsylvania, Inc. (July 1992 to present); President, Philadelphia Suburban Water Company (February 1995 to January 1999) (2)

54 Executive Vice President and General Counsel (May 2000 to present); Secretary (June 2001 to present); Senior Vice President and General Counsel (April 1991 to May 2000) (3)

48 Senior Vice President - Finance and Chief Financial Officer (December 1999 to present); Vice President -Finance and Chief Financial Officer (May 1999 to December 1999); Vice President - Rates and Regulatory Relations, Philadelphia Suburban Water Company (March 1991 to May 1999) (4)

60 Vice President - Engineering and Environmental Affairs (May 2006 to present); Senior Vice President -Engineering and Environmental Affairs (January 1999 to May 2006) (5)

Karl M. Kyriss

Robert G. Liptak, Jr.

56 President - Aqua Pennsylvania (March 2003 to present) and President, Mid-Atlantic Operations (May 2005 to present) (6)

59 President, Northern Operations (March 1999 to present); President, Consumers Pennsylvania Water Company (1980 to March 1999) (7)

Robert A. Rubin 44 Vice President, Controller and Chief Accounting Officer (May 2005 to present); Controller and Chief Accounting Officer (March 2004 to May 2005); Controller (March 1999 to March 2004) (8)

(1) In addition to the capacities indicated, the individuals named in the above table hold other offices or . directorships with subsidiaries of the Registrant. Officers serve at the discretion of the Board of

Directors.

(2) Mr. DeBenedictis was Secretary of the Pennsylvania Department of Environmental Resources from 1983 to 1986. From December 1986 to April 1989, he was President of the Greater Philadelphia Chamber of Commerce. Mr. DeBenedictis was Senior Vice President for Corporate and Public Affairs of Philadelphia Electric Company from April 1989 to June 1992.

(3) From January 1984 to August 1985, Mr. Stahl was Corporate Counsel, from August 1985 to May 1988 he was Vice President - Administration and Corporate Counsel of Aqua America, Inc., and from May 1988 to April 3991 he was Vice President and General Counsel of Aqua America, Inc..

(4) Mr. Smeltzer was Vice President - Controller of Philadelphia Suburban Water Company from March, 1986 to March 1991.

(5) Mr. Riegler was Senior Vice President - Operations, Philadelphia Suburban Water Company (April 1989 to January 1999), and from 1982 to 1984 he was Chief Engineer of Philadelphia Suburban Water Company. He then served as Vice President and Chief Engineer from 1984 to 1986 and Vice President of Operations from 1986 to 1989.

(6) Mr. Kyriss was Vice President - Northeast Region of American Water Works Services Company from 1997 to 2003.

(7) Mr. Liptak was President of Consumers Pennsylvania Water Company from 1980 to March 1999.

(8) Mr. Rubin was Accounting Manager with Aqua America, Inc. from June 1989 to June 1994. He then served from June 1994 to March 1999 as Assistant Controller of Philadelphia Suburban Water Company.

Item 11. Executive Compensation

The information appearing in the sections captioned "Executive Compensation" of the Proxy Statement relating.to our May 24, 2007, annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by this Form 10-K, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Ownership of Common Stock - The information appearing in the section captioned "Ownership of Common Stock" of the Proxy Statement relating to our May 24,2007, annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by this Form 10-K, is incorporated herein by reference.

Securities Authorized for Issuance under Equity Compensation Plans - The following table provides information for our equity compensation plan as of December 31, 2006:

Equity Compensation Plan Infonnation

Plan Category

Number ofsecurities to be issued upon exercise of outstanding options, warrants and rights (a)

Wei gh ted-average exercise price of outstanding options, warrants and rights (b)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

Equity compensation plans approved by security holders 3,364,778 $16.72 3,521,136 Equity compensation plans not approved by security holders 0 0 . 0 Total 3,364,778 $16.72 3,521,136

Item 13. Certain Relationships and Related Transactions, and Director Independence

The infonnation appearing in the sections captioned "Corporate Governance - Director Independence" and " -Policies and Procedures of Related Person Transactions" of the Proxy Statement relating to our May 24, 2007, annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by this Form 10-K, is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information appearing in the section captioned "Independent Registered Public Accounting Finn -Services and Fees" of the Proxy Statement relating to our May 24,2007, annual meeting of shareholders, to be filed within 120 days after the end of the fiscal year covered by this Fonn 10-K, is incorporated herein by reference.

PARTIV

Item 15. Exhibits and Financial Statement Schedules

Financial Statements. The following is a list of our consolidated financial statements and supplementary data incorporated by reference in Item 8 hereof:

Management's Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets - December 31, 2006 and 2005

Consolidated Statements of Income and Comprehensive Income - 2006,2005 and 2004

. Consolidated Statements of Cash Flows - 2006,2005 and 2004

Consolidated Statements of Capitalization - December 31,2006 and 2005

Consolidated Statements of Common Stockholders' Equity - December 31,2006,2005 and 2004

Notes to Consolidated Financial Statements

Financial Statement Schedules. All schedules to our consolidated financial statements are omitted because they are not applicable or not required, or because the required infonnation is included in the consolidated financial statements or notes thereto.

Exhibits, Including Those Incorporated by Reference. A list of exhibits filed as part ofthis Form 10-K is set forth in the Exhibit Index hereto which is incorporated herein by reference. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AQUA AMERICA, INC.

By NICHOLAS DEBENEDICTIS Nicholas DeBenedictis

Chairman, President and Chief Executive Officer

Date: February 27, 2007

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, thai each person whose signature appears below constitutes and appoints Roy H. Stahl, Executive Vice President and General Counsel, and David P. Smeltzer, Senior Vice President — Finance and Chief Financial Officer, as true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to sign this Report filed herewith and any or ail amendments to said Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perfonn each and every act and thing requisite and necessary to be done in and about the foregoing, as to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or her substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

jyCHOLAS DEBENEDICTIS Tlicholas DeBenedictis Chainnan, President, Chief Executive Officer and Director (Principal Executive Officer)

DAVID P. SMELTZER David P. Smeltzer Senior Vice President - Finance and Chief Financial Officer (Principal Financial Officer)

ROBERT A. RUBIN Robert A. Rubin Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)

MARY C. CARROLL Mary C. Carroll Director

.RICHARD H. GLANTON Richard H. Glanton Director

LONR. GREENBERG Lon R. Greenberg Director

..WILLIAM P. HANKOWSKY William P. Hankowsky Director

DR. CONSTANTINE PAPADAKIS Dr. Constantine Papadakis Director

ELLEN T. RUFF Ellen T. Ruff Director

RICHARD L. SMOOT Richard L. Smoot Director

ANDREW J. SORDONI ID Andrew J. Sordoni ID Director

EXHIBIT INDEX Exhibit No. Description

3.1 Restated Articles of Incorporation (as of December 9,2004) (20) (Exhibit 3.1)

3.2 By-Laws, as amended (9) (Exhibit 3.2)

3.3 Amendment to Section 3.03 and addition of Section 3.17

to Bylaws (11) (Exhibits / and 2)

3.4 Amendment to Section 3.03 of the Bylaws (13) (Exhibit 3.8)

3.5 Amendments to Sections 2.01(a), 2.02 and 3.08(b) of the Bylaws (14) (Exhibit 3.10) 4.1 Indenture of Mortgage dated as of January 1,1941

between Philadelphia Suburban Water Company and The Pennsylvania Company for Insurance on Lives and Granting Annuities(now First Pennsylvania Bank, N.A.), as Trustee, with supplements thereto through the Twentieth Supplemental Indenture dated as of August 1,1983 (2) (Exhibits 4.1 through 4.16)

. 4.2 Agreementto furnish copies of other long-term debt instruments (1) (Exhibit 4.7)

4.3 Twenty-fourth Supplemental Indenture dated as of June 1, 1988 (3) (Exhibit 4.5)

4.4 Twenty-fifth Supplemental Indenture dated as of January 1, 1990 (4) (Exhibit 4.6)

4.5 Twenty-sixth Supplemental Indenture dated as ofNovember _ gxl -

4.6

:, 1991 (5) (Exhibit 4.12)

Twenty-eighth Supplemental Indenture dated as of April 1, 1993 (6) (ExhibM.15)

4.7 • Twenty-ninth Supplemental Indenture dated as of March 30, 1995 (7) (Exhibit A. 17)

4.8 Thirtieth Supplemental Indenture dated as of August 15, 1995 (8) (Exhibit A. 18)

4.9 Thirty-first Supplemental Indenture dated as of July 1, 1997(10) (Exhibit 4.22)

4.10 First Amended and Restated Rights Agreement, dated as of February 20, 2004 between Aqua America, Inc. and Equiserve Trust Company, N.A., as Rights Agent. (22) (Exhibit 4.10)

4.11 Thirty-second Supplement Indenture, dated as of October 1,1999 (12) (Exhibit 4.26)

4.12 Thirty-third Supplemental Indenture, dated as ofNovember 15, 1999. (13) (Exhibit 4.27)

4.13 Revolving Credit Agreement between Philadelphia Suburban Water Company and PNC Bank National Association, First Union National Bank, N.A., Mellon Bank, N.A. dated as of December 22,1999 (13) (Exhibit 4.27)

4.14 First Amendment to Revolving Credit Agreement dated as ofNovember 28, 2000, between Philadelphia Suburban Water Company and PNC Bank, National Association, First Union National Bank, N.A., Mellon Bank, N.A. dated as of December 22,1999 (14) (Exhibit 4.19)

4.15 Second Amendment to Revolving Credit Agreement dated as of December 18, 2001, between Philadelphia Suburban Water Company (and its successor Pennsylvania Suburban Water Company) and PNC Bank, National Association, Citizens Bank of PennsyIvania, First Union National Bank, N.A., Fleet National Bank dated as of December 22,1999 (15) (Exhibit 4.20)


4.16 TTiirty-fourth Supplemental Indenture, dated as of October 15,2001. (15) (Exhibit 4.21)

4.17 Thirty-fifth Supplemental Indenture, dated as of January 1,2002. (15) (Exhibit 4.22)

4.18 Thirty-sixth Supplemental Indenture, dated as of June 1,2002. (17) (Exhibit 4.23)

4.19 Thirty-seventh Supplemental Indenture, dated as of December .15,2002. (18) (Exhibit 4.23)

4.20 Credit Agreement dated as of October 25,2002, between Philadelphia Suburban Corporation and PNC Bank, National Association. (18) (Exhibit 4.24)

4.21 Third Amendment to Revolving Credit Agreement dated as of December 16, 2002, between Philadelphia Suburban Water Company (and its successor Pennsylvania Suburban Water Company) and PNC Bank, National Association, Citizens Bank of Pennsylvania, Fleet National Bank dated as of December 22,1999. (18) (Exhibit 4.25)

4.22 Fourth Amendment to Revolving Credit Agreement dated as of December 24, 2002, between Philadelphia Suburban Water Company (and its successor Pennsylvania Suburban Water Company) and PNC Bank, National Association, Citizens Bank of Pennsylvania, Fleet National Bank, National City Bank dated as of December 22,1999. (18) (Exhibit 4.26)

4.23 Note Purchase Agreement among the note purchasers and Philadelphia Suburban Corporation, dated July 31, 2003 (19) (Exhibit 4.27)

4.24 Credit Agreement dated as of July 31, 2003, between Philadelphia Suburban Corporation and PNC Bank, National Association (19) (Exhibit 4.28)

4.25 Fifth Amendment to Revolving Credit Agreement dated as of December 14, 2003, between Philadelphia Suburban Water Company (and its successor Pennsylvania Suburban Water Company) and PNC Bank, National Association, Citizens Bank of Pennsylvania, Fleet National Bank, National City Bank dated as of December 22, 1999. (22) (Exliibit 4.25)

4.26 Credit Agreement dated as of May 28, 2004, between Aqua America, Inc. and PNC Bank, National Association (21) (Exliibit 4.26)

4.27 Sixth Amendment to Revolving Credit Agreement dated as of December 12,2004 between Aqua Pennsylvania, Inc. (formerly known as Pennsylvania Suburban Water Company, successor by merger to Philadelphia Suburban Water Company) and PNC Bank, National Association, Citizens Bank of Pennsylvania, Fleet National Bank, National City Bank dated as of December 22, 1999. (25) (Exhibit 4.27)

4.28 Thirty-eighth Supplemental Indenture, dated as ofNovember 15, 2004. (25) (Exliibit 4.28)

4.29 Thirty-ninth Supplemental Indenture, dated as of May 1, 2005. (24) (Exliibit 4.29)

4.30 Seventh Amendment to Revolving Credit Agreement dated as of December 6,2005 between Aqua Pennsylvania, Inc. (formerly known as Pennsylvania Suburban Water Company, successor by merger to Philadelphia Suburban Water Company) and PNC Bank, National Association, Citizens Bank of Pennsylvania, Bank of America, N.A. (formerly Fleet National Bank), National City Bank dated as of December 22, 1999. (16) (Exhibit 4.30)

4.31 Fortieth Supplemental Indenture, dated as of December 15,2005. (16) (Exhibit 4.31)

4.32 Eighth Amendment to Revolving Credit Agreement dated as of December 1,2006 between Aqua Pennsylvania, Inc. (fonnerly known as Pennsylvania Suburban Water Company, successor by merger to Philadelphia Suburban Water Company) and PNC Bank, National Association, Citizens Bank of Pennsylvania, Bank of America, N.A. (formerly Fleet National Bank), National City Bank dated as of December 22, 1999.

10.1 Excess Benefit Plan for Salaried Employees, effective December 1, 1989* (4) (Exliibit 10.4)

10.2 Supplemental Executive Retirement Plan, effective December 1, 1989* (4) (Exhibit 10.5)


10.3 Supplemental Executive Retirement Plan, effective March 15,1992*(1) (Exhibit 10.6)

10.4 Employment letter agreement with Mr. Nicholas DeBenedictis, dated May 20, 1992* (1) (Exhibit 10.8)

10.5 1994 Equity Compensation Plan, as amended by Amendment effective August 5, 2003* (22) (Exhibit 10.5)

10.6 Placement Agency Agreement between Philadelphia Suburban Water Company and PaineWebber Incorporated dated as of March 30, 1995 (7) (Exliibit 10.12)

10.7 Bond Purchase Agreement among the Delaware County Industrial Development Authority, Philadelphia Suburban Water Company and Legg Mason Wood Walker, Incorporated dated August 24,1995 (8) (Exhibit 10.13)

10.8 Construction and Financing Agreement between the Delaware County Industrial Development Authority and Philadelphia Suburban Water Company dated as of August 15, 1995 (8) (Exhibit 10.14)

10.9 Philadelphia Suburban Corporation Amended and Restated Executive Deferral Plan* (22) (Exliibit 10.9)

10.10 Philadelphia Suburban Corporation Deferred . Compensation Plan Master Trust Agreement with PNC Bank, National Association, dated as of December 31,1996* (9) (Exliibit 10.24)

10.11 First Amendment to Supplemental Executive Retirement Plan* (9) (Exliibit 0.25)

10.12 Placement Agency Agreement between Philadelphia Suburban Water Company and A.G. Edwards and Sons, Inc., Janney Montgomery Scott Inc., HSBC Securities, Inc., and PaineWebber Incorporated (10) (Exliibit 10.26)

10.13 The Director Deferral Plan* (22)(Exhibit 10.13)

10.14 • Bond Purchase Agreement among the Delaware County Industrial Development Authority, Philadelphia Suburban Water Company and Commerce Capital Markets dated September 29, 1999 (12) (Exliibit 10.37)

10.15 Construction and Financing Agreement between the Delaware Countv Industrial Development Authority and Philadelphia Suburban Water Company dated as of October 1, 1999 (12) (Exliibit 10.38)

10.16 Placement Agency Agreement between Philadelphia Suburban Water Company and Merrill Lynch & Co., PaineWebber Incorporated, A.G. Edwards & Sons, Inc., First Union Securities, Inc., PNC Capital Markets, Inc. and Janney Montgomery Scott, Inc., dated as ofNovember 15,1999 (13) (Exhibit 10.41)

10.17 Bond Purchase Agreement among the Delaware County Industrial Development Authority, Philadelphia Suburban Water Company and TTie GMS Group, L.L.C, dated October 23,2001 (15) (Exliibit 10.35)

10.18 Construction and Financing Agreement between the Delaware County Industrial Development Authority and Philadelphia Suburban Water Company dated as of October 15, 2001 (15) (Exhibit 10.36)


10.19 Agreement among Philadelphia Suburban Corporation, Philadelphia Suburban Water Company and Nicholas DeBenedictis, dated August 7,2001 * (15) (Exhibit 10.37)

10.20 Agreement among Philadelphia Suburban Corporation, . Philadelphia Suburban Water Company and Roy H. Stahl, dated August 7,2001 * (15) (Exhibit 10.38)

10.21 Agreement among Philadelphia Suburban Corporation, Philadelphia Suburban Water Company and Richard R. Riegler, dated August?, 2001* (15) (Exliibit 10.39)

10.22 Agreement among Philadelphia Suburban Corporation, Philadelphia Suburban Water Company and David P. Smeltzer, dated August 7,2001* (15) (Exhibit 10.40)

10.23 Agreement among Philadelphia Suburban Corporation, Philadelphia Suburban Water Company and Richard D. Hugus, dated August 7,2001 * (22) (Exhibit 10.23)

1,0.24 2007 Annual Cash Incentive Compensation Plan*

10.25 Bond Purchase Agreement among the Bucks County Industrial Development Authority, Pennsylvania Suburban Water Company and Janney Montgomery Scott LLC, dated May 21, 2002 (17) (Exhibit 10.42)

10.26 Construction and Financing Agreement between the Bucks County Industrial Development Authority and Pennsylvania Suburban Water Company dated as of June 1,2002 (17) (Exhibit 10.43)

10.27 Bond Purchase Agreement among the Delaware County Industrial Development Authority, Pennsylvania Suburban Water Company, and The GMS Group, L.L.C, dated December 19, 2002 (18) (Exhibit 10.44)

10.28 Construction and Financing Agreement between the Delaware County Industrial Development Authority and Pennsylvania Suburban Water Company dated as of December 15,2002 (18) (Exhibit 10.45)

10.29 Aqua America, Inc. 2004 Equity Compensation Plan as amended by Amendment effective February 22, 2007*

10.30 2006 Annual Cash Incentive Compensation Plan* (16) (Exhibit 10.30)

10.31 Bond Purchase Agreement among the Northumberland County Industrial Development Authority, Aqua Pennsylvania, Inc., and Sovereign Securities Corporation, LLC, dated November 16,2004. (25) (Exhibit 10.31)

10.32 Aqua America, Inc. 2004 Equity Compensation Plan* (23)

10.33 2005 Executive Deferral Plan* (25) (Exliibit 10.33)

10.34 2005 Director Deferral Plan* (25) (Exhibit 10.34)

10.35 Non-Employee Directors' Compensation for 2006* (26) (Exhibit 10.1)

10.36 Bond Purchase Agreement among the Delaware County Industrial Development Authority, Aqua Pennsylvania, Inc. and Sovereign Securities Corporation, LLC, dated May 10,2005. (24) (Exhibit 10.36)

10.37 Bond Purchase Agreement among the Delaware County Industrial Development Authority, Aqua Pennsylvania, Inc. and Sovereign Securities Corporation, LLC, dated December 21,2005. (16) (Exhibit 10.37)

10.38 Aqua America, Inc. Dividend Reinvestment and Direct Stock Purchase Plan* (29)

10.39 Aqua America, Inc. Amended and Restated Employee Stock Purchase Plan* (16) (Exhibit 10.39)


10.40 Form of Stock Option Agreement* (16) (Exhibit 10.40)

10.41 Acceleration of Payout of2004 and 2005 Dividend Equivalent Awards; Grants of 2006 Dividend Equivalent Awards; Performance Criteria for Acceleration of Payout of Dividend Equivalent

. Awards* (28) (Exhibit 10.2)

10.42 Vesting of Restricted Stock Granted in 2005; Grants of Restricted Stock* (28) (Exhibit 10.3)

10.43 2006 Salaries; Annual Incentive Compensation Earned in 2005* (28) (Exhibit 10.1)

10.44 Non-Employee Directors' Compensation for 2007*

13.1 Selected portions of Annual Report to Shareholders for the year ended December 31,2006 incorporated by reference in Annual Report on Form 10-K for the year ended December 31,2006.

'21.1 Subsidiaries of Aqua America, Inc.

23.1 Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP

24.1 Power of Attomey (mcluded on signature page)

31.1 Certification of Chief Executive Officer, pursuant to Rule 13a-l 4(a) under the Securities and Exchange Act of 1934

31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-l 4(a) under the Securities and Exchange Act of 1934

32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350

32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350

Notes -Documents Incorporated by Reference

(1) Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31,1992.

(2) Indenture of Mortgage dated as of January 1,1941 with supplements thereto through the Twentieth Supplemental Indenture dated as of August 1, 1983 were filed as an Exhibit to Annual Report on

" Form 10-K for the year ended December 31,1983.



(5) Filed as an Exhibit to Annual Report on Form 10-K for the year ended December 31, 1991.

(6) Filed as an Exhibit to Annua] Report on Form 10-K for the year ended December 31,1993.

(7) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended March 31,1995.

(8) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.


(10) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended June 30,1997.

(11) Filed as an Exhibit to Form 8-K filed August 7, 1997.

(12) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended September 30,1999.




. (1.6) Filed as an Exhibit to Annual Report on Fonn 10-K for the year ended December 31, 2005.

(17) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.


(19) Filed as an Exliibit to Quarterly Report on Form 1 OQ for the quarter ended September 30,2003

(20) Filed as an Exliibit to Form 8-K filed December 9, 2004.

(21) Filed as an Exhibit to Quarterly Report on Fonn 10-Q for the quarter ended June 30, 2004.


(23) Filed as Appendix C to definitive Proxy Statement dated April 2,2004.

(24) Filed as an Exhibit to Quarterly Report on Form 3 0-Q for the quarter ended June 30, 2005.


(26) Filed as an Exhibit to Form 8-K filed December 12,2005.

(27) Filed as an Exhibit to Form 8-K filed March 7, 2005.

(28) Filed as an Exhibit to Form 8-K filed March 13, 2006.

(29) Filed as a Registration Statement on Form S-3 on February 18,2005.

*Indicates management contract or compensatory plan or arrangement.

TO OUR SHAREHOLDERS

March 9, 2007

Growth continued to be a key part of our performance in 2006.

During the past year, our growth-through-acquisition strategy, coupled with organic

growth, added more than 62,000 new customers, or 7 percent, to our customer base. The

majority of these customers came through the acquisition of New York Water Service

Corporation, which serves approximately 45,000 customers on Long Island. Shortly after

closing New York Water Service, we continued building on our New York base by entering

into an agreement with Kelda Group, Inc. to acquire the nearby Aquarion Water Company

of Sea Cliff, Inc., which serves approximately 4,500 Long Island customers.

The majority of our 28 acquisitions in 2006 were "tuck-ins"— acquisitions of small

systems located in close proximity to our existing systems. Purchasing water and

wastewater assets of nearby systems allows us to realize economies of scale, increase

revenues and add new platforms for future capital investment and customer growth.

Included in the 28 acquisitions are four new septage hauling operations that complement

our wastewater business and allow us to provide additional services to our residential and

mmercial water customers in Pennsylvania.

In August, Aqua America's Board of Directors approved and announced a quarterly

dividend increase of eight percent from $0.1069 per common share to $0,115 per

common share. With the dividend paid on September 1, 2006, we effected our 16 t h

dividend increase in the last 15 years. The increase marked the eighth consecutive year in

which the dividend was increased greater than five percent.

Operating results in 2006 were adversely affected by weather, regulatory lag, the

inflationary impact on production costs, expensing of stock options, and a rapid rise in

short-term interest rates. Operating revenues grew more than seven percent to $533.5

million in 2006 from $496.8 million in 2005. Net income was up slightly at $92.0 mil

lion compared to $91.2 million during 2005. Corresponding diluted earnings per share

was $0.70 in 2006 versus $0.71 for the full year 2005, on three percent more shares

outstanding.

We spent record amounts of capital in 2006, approximately $272 million, to upgrade and

expand our water and wastewater systems around the country. Prudent capital

investment allows us to continue to deliver quality water and reliable service to our

customers and receive a fair return on that investment from regulators.

(2006, we received rate relief in our largest operating subsidiary, Aqua Pennsylvania, and

in other states, which is expected to provide about $40.0 million in annualized revenue.

"In 2006, we used our

experience as a trusted

water company to

increase our customer

base by more than

62,000 customers."

experience j watar

2006 Dividend Highlights

s Increased cash dividend by eight percent to $0,46 on an annualized basis as of September 1, 2006.

a Sixteen cash dividend increases in the last 15 years.

o Paid dividends for more than 60 consecutive years.

Earnings Per Share

2002 2003 2004 2005 2006

SO. 50 -,

$0.40 -

D.30 -

$0.20 -

$0.10 -

$0.00 -1

Dividends Per Share {annualized as of 12/31)

$0.4276

$0.46

2002 2003 2004 2005 2006

Operating Revenues (in nfiflions)

S533.5

2002 2003 2004 2005 2006

1.000.000-1

900,000 -

800,000 -

700,000 -

600,000 -

500,000 -

400,000 -

300,000 -

200,000 -

100,000 -

0 -

Customer Count*

835,512

749,491

605,474

2002 2003 2004

927.235

864,894

2 OOS

* 2006 includes 44,792 customers associated with the New York Service Corporation acquisition that was completed on January

2006

Water 1, 2007.

experience water

4* oard of Directors Nicholas DeBenedictis, 61 Chairman, President and CEO Aqua America, Inc. Director since 1992

Mary C. Carroll, 66 Consultant and Community Volunteer Director since 1981

Richard Glanton, 60 Senior Vice President Exelon Corporation Director since 1995

Lon R. Greenberg, 56 Chairman and CEO UGI Corporation Director since 2005

William P. Hankowsky, 55 Chairman, President and CEO Liberty Property Trust Iredor since 2004

Officers Nicholas DeBenedictis,.61 Chairman, President and CEO

Christopher H. Franklin, 42 Regional President Aqua America - Southern Operations Senior Vice President Public Affairs and Customer Operations

Mark J. Kropilak, 50 Senior Vice President Corporate Development and Corporate Counsel

Karl M. Kyriss, 56 Regional President Aqua America— Mid-Atlantic Operations

bert G. Liptak, 58 egional President

Aqua America - Northern Operations

Constantine Papadakis, 61 President Drexel University Director since 2005

Ellen T. Ruff, 59 President Duke Energy Carolinas Director since 2006

Richard L. Smoot, 66 Regional Chairman, Advisory Board Philadelphia and Southern New Jersey PNC Financial Services Group (Retired) Director since 1997

Andrew J. Sordoni, III, 66 Former President and Chairman, C-TEC Corporation Chairman, Sordoni Construction Services, Inc. Director since 2006

Kathy L. Pape, 54 Senior Vice President Treasurer and Rates Counsel

Richard R. Riegler, 60 Vice President Engineering and Environmental Affairs

Robert A. Rubin, 44 Vice President Chief Accounting Officer and Controller

David P. Smeltzer, 48 Chief Financial Officer

Roy H. Stahl, Esq., 54 Chief Administrative Officer, General Counsel and Secretary

experience water

including engineering and design, capital investments and public utility regulation. It also offered Aqua

e ability to improve the quality of wastewater discharges (effluent) released into streams and the rses for effluent, such as groundwater

recharge. Since its first wastewater

acquisition, Aqua's wastewater

customer base has grown to more

than 90,000 customer accounts (about

270,000 residents).

Aqua is gaining new experience in

another segment of the wastewater

industry. In 2005, Aqua purchased a

small private southeast Pennsylvania

company that provides commercial

and residential wastewater services,

such as sludge and bulk wastewater hauling and septic tank dean-outs.

Since then, Aqua has purchased four additional private companies that offer the same services. These

businesses complement Aqua's expertise in regulated wastewater treatment and disposal operations,

ey also provide an opportunity to offer additional services to our existing water customers with septic

terns.

Experience Prudent Capital Investment The water industry is the most capital intensive of all utilities, having to invest more capital per dollar

of revenue earned than any other utility. With nearly $3 billion in assets — most buried beneath the

ground —Aqua is heavily vested in the communities it serves.

Our experience has shaped our proactive approach to infrastructure rehabilitation. We perform needed

maintenance at our treatment and operating facilities to ensure optimum performance throughout the

life of these facilities. In 2003, the Environmental Protection Agency (EPA) estimated that $277 billion

would be needed over the next 20 years to maintain and upgrade the nation's water infrastructure.

To maintain reliability and water quality, Aqua invests

significant capital in its infrastructure. In 2006, the

company spent about $272 million to replace and upgrade

aging pipe, storage tanks, treatment facilities, pumping

stations, etc. Prudent and disciplined capital investment

allows customers to continue to receive reliable service

and quality water and allows Aqua to earn a fair rate of

return on its investment for shareholders.

Water treatment plants,

sewer and distribution

lines and storage

facilities ensure

protection of public

health. That's why

infrastructure upgrades

are necessary to sustain

our water quality.

experience water

Aqua America, Inc. 2006 Annual Report Financial Data

AQUA AMERICA, INC. A N D SUBSlblARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations (IN thousand! of dollars, except per share amounts)

F O R W A R D - L O O K I N G S T A T E M E N T S

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" or the negative o f such terms or similar expressions. Forward-looking statements in this report, include, but are not limited to, statements regarding:

• recovery of capital expenditures and expenses in rates;

• projected capital expenditures;

• availability o f capital financing;

• dividend payment projections;

• future financing plans;

• future pension contributions;

• opportunities for future acquisitions, the success of pending acquisitions and the impact of future acquisitions;

• acquisition-related costs and synergies;


• the availability and cost of key production necessities, including power, chemicals and purchased water or wastewater services;


• the return performance of our defined benefit pension plan assets;


• the impact o f geographic diversity on our exposure to unusual weather; and

• the impact of accounting pronouncements.


• changes in general economic, business and financial market conditions;

• changes in government regulations and policies, including environmental and public utility regulations and policies;

• changes in environmental conditions, including diose that result in water use restrictions;

• abnormal weather conditions;

• changes in, or unanticipated, capital requirements;

• changes in our credit rating or the market price of our common stock;

• our ability to integrate businesses, technologies or services which we may acquire;

• our ability to manage the expansion of our business;

• the extent to which we are able to develop and market new and improved services;

• the effect of the loss of major customers;

• our ability to retain the services o f key personnel and to hire qualified personnel as we expand;

• increasing difficulties in obtaining insurance and increased cost of insurance;

• cost overruns relating to improvements or the expansion of our operations;

• changes in accounting pronouncements; and

• civil disturbance or terroristic threats or acts.

AQUA AMERICA, INC. A N D SUBSIDIARIES

Management's Discussion and Analysis of Financial Condidon and Results o f Operations (continued) (In thousands of dollars, except per share amounts)

All of the states in which we acquired operations in 2004 and 2003 permit some form of consolidated rates in varying degrees, but none currendy permits us to fully consohdate rate filings state-wide. Between August 2003 and December 2006, we have filed rate filings in over 121 operating divisions. Due to the length o f time since the last rate increase for some acquired systems and the large amount of capital improvements relative to the number of customers in some smaller systems, the proposed rate increase in some of these systems may be substantial. While each of these rate filings will proceed through the applicable regulatory process, we can provide no assurance that the rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increases. Further, there remain 20 divisions within these acquired operations where we have not yet filed a rate request.

Revenue Surcharges-Six states in which we operate permit water utilities, and in two states wastewater utilities, to add a surcharge to their water or wastewater bills to offset the additional depreciation and capital costs associated with certain capital expenditures related to replacing and rehabilitating infrastructure systems. In all other states, water and wastewater utilities absorb all o f the depreciation and capital costs of these projects between base rate increases without the benefit of additional revenues. The gap between tbe time that a capital project is completed and the recovery of its costs in rates is known as regulatory lag. The infrastructure rehabihtation surcharge mechanism is intended to substantially reduce regulatory lag, which often acts as a disincentive to water and wastewater utilities to rehabilitate their infrastructure. In addition, certain states permit our subsidiaries to use a surcharge or credit on their bill to reflect certain allowable changes in costs, such as changes in state tax rates, other taxes and purchased water, until such time as these costs are fully incorporated in base rates.

Effects o f InUation-Rzcovery o f the effects of inflation through higher water 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, During periods of moderate inflation, as has been experienced in 2006, the effects of inflation on our operating results are noticeable and pardy responsible for lower than expected earnings growth.

Growth-Through-Acquisition Strategy

Part o f our strategy ro meet the industry challenges is to actively explore opportunities to expand our utility operations through fcquisitions 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. This growth-through-acquisition strategy allows us to operate more efficiendy 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 qualified and trained workforce, which we strive to retain by treating employees fairly and providing our employees with development and growth opportunities.

During 2006 we completed 28 acquisitions, growing our number of customers served by 62,341 or 7.2%, including the customers acquired with the New York Water Services Corporation acquisition. On January 1, 2007, we completed the acquisition o f the capital stock o f New York Water Service Corporation for $28,866 in cash, as adjusted pursuant to the purchase agreement primarily based on working capital at closing, and the assumption of $23,460 of long-term debt. The operating results of New York Water Service Corporation will be included in our consolidated financial statements beginning January 1, 2007. The acquired operation provides water service to 44,792 customers in several water systems located in Nassau County, Long Island, New York. The acquisition was funded through the issuance of long-term debt that was issued in 2006.

During 2005 and 2006, we completed six acquisitions of non-regulated companies that provide on-site septic tank pumping, sludge hauling and other wastewater-related services to customers in eastern Pennsylvania, New Jersey, Delaware, New York and Maryland. The operating revenues o f these businesses for the year ended December 31, 2006 were $5,424 and are excluded from our Regulated segment. In total during 2006, $7,897 in cash was invested in these non-regulated wastewater and septage acquisitions on which we believe we will earn an appropriate return. Please refer to the section captioned "Acquisitions" for an additional discussion of acquisitions.

We believe that utility acquisitions will continue to be the primary source of growth for us. With approximately 53,000 community water systems in the U.S., 84% of which serve less than 3,300 customers, the water industry is the most fragmented o f the major utility industries (telephone, natural gas, electric, water and wastewater). In the states where we operate, we believe there are approximately 22,000 public water systems of widely varying size, with the majority of the iopulation being served by government-owned water systems.


Management's Discussion and Analysis of Financial Condidon and Results of Operadons (continued)

(In thousands of dollars, except per share amounts)

Consolidated Selected Financial and Operating Statistics

Our selected five-year consolidated financial and operating stadsucs follow:

Years ended December 31, 2006 (a) 2005 2004 (b) 2003 (c) 2002 (d)

Utility customers:

Residential water 780,828. 724,954 702,367 624,355 535,506

Commercial water • 36,280 33,975 33,720 ' 33,015 30,355

Industrial water 1,337 1,356 1,365 1,397 1,423

Otiier water 15,587 15,584 15,700 20,483 16,466

Wastewater 93,203 89,025 82,360 70,241 21,724

Total 927,235 864,894 835,512 749,491 605,474

Operating revenues:

Residential water $317,770 ! if 295,473 $264,910 $218,487 $197,190

Commercial water 76,076 73,455 65,605 61,343 55,962

Industrial water 18,752 18,364 17,377 17,675 17,221

Other water 51,263 50,827 44,593 40,048 36,255

Wastewater 48,907 42,176 35,931 17,874 8,210

Otiier 13,525 13,161 11,556 9,821 5,861

Regulated segment total 526,293 493,456 439,972 365,248 320,699

Other 7,198 3,323 2,067 1,985 1,329

Consolidated $533,491 3 I 496,779 $ 442,039 $ 367,233 $ 322,028

Operations and maintenance expense $219,560 5 J 203,088 $178,345 $140,602 $117,735

Net income available to common stock $ 92,004 5 \ 91,156 : $ 80,007 $ 70,785 $ 67,154

Capital expenditures $271,706 \ \ 237,462 $195,736 $163,320 $136,164

Opera t ing Statistics

Selected operating results as a

percentage o f operating revenues:

Operations and maintenance 41.2% 40.9% 40.3%) 38.3%) 36.6%

Depreciation and amortization 14.1%) 13.2% 13.3% 14.0% 13.8%

Taxes other than income taxes 6.2%) 6.4%) 6.2%. 5.9% 6.0%

Interest expense, net 10.9% 10.4%, 11.0% 12.2% 12.5% Net income available to common stock 17.2% 18.3%o 18.1% 19.3% 20.9%

Return on average stockholders' equity 10.6% 11.7% 11.4%) 12.3% 13.9%)

Effective tax rates 39.6%) 38.4%) 39.4% 39.3% 38.5%

(a) 2006 includes 44,792 customers associated with the New York Water Service Corporation acquisition which was completed on January 1, 2007. The operating results of this acquisition will be reported in our consolidated financial statements beginning January 1, 2007.

(b) Net income available to common stock includes the gain of $1,522 ($2,342 pre-tax) realized on the sale of our Geneva, Ohio water system. The gain is reported in the 2004 consolidated statement of income as a reduction to operations and maintenance expense. 2004 includes a partial year of financial results for the mid-year acquisition of Heater Utilities, Inc. and certain utility assets of Florida Water Services Corporation.

2003 includes five months of finandal results for the AquaSource operations acquired in July 2003.

Net income available to common stock and net income includes the gain of $3,690 ($5,676 pre-tax) realized on the sale of a portion of our Ashtabula, Ohio water system.

5


Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (In thousands of dollars, except per share amounts)

administrative expenses, and interest expense for certain of our utility companies that do not have their own credit . facilities.

Prior to the acquisition in 2006 of companies that provide on-site septic tank pumping and sludge hauling services, our non-regulated operations were limited in scope and impact on our financial results. As a result we previously operated them as part of our regulated operating segments. We made this determination based on an evaluation of our operating segments during the fourth quarter of 2006. Unless specifically noted, the following discussion and analysis provides information on our consolidated result of operations. The following table provides the Regulated segment and Consolidated information for the years ended December 31, 2006, 2005 and 2004:

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 o f A F U D C Gain on sale o f other assets Provision for income taxes Net income

2006 2005

Regulated Other Consolidated Regulated Other Consolidated

$ 526,293 : 216,919

32,273

I 7,198 2,641 1,070

$ 533,491 219,560

33,343

$ 493,456 \ 202,662

30,820

f 3,323 426 876

% 496,779 203,088 31,696

% 277,101 : if 3,487 280,588 % 259,974 \ i 2,021 261,995

75,041 65,488

205,547 54,491 (1,194)

60,246

196,507 49,615 (1,177) 56,913

2004

% 92,004 % 91,156

Regulated Other Consolidated

% 439,972 %

^ 179,332

26,963

E 2,067

(987)

633

% 442,039

178,345

27,596

$ 233,677 3 J 2,421 236,098

58.864

177,234 46,375 (1,272)

52,124 S 80,007

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 o f A F U D C Gain on sale o f other assets Provision fo r income taxes Net income

Consolidated Result^

Operating Revenues—The growth in revenues over the past five years is a result of increases in the customer base, water rates and the acquisition of non-regulated operations. The number of customers increased at an annual compound rate of 9.6% in the past five years primarily as a result of acquisitions o f water and wastewater systems, including the January 1, 2007 acquisition of New York Water Service Corporation, the mid-year 2004 Heater and Florida Water Services acquisitions, and the AquaSource acquisition completed July 2003. The operating revenues and financial results o f New York Water Service Corporation will be included in our consolidated financial statements beginning January 1, 2007. Acquisitions in our Regulated segment have provided additional water and wastewater revenues of approximately $4,715 in 2006, $12,630 in 2005 and $54,900 in 2004. Excluding the effect o f acquisitions, our customer base increased at a five-year annual compound rate of 1.8%. Rate increases implemented during the past three years have provided additional operating revenues of approximately $32,000 in 2006, $26,800 in 2005 and $15,800 in 2004.

n June 22, 2006, the Pennsylvania Public Utility Commission (PAPUC) granted our Pennsylvania operating subsidiary a

24,900 base water rate increase, on an annualized basis. The rates in effect at the time of the filing included $12,397 in


Management's Discussion and Analysis of Financial Condidon and Results of Operations (continued)


and employee benefits, electricity, chemicals, maintenance expenses and insurance costs. Electricity and chemical expenses vary in relationship to water consumption, raw water quality, and to a lesser extent the competitive electric market in some of the states in which we operate. Maintenance expenses are sensitive to extremely cold weather, which can cause water mains to rupture. Operations and maintenance expenses increased in 2006 as compared to 2005 by $16,472 or 8.1% primarily due to the additional operating costs associated with acquisitions of $6,316, increased water production expenses of $3,576, increased insurance expense, driven by higher claims of $1,945, stock-based compensation expense of $2,894, a reduction in the deferral of expenses related to the Texas rate case filing of $1,989, and normal increases in other operating costs, offset partially by receipt o f $1,500 relating to a waiver of certain contractual rights reported outside of die Regulated segment. The additional operating costs associated with acquisitions noted above includes $3,760 associated with the businesses that provide on-site septic tank pumping, sludge hauling services and other non-regulated water and wastewater services which are not a component of the Regulated segment.

Operations and maintenance expenses increased in 2005 as compared to 2004 by $24,743 or 13.9% primarily due to the additional operating costs associated with acquisitions of $9,574, additional water production expenses of $3,856, increased postretirement benefit costs of $2,430, higher insurance costs due to the absence in 2005 of the favorable claim settlements that had occurred in 2004 of $2,142, and the effect of the $2,342 gain on the sale of the Geneva water system which was recorded as a component of operations and maintenance expense in 2004. In the consolidated statement of income for 2004, the gain on the sale of the Geneva water system is reported as a component of the line titled operations and maintenance expense.

Depreciation and Amortization iSxpe/Jses-Depreciation expense was $70,895 in 2006, $60,747 in 2005 and $54,564 in 2004, and has increased principally as a result of the significant capital expenditures made to expand and improve our utility facilities, and as a result of acquisitions of water and wastewater systems.

Amortization expense was $4,146 in 2006, $4,741 in 2005 and $4,300 in 2004. The decrease in 2006 and the increase in 2005 is ue to,the amortization of the costs associated with, and other costs being recovered in, various rate filings. Expenses ssociated with filing rate cases are deferred and amortized over periods that generally range from one to three years.

Taxes Other than Income Taxes-^nzzs other than income taxes increased by $1,647 or 5.2% in 2006 as compared to 2005 and $4,100 or 14.9% in 2005 as compared to 2004. The increase in 2006 is due to additional state and local taxes, primarily property taxes. The increase in 2005 is due to additional taxes associated with acquisitions and increases in state and local taxes. The other taxes associated with acquisitions resulted from the effect of the mid-year 2004 acquisitions of Heater Utilities and the systems of Florida Water.

Interest Expense, .ner-Net interest expense was $58,432 in 2006, $52,062 in 2005 and $48,679 in 2004. Interest income of $3,24] in 2006, $3,040 in 2005 and $1,762 in 2004 was netted against interest expense. Interest expense increased in 2006 primarily due to additional borrowings to finance capital projects and acquisitions, and increased interest rates on short-term borrowings. Interest expense increased in 2005 primarily as a result of higher levels o f borrowings, offset partially by the effects of decreased interest rates on botrowings. The higher level of average borrowings in 2005 was used to finance die Heater and Florida Water acquisitions in mid-year 2004, and capital expenditures. Interest income decreased in 2006 due to a reduction in investment income earned in 2006 as compared to 2005. Interest income increased in 2005 due to additional investment income earned in 2005 on the proceeds from the issuance of tax-exempt bonds while being held by trustees pending completion of projects financed with the issues. Such interest income is capitahzed through our allowance for funds used during construction, a reduction to net interest expense. Interest expense on long-term debt during 2006 and 2005 was favorably impacted by a reduction in the weighted cost of long-term debt from 6.00% at December 31, 2004, to 5.74% at December 31, 2005, and to 5.72% at December 31, 2006.

AHoivance for Funds Used D u r i n g Construction-^he allowance for funds used during construction (AFUDC) was $3,941 in 2006, $2,447 in 2005 and $2,304 in 2004 and has varied over the years as a result o f changes in the average balance of utility plant construction work in progress (CWIP), to which AFUDC is applied, and to changes in the AFXJDC rate. The increase in 2006 is due to an increase in the average balance of CWIP to which AFUDC is apphed and an increase in the AFUDC rate which is based on short-term interest rates. The increase in 2005 is due to an increase in the average balance of CWIP to which ^ F U D C is applied, and additional AFUDC recorded as an adjustment in 2005 of $719 resulting from the identification of a xeviously issued rate order which allowed the continuation of AFUDC on certain capital projects subsequent to being placed

into utility service. This post-in-service AFUDC was not recognized in prior periods. These variances were partially offset by investment income earned during 2005, which reduced AFUDC.

9


Management's Discussion and Analysis of Financial Condidon and Results of Operations (continued) (In thousands of dollars, except per share amounts)

F I N A N C I A L C O N D I T I O N

Consolidated Cash Flow and Capital Expenditures

Net operating cash flow, dividends paid on common stock, capital expenditures, including allowances for funds used during construction, and expenditures for acquiring water and wastewater systems for the five years ended December 31, 2006 were as follows:

Net Operating

Cash Flow

Common

Dividends

Capital

Expenditures Acquisitions

2002 S 121,560 % 36,789 5 136,164 % 8,914

2003 143,373 39,917 163,320 192,331

2004 173,603 45,807 195,736 54,300

2005 199,674 51,139 237,462 11,633

2006 170,726 58,023 271,706 11,848

% 808,936 $ 231,675 S 1,004,388 % 279,026

pre

Included in capital expenditures for the five-year period are: expenditures for the modernization and replacement of existing treatment plants, new water mains and customer service lines, rehabilitation of existing water mains and hydrants, water meters and an office building expansion. During this five-year period, we received 559,475 of customer advances and contributions in aid of construction to finance new water mains and related facilities which are not included in the capital expenditures

resented in the above table. In addition, during this period, we have made sinking fund contributions and repaid debt in the

ount of $251,639, retired $1,116 of preferred stock, and have refunded $24,217 of customer advances for construction, 'ommon dividends increased during the past five years as a result of an annual increase in the common dividends declared and

paid and an increase in the number of shares outstanding during the period.

Our planned 2007 capital program, exclusive of the costs of new mains financed by advances and contributions in aid of construction, is estimated to be $235,800 of which $80,308 is for infrastructure rehabilitation surcharge-qualified projects. Our planned capital program includes spending for infrastructure rehabilitation in response to the infrastructure rehabilitation surcharge mechanisms, and should these mechanisms be discontinued for any reason, which is not anticipated, we would reevaluate the magnitude of our capital program. Our 2007 capital program, along with $31,155 of sinking fund obligations and debt maturities, $28,866 for the acquisition of New York Water Service Corporation and $103,482 of other contractual cash obligations, as reported in die section captioned "Contractual Obligations", has been or is expected to be financed through internally-generated funds, our revolving credit facUities, the issuance of equity through public offerings or through settiement in common shares of the forward equity sale agreement, and the issuance of long-term debt. The New York Water Service Corporation, which was acquired in January 2007, was financed through the issuance of unsecured long-term notes that were issued in December 2006.

Future utility construction in the period 2008 through 2011, including recurring programs, such as the ongoing replacement of water meters, water treatment plant upgrades, storage facility renovations, the rehabilitation of water niains 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 $1,000,000. We anticipate that approximately one-half of these expenditures will require external financing of debt and the additional issuance of common stock through our dividend reinvestment and stock purchase plans and the issuance of equity through public offerings or through settlement in common shares of the forward equity sale agreement. We expect to refinance $112,155 of sinking fund obligations and debt maturities during this period as they become due with new issues of long-term debt. The estimates discussed above do not include any amounts for possible future acquisitions of water systems or the financing necessary to support them.

ur primary source of liquidity is cash flows from operations, borrowings under various short-term lines of credit and other dit 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 and water consumption. We fund our capital and acquisition programs


Managenient's Discussion and Analysis of Financial Condidon and Results of Operations (continued) (In thousands of dollars, except per share amounts)

issuance of $135,000 of unsecured notes due in 2023, with an interest rate of 4.87%, and the issuance of 6,666,667 shares of common stock through a she/f registration. The acquired operations of AquaSource serve over 130,000 water and wastewater customer accounts in 11 states (including the Connecticut and Kentucky operations which were subsequently sold to other parties). Please refer to the section captioned "Dispositions" for a discussion of the disposition of the AquaSource operations located in Connecticut and Kentucky. The acquisition provides an expanded platform from which to extend our growth-through-acquisition strategy of acquiring water and wastewater systems that are near or adjacent to our existing service territories. The AquaSource operations are comprised of approximately 600 small systems, which are generally clustered in regions to achieve some level of operating efficiency.

We continue to hold acquisition discussions with several water and wastewater systems. Generally acquisitions are expected to be financed through the issuance of equity (for the acquisition of some investor-owned systems) or funded initially with short-term debt with subsequent repayment from the proceeds of long-term debt or proceeds from equity offerings.

Dispositions

In 2004, as a result of the settlement of a condemnation action, our Ohio operating subsidiary sold its water utility assets within the municipal boundaries of the City of Geneva in Ashtabula County, Ohio for net proceeds of approximately $4,716, 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 2004 of a gain on the sale of these assets, net o f expenses, of $2,342. The gain is reported in the 2004 consolidated statement of income as a reduction to operations and maintenance expense. We continue to operate this water system for the City of Geneva under a multi-year operating contract that expires in December 2008. These water utility assets represented less than 1% of Aqua America's total assets, and the total number of customers included in the water system sold represented less than 1% of our total utility customer base.

We reviewed and evaluated areas of our business and operating divisions that were acquired in 2003 with die AquaSource operations and have completed the following sale transactions of operating divisions acquired as part of the AquaSource

ansaction:

• In 2004, we sold our only operation in Kentucky. The sale price approximated our investment in this operation. 'Hie operation represented approximately 0.2% of the operations acquired from AquaSource, Inc.

• In 2003, we completed the sale o f our only operation in Connecticut. The sale price of $4,000 approximated our investment in this operation. The operation represented approximately 2% of the operations acquired from AquaSource, Inc.

In 2002, as a result of the settiement of a condemnation action, our Ohio operating subsidiary sold to Ashtabula County, Ohio the water utility assets in the unincorporated areas of Ashtabula County and the area within the Village of Geneva on the Lake for net proceeds of $12,118, 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 2002 of a gain on the sale of these assets, net of expenses, of $5,676. We continue to operate this water system for Ashtabula County under a multi-year operating contract that expires in December 2008. The water utility assets sold represented less than 1% of our total assets, and the total number of customers included.in the water system sold represented less than 1% of our total customer base.

The City of Fort Wayne, Indiana has authorized the acquisition, by eminent domain or otherwise, of a portion of the utility assets o f one of the operating subsidiaries that we acquired in connection with the AquaSource acquisition. We have challenged whether the City is following the correct legal procedures in connection with the City's attempted condemnation and we have challenged the City's valuation of this portion of our system. The portion of the system under consideration represents approximately 1% of our total utility customer base. While we continue to discuss this matter with officials from the City of Fort Wayne, we continue to protect our legal interests in this proceeding. A sanitary district in Illinois and a city in Texas have also indicated interest in acquisition, by eminent domain or otherwise, of all or a portion of the utility assets of two o f our operations. The systems represent approximately 3,000 customers or less than 0.5% of our total utility customer base. We believe that we will be entitled to fair market value for our assets i f they are condemned, and that the fair market value will be in excess of the book value for such assets.

#

espite these transactions, our strategy continues to be to acquire additional water and wastewater systems, to maintain our

sting systems where there is a business or a strategic benefit, and to actively oppose unilateral efforts by municipal governments to acquire any of our operations.

13



Contractual Obligations

The following table summarizes our contractual cash obligations as of December 31, 2006:

Payments Due By Period

2007 2008 2009 2010 2011 Thereafter Total

Long-term debt (a) ! S 31,155 ? 23,961 % 7,004 $ 54,192 \ i 26,998 S 839,505 $ 982,815

Interest on fixed-rate,

long-term debt (b) 56,066 53,369 52,690 50,037 46,880 588,756 847,798

Operating leases (c) 4,007 3,659 2,148 1,092 694 17,136 28,736

Unconditional purchase

obligations (d) 10,764 10,333 10,008 9,582 9,774 59,091 109,552

Other purchase

obligations (e) 20,614 - - - - 20,614

Postretirement benefit

plans' obligations (f) 10,260 - - - - - 10,260

Other obligations (g) 1,771 200 190 - - 3,000 5,161

Total J 5134,637 : I 91,522 : t 72,040 : 5114,903 $ 84,346 $1,507,488 $2,004,936

(3 )

r Cd)

CO

Represents sinking fund obligations and debt maturities. Represents interest payable on fixed-rate, long-term debt. Amounts reported may differ from actual due to future refinancing of debt. Represents operating leases that are noncancelable, before expiration, for the lease of motor vehicles, buildings, land and other equipment. 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. Represents an approximation of the open purchase orders as of the period end for goods and services purchased in the ordinary course of business. Represents contributions expected to be made to postretirement benefit plans. The amount of required contributions in 2008 and thereafter is not determinable. Represents capital expenditures estimated to be required under legal and binding contractual obligations.

Iri addition to these obligations, wc 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 o f these refund amounts are payable annually through 2021 and amounts not paid by the contract expiration dates become non-re fundable.

We will fund these contractual obligations with cash flows from operations and liquidity sources held by or available to us. On January 1, 2007, we completed the acquisition of New York Water Service Corporation for $28,866 in cash and the assumption of $23,460 of long-term debt. The acquisition was funded through the issuance of long-term debt that was issued in 2006 and included in the table above.

15

•



We believe our most critical accounting policies include revenue recognition, the use of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation," the valuation of our long-lived assets which consist primarily of Utility Plant in Service, regulatory assets and goodwill, our accounting for postretirement 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.

Revenue Recognition —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 are 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 ruling. We monitor the 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 final ruling. Please refer to the section named "Operating Revenues" for a discussion of revenue currently being recognized under rate filings that are not final.

Regulatory Assets and Liabilities—SFAS No. 71 stipulates generally accepted accounting principles for companies whose rates are established by or are subject to approval by an independent third-party regulator. In accordance with SFAS No. 71, 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 ate reflected.in our rates charged for water and 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 die

ange in our assessment or change in regulatory approval.

Valuation o f Long-Livcd Assets, Goodwill and Intangible Assets —In accordance with the requirements of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", we review for impairment of our long-lived assets, including Utility Plant in Service. We also review regulatory assets for the continued apphcation of SFAS No. 71. 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. In accordance with SFAS No. 71, adjustments to the carrying value of these assets would be made in instances where the inclusion in the rate-making process is unlikely.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we test the goodwill attributable to each of our reporting units for impairment at least annually on July 31, or more often, i f certain circumstances indicate a possible impairment may exist. We evaluate goodwill for impairment using the discounted cash flow methodologies, transaction values for other comparable companies, and other valuation techniques for all of our reporting units with goodwill balances. The evaluation requires significant management judgment and estimates that are based on budgets, general strategic business plans, historical trends and other data and relevant factors. I f changes in circumstances or events occur, or estimates and assumptions which 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 2006 concluded chat none of our goodwill was impaired.

Accounting for Postretirement Benefits--We maintain a qualified defined benefit pension plan and plans that provide for certain postretirement benefits other than pensions. Accounting for pensions and other postretirement benefits requires an extensive use of assumptions about the discount rare, expected return on plan assets, the rate of future compensation increases received by our employees, mortahty, 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 postretirement benefit expense that we recognize.

ur discount rate assumption was determined using a yield curve that was produced from a universe containing over 500 U.S.-ssued Aa-graded corporate bonds, all of which were noncallable (or callable with make-whole provisions), and excluding the

10% of the bonds with the highest yields and the 10% with the lowest yields. The discount rate was then developed as the

17


Management's Discussion and Analysis of Financial Condidon and Results of Operadons (continued) (In thousands of dollars, except per share amounts)

I M P A C T O F R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88,106 and 132(R)." This statement requires the recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net o f tax effects. We adopted SFAS No. 158 on December 31, 2006 as required. Because we are subject to regulation in the states in which we operate, we maintain our accounts in accordance with the regulatory authority's rules and guidelines, which may differ from other authoritative accounting pronouncements. In those instances, we follow the guidance of SFAS No. 71. Based on prior regulatory experience, and in accordance with SFAS No. 71, we recorded a regulatory asset for the pension and other postretirement benefit costs associated with SFAS No. 158, that would otherwise be charged to common stockholders' equity, for which we anticipate recoverability through customer rates. As a result, the impact of adopting SFAS No. 158 on our ConsoUdated Balance Sheet was to increase total liabilities by 530,305, and increase total assets by $30,305. The adoption of this standard had no impact on our results of operations or cash flow, and the impact on financial position is described above. See the Pension Plans and Other Postretirement Benefits footnote to the consolidated financial statements for further information and the required disclosures under SFAS No. 158.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The statement applies when other statements require or permit the fair value measurement o f assets and liabilities. This statement does not expand the use of fair value measurement. SFAS No. 157 is effective for our fiscal year beginning January 1, 2008. We are currently evaluating the provisions of this statement and have not yet determined the effect

adoption on our results of operations or financial position.

September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects o f Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in current year Financial statements for purposes of determining whether the current year's financial statements are materially misstated. We adopted SAB 108 as required for the fiscal year ended December 31, 2006 and it did not have a material impact on our results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109," which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement o f a tax position taken or expected to be taken in a tax return. We adopted FIN 48 as required on January 1, 2007 and it did not have a material effect on our results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No. 123R generally requires that we measure the cost o f employee services received in exchange for stock-based awards on the grant-date fair value and this cost will be recognized over the period during which an employee provides service in exchange for the award. Prior to the adoption of SFAS No. 123R on January 1, 2006, we provided pro forma disclosure of our compensation costs associated with the fair value of stock options that had been granted, and accordingly, no compensation costs were recognized in our consolidated financial statements. We adopted this standard using the modified prospective method, and accordingly, the consolidated financial statement amounts for the prior periods presented in this report have not been restated to reflect the fair value method o f expensing share-based compensation. During 2006, the adoption of SFAS No. 123R increased operations and maintenance expense by $2,894, lowered net income by $2,568, and lowered diluted net income per share by $0.019. The adoption o f this standard had no material impact on our overall financial position, no impact on cash flow, 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 recognized in the income statement. As of the date o f adoption, we calculated our pool of windfall tax benefits in accordance with the method

utlioed in SFAS No. 123R. See the Employee Stock and Incentive Plan footnote to the consolidated finandal statements for er information and the required disclosures under SFAS No 123R.

^ ^ m t u i ^fcrth

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Aqua America, Inc.:

We have completed integrated audits of Aqua America, Inc.'s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 in accordance widi the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated Financial Statements In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, of capitalization, of common stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Aqua America, Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require tliat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit of financial statements includes 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. We believe |hat our audits provide a reasonable basis for our opinion.

As discussed under Summary of Significant Accounting Policies-Recent Accounting Pronouncements in the notes to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006 and the manner in which it accounts for its defined benefit pension and other postretirement plans effective December 31,2006.

Internal Control Over Financial Reporting Also, in our opinion, management's assessment, included in the accompanying Management's Report ori Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on crireria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness o f internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

21

AQUA AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except per share amounts) Years ended December 31, 2006,2005 and 2004

Operating revenues 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 o f otiier assets

Income before income taxes Provision for income taxes Net income

Net income Other comprehensive income (loss), net o f tax:

Minimum pension liability adjustment Unrealized holding gains on investments Reclassification adjustment f o r gains reported in net income

Comprehensive income

N e t income per common share: Basic Diluted

Average common shares outstanding during the period: Basic Diluted

See accompanying notes to consolidated financial statements.

2006 2005 2004

% 533,491 $ 496,779 3 ; 442,039

219,560 203,088 178,345 70,895 60,747 54,564 4,146 4,741 4,300

33,343 31,696 27,596 327,944 300,272 264,805

205,547 196,507 177,234

58,432 52,062 48,679 (3,941) (2,447) (2,304)

(1,194) (1,177) (1,272) 152,250 148,069 132,131 60,246 56,913 52,124

S 92,004 3 91,156 $ 80,007

% 92,004 % 91,156 % 80,007

3,082 (1,340) (1,742)

194 - 59 - (230)

3,276 (1,340) (1,913)

S 95,280 S 89,816 S 78,094

% 0.70 $ 0.72 $ 0.64

% 0.70 S 0.71 S 0:64

130,725 127,364 124,329

131,774 129,206 125,710

23

AQUA AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION

(In thousands of dollars, except per share amounts) December 31, 2006 and 2005

Common stockholders' equity: Common stock, $.50 par value Capital in excess o f par value Retained earnings Treasury stock, at cost

Accumulated other comprehensive income Unearned compensation

Total common stockholders' equity

Long-term debc Long-term debt o f subsidiaries (substantially

secured by utility plant): Interest Rate Range

0.00% to 2.49% 2.50% to 2.99% 3.00%) to 3.49% 3.50%) to 3.99% 4.00%) to 4.99% 5.00%) to 5.49% 5.50%. to 5.99% 6.00% to 6.49% 6.50% to 6.99% 7.00% to 7.49% 7.50% to 7.99% 8.00% to 8.49% 8.50% to 8.99%) 9.00% to 9.49% 9.50% to 9.99%

10.00% to 10.50%

Unsecured notes payable, 4.87%, maturing in various installments 2010 through 2023

Unsecured notes payable, 5.95%), due in 2023 through 2034

Unsecured notes payable, 5.64%), due in 2014 through 2021

Unsecured notes payable, 5.54%, due in 2013 through 2018

Unsecured notes payable, 5.01%), due 2015 Unsecured notes payable, 5.20%), due 2020 Notes payable, 6.05%, maturing in 2007 and 2008

Current portion o f long-term debt Long-term debt, excluding current portion Total capitalization

2006 2005

$ 66,509 5 E 64,829 548,806 478,508

319,113 285,132

(12,992) (12,914)

194 (3,082)

- (550)

921,630 811,923

25,740 21,574

25,272 28,684

17,220 17,380

6,073 6,748 30,645 30,695

262,496 262,588

79,000 79,000

94,360 88,504

22,000 32,000 13,288 15,878

24,778 25,012

26,288 26,507

9,000 9,000

46,101 46,764

38,738 40,933

6,000 6,000

726,999 737,267

135,000 135,000

40,000 -

20,000 -

30,000 _

18,000 18,000

12,000 12,000

816 816

982,815 903,083

31,155 24,645

951,660 878,438

$ 1,873,290 S ; 1,690,361

See accompanying notes to consolidated financial statements.

25

AQUA AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars) Years ended December 31, 2006, 2005 and 2004

Cash flows f rom operating activities: Net income

Adjustments to reconcile net income to net cash flows f rom operating acdvioes: Depreciation and amortization Deferred income taxes Stock-based compensation Gain on sale o f water system Gain on sale o f other assets

Net decrease (increase) in receivables, inventory and prepayments Net increase (decrease) in payables, accrued interest,'accrued

taxes and other accrued liabilities Other

Net cash flows f rom operating activities Cash flows f rom investing activities:

Property, plant and equipment additions, including allowance for funds used during construction o f 53,941, 52,447 and 52,304

Acquisitions o f utility systems and other, net Release o f funds previously restricted for construction activity Additions to funds restricted fo r construction activity Net proceeds f rom the sale o f water systems Net proceeds f rom the sale o f otiier assets Other

Net Cash flows used in investing activities Cash flows f rom financing activities:

Customers' advances and contributions in aid o f construction Repayments o f customers' advances Net proceeds (repayments) o f short-term debt Proceeds f rom long-term debt Repayments o f long-term debt Change in cash overdraft position Proceeds f rom issuing common stock Proceeds f rom exercised stock options Stock-based compensation windfall tax benefits Repurchase o f common stock Dividends paid on common stock Other

Ne t cash flows f rom financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning o f year

Cash and cash equivalents at end o f year

Cash paid during the year for:

Interest, net o f amounts capitalized

Income taxes

2006 2005 2004

$ 92,004 3 ; 91,156 s ; 80,007

75,041 65,488 58,864

10,794 26,027 40,577

3,604 - -

- - (2,342)

(1,194) (1,277) (1,272) (8,769) 7,572 (2,766)

(5,609) 12,933 863

4,855 (2,325) (328) 170,726 199,674 173,603

(271,706) (237,462) (195,736) (11,848) (11,633) (54,300) 59,467- 56,137 14,015 (2,332) (107,566) (2,772)

- - 4,716

1,283 1,300 2,098 (213) 102 (517)

(225,349) (299,122) (232,496)

12,031 14,728 14,269

(5,168) (4,792) (4,930) (19,355) 63,695 (30,150) 103,360 147,012 130,258

(24,606) (83,235) (55,928) 11,166 (8,808) (2,190)

58,088 9,641 51,132 7,962 11,775 5,061

2,307 - -

(972) (1,749) (1,082) (58,023) (51,139) (45,807)

- - 179

86,790 97,128 60,812

32,167 (2,320) 1,919 11,872 14,192 12,273

$ 44,039 $ 11,872 ? 14,192

$ 53,222 $ 48,278 S 45,261

$ 28,700 % 30,734 $ 22,322

See Summary o f Significant Accounting Policies-Customers' Advances for Construction, Acquisitions and Employee Stock and Incentive Plans footnotes for description o f non-cash activities,

ee accompanying notes to consolidated financial statements.

27

as:

#

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued) (In thousands of dollars, except per share amounts)

The cost of software upgrades and enhancements are capitalized i f they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Certain information technology costs associated with major system installations, convetsions and improvements, such as software training, data conversion and business process reengineering costs, are deferred as a regulatory asset i f the Company expects to recover these costs in future rates. I f these costs are not deferred in accordance with SFAS No. 71, then these costs are charged to operating expenses when incurred. As of December 31, 2006, $5,597 of 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.

In accordance with the requirements of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", tiie 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.

Allowance for Funds Used D u r i n g Construction—The allowance for funds used during construction ("AFUDC") is a noncash credit which represents the estimated cost of funds used to finance the construction of utility plant. In general, AFUDC is

plied to construction projects requiring more than one month to complete. No AFUDC is applied to projects funded by ustomer advances for construction or contributions in aid of construction. AFUDC includes the net cost of borrowed funds

and a1 rate of return on other funds when used, and is recovered through water rates as the utility plant is depreciated. The amount o f AFUDC related to equity funds in 2006 was $6 and in 2005 was $1. There was no AFUDC related to equity funds in 2004. No interest was capitalized by our non-regulated businesses.

Cash and Cash Equivalents--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 certain of its disbursement cash accounts of $13,739 and $2,573 at December 31, 2006 and 2005, respectively. A book ovetdraft 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 m 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.

Accounts Receivable—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 arid 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—-Deferred charges and other assets consist of financing expenses, other costs and marketable securities. Deferred bond issuance expenses are amortized by the straight-line method over the life of thei 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. Other.costs, for which the Company has received or expects to receive prospective rate recovery, are deferred as a regulatory asset and amortized over the period of rate recovery in accordance with SFAS No. 71.

arketable securities are considered "available-for-sale" and accordingly, are carried on the balance sheet at fair market value, nrecognized gains are included in other comprehensive income.

29

•



employee compensation was detennined as of the grant date under the fair value method of SFAS No. 123, "Accounung for Stock-Based'Compensadon," as amended by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure."

•Years Ended December 31, 2005 2004

Net income, as reported S 91,156 5 80,007 Add: stock-based employee compensation

expense included in reported net income, net o f tax 290 266

Less; pro forma expense related to stock options granted, net o f tax effects (2,054) (1,990)

Pro forma $ 89,392 % 78,283

Basic net income per share: As reported S 0.72 $ 0.64 Pro forma 0.70 0.63

Diluted net income per share: As reported % 0.71 $ 0.64 Pro forma 0.69 0.62

For the purposes of this pro forma disclosure, the fair value of the options at the date of the grant was estimated using the lack-Scholes option-pricing model.

Use o f JEsdmates i n Preparation o f ConsolidatedFinancial Statements--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.

Reclassifications—Certain prior year amounts have been changed to conform with current year's presentation.

Recent Accounting Pronouncements—In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)." This statement requires the recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net o f tax effects. The Company adopted SFAS No. 158 on December 31, 2006 as required. Because the Company is subject to regulation in the states in which it operates, the Company maintains its accounts in accordance with the regulatory authority's rules and guidelines, which may differ from other authoritative accounting pronouncements. In those instances, the Company follows the guidance of SFAS No. 71. Based on prior regulatory experience, and in accordance with SFAS No. 71, the Company has recorded a regulatory asset for the pension and other postretirement benefit costs associated with SFAS No. 158 that would otherwise be charged to common stockholders' equity, for which the Company anticipates recoverability through customer rates. As a result, the impact of adopting SFAS No. 158 on the Company's Consolidated Balance Sheet was to increase total liabilities by $30,305, and increase total assets by $30,305. The adoption of this standard had no impact on the Company's results of operations or cash flow, and the impact on financial position is described above. See the Pension Plans and Other Postretiremenr Benefits foomote to the consolidated financial statements for further information and the required disclosures under SFAS No. 158.

n September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This statement defines fair value, Establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The statement applies when other statements require or permit the fair value measurement of assets and liabilities. This statement does not expand the use of fair value measurement. SFAS No. 157 is effective for the Company's

31



adjusted pursuant to the purchase agreement. In accordance with Florida Public Service Commission procedures, the acquisidon was approved by the Commission and rate base was determined on December 20, 2005. Under the terms of the purchase agreement, the Commission's rate base determinadon resulted in a reducdon of the final purchase price which did not result in the recognition of goodwill.

AquaSource—On July 31, 2003, the Company completed its acquisition of four operating water and wastewater subsidiaries of AquaSource, Inc. (a subsidiary of DQE, Inc.), including selected, integrated operating and maintenance contracts and related assets (individually and collectively the acquisition is referred to as "AquaSource") for 5190,717 in cash, as adjusted pursuant to the purchase agreement based on working capital at closing. In August 2004, we were awarded and received $12,289 plus interest in an arbitration related to the calculation of the final purchase price under the terms of the purchase agreement, which resulted in a final purchase price of $178,428. In the consolidated statement of cash flow for 2004, the $12,289 award has been reported as proceeds on the line titled acquisitions of utility systems and other, net.

Other Acquisitions— During 2006, the Company completed 27 acquisitions or other growth ventures in various states for an aggregate purchase price of $11,848 in cash. The operating revenues included in the consolidated financial statements of the Company during the period owned by the Company were $4,511.

During 2005, the Company completed 30 acquisitions or other growth ventures in various states. The total purchase price of $12,308 for the systems acquired in 2005 consisted of $11,633 in cash and the issuance of 24,684 shares of the Company's common stock. The operating revenues included in the consolidated financial statements of the Company during the period owned, by the Company were $6,203 in 2006 and $2,145 in 2005.

During 2004, in addition to the Heater and Florida Water acquisitions, the Company completed 27 acquisitions or other growth ventures in the various states in which the Company operates for an aggregate purchase price of $3,842 in cash. The operating revenues included in die consolidated financial statements of the Company during the period owned by the

ompany were $2,309 in 2006, $1,580 in 2005 and $617 in 2004.

Dispositions

In 2004, as a result of the settlement of a condemnation action, the Company's Ohio operating subsidiary sold its water utility assets within the municipal boundaries of the City of Geneva in Ashtabula County, Ohio for net proceeds of approximately $4,716, 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 2004 of a gain on the sale of these assets, net of expenses, o f $2,342. The gain is reported in the 2004 consolidated statement of income as a reduction to operations and maintenance expense. We continue to operate this water-system for the City of Geneva under a multi-year operating contract that expires in December 2008. These water utility assets represented less than 1% of Aqua America's total assets, and the total number of customers included in the water system sold represented less than 1% of our total utility customer base.

In 2004, the Company sold its only operations in Kentucky. The sale price approximates our investment in this operation. The operation represented approximately 0.2% of the operations acquired from AquaSource, Inc.

The City o f Fort Wayne, Indiana has authorized the acquisition, by eminent domain or otherwise, of a portion of the utility assets o f one o f the operating subsidiaries that the Company acquired in connection with the AquaSource acquisition in 2003. The Company has challenged whether the City is following the correct legal procedures in connection with the City's attempted condemnation and the Company has challenged the City's valuation of this portion of its system. The portion of the system under consideration represents approximately 1% of the Company's total utility customer base. While the Company continues to discuss this matter with officials from the City of Fort Wayne, the Company continues to protect its legal interests in this proceeding. A sanitary district in Illinois and a city in Texas have also indicated interest in acquisition, by eminent domain or otherwise, of all or a portion o f the utility assets of two of the Company's operations. The systems represent approximately 3,000 customers or less than 0.5% of our total utility customer base. The Company believes that it will be entitled to fair market value for its assets i f they are condemned, and it is believed that the fair market value will be in excess of the book value for such assets.

33



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 and the competitive transition charge payment, regulator}' 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, December 31, 2006 2005

Regulatory Regulatory Regulatory Regulatory Assets Liabilities Assets Liabilities

Income taxes % 70,146 $ 2,104 J 69,531 S 2,203 Utility plant retirement costs 20,060 8,960 17,421 8,368

Postretirement benefits 36,469 - 10,871 -

Texas rate filing expense deferral 12,382 - 9,486 -Competitive Transition

Charge payment 4,586 - 5,733 -Water tank painting 4,822 32 4,292 267 Fair value o f long-term debt

assumed in acquisition 2,594 - 2,804 -Merger costs 1,111 - 1,641 -Rate case filing expenses & other 12,893 496 9,174 913 Rate case filing expenses & other

S 165,063 $ 11,592 $130,953 % 11,751

Items giving rise to deferred state income taxes, as well as a portion of deferred Federal income taxes related to certain differences between tax and book depreciation expense, are recognized in the rate setting process on a cash or flow-through basis, and will be recovered as they reverse.

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 recover)7 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.

Postretirement benefits include pension and other postretirement benefits. The pension costs include deferred net pension expense in excess of amounts funded which the Company believes will be recoverable in future years as pension funding is required. In.addition, a regulatory asset has been recorded for the costs that would otherwise be charged to common stockholders' equity in accordance with SFAS No. 158, for the underfunded status of our pension'and other postretirement benefit plans. See the Pension Plans and Other Postretirement Benefits footnote to the consolidated financial statements for the effect on regulatory assets of the adoption of SFAS No. 158. The regulatory asset related to postretirement benefits other thanipensions represents costs that were deferred between the time that the accrual method of accounting for these benefits was adopted in 1993 and the recognition of the accrual method in the Company's rates as prescribed in subsequent rate filings. Amortization of the amount deferred for postretirement benefits other than pensions began in 1994 and is currently being recovered in rates.

The regulatory asset for the Texas rate filing of 2004 results from a multi-year plan to increase annual revenues in phases, and to defer and amortize a portion of the Company's depreciation, operating and other tax expense over a similar multi-year period. These costs will be amortized over a period of time, expected to approximate four years, as determined by the final rate order.

The regulatory asset associated with the Competitive Transition Charge ("CTC") payment represents the full payoff in 2001, net of amortization, of the allocable share of a CTC as negotiated by Aqua Pennsylvania, Inc. from an electric distribution ompany. The Pennsylvania Electricity Generation Customer Choice and Competition Act permitted electric distribution

Utilities'to recover their stranded costs from its customers in the form ofa CTC. Rate recovery of the $11,465 CTC payment began in 2000 and is expected to conclude in 2010.

35



The reasons for the differences between amounts computed by applying the statutory Federal income tax rate to income before income tax expense are as follows:

Years Ended December 31, 2

Computed Federal tax expense at statutory rate Increase in tax expense for depreciation expense

to be recovered in future rates Domestic Production Credit Stock-based. compensation

Deduction for Aqua America common dividends paid under employee benefit plan

Amortization o f deferred investment tax credits Prior year rate reductions State income taxes, net o f federal tax benefit Other, net

Actual income tax expense

2006 2005 2004

$ 53,287 % : 51,824 3 ; 46,245

716 806 1,376 (602) (656) -715 -

(307) (321) (245) (274) (359) (285) (154) (437) (538) 6,999 6,631 5,634 (134) (575) (63)

$ 60,246 % : 56,913 3 ; 52,124

The tax effects of temporary differences between book and tax accounting that give rise to the deferred tax assets and deferred tax liabilities are as follows:

December 31,

Deferred tax assets: Customers' advances for construction Costs expensed for book not deducted

for tax, principally accrued expenses Utility plant acquisition adjustment

basis differences Postretirement benefits Other

Total gross deferred tax assets

Deferred tax liabilities: Utility plant, principally due to

depredation and differences in die basis o f fixed assets due to variation in tax and book accounting

Deferred taxes associated with the g;ross-up o f revenues necessary to recover, in rates, the effect o f temporary differences

Tax effect o f regulatory asset for postretirement benefits

Deferred investment tax credit Other

Total gross deferred tax liabilities

Net deferred tax liability

2006 2005

S 17,786 S 17,549

2,787 1,803

18,673 29,429 12,530 1,660 295 -

52,071 50,441

278,917 267,835

26,276 25,796

12,530 _ 5,801 6,066 1,746 1,090

325,270 300,787

3 273,199 $ 250,346

June 2006, the FASB issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes-An

interpretation of FASB Statement No. 109," which prescribes a recognition threshold and measurement attribute for the

37



Long-term Debt and Loans Payable

The Consolidated Statements of Capitalization provide a summary of long-term debt as of December 31, 2006 and 2005. The supplemental indentures with respect to certain issues of the First Mortgage Bonds restrict the ability of Aqua Pennsylvania, Inc. and certain other operating subsidiaries of the Company to declare dividends, in cash or property, or repurchase or otherwise acquire the stock of these companies. As of December 31, 2006, approximately 5326,000 of Aqua Pennsylvania's retained earnings of approximately 5346,000 and $76,000 of the retained earnings of $85,000 of certain otiier subsidiaries were free of these restrictions. Certain supplemental indentures also prohibit Aqua Pennsylvania and certain other subsidiaries of the Company from making loans to, or purchasing the stock of, the Company.

Sinking fund payments are required by the terms of certain issues of long-term debt. The future sinking fund payments and debt maturities o f the Company's long-term debt are as follows:

Interest Rate Range 2007 2008 2009 2010 2011 Thereafter

0:00% to 2.49% $ 1,514 $ 1,614 5 £ 1,657 : $ 1,689 $ 1,714 $ 17,552 2.50% to 2.99% 1,533 1,604 1,649 1,682 1,729 17,075 3.00% to 3.49% 12,248 258 276 287 299 3,852 3.50% to 3.99% 685 695 706 717 328 2,942 4.00% to ,4.99% 50' 50 55 27,055 55 138,380 5.00% to 5.49% - - - - - 292,496 5.50% to 5.99% - - - - 169,000 6.00% to 6.49% 644 10,172 - - 15,000 69,360 6.50% to 6.99% 10,000 - - - - 12,000 7.00% to 7.49% 2,540 2,585 634 687 744 6,098 7.50% to 7.99% 210 227 245 264 286 23,546 8.00% to 8.49% 152 167 184 202 222 25,361 8.50% to 8.99% - - - - - 9,000 9.00% to 9.49% 584 594 604 20,615 5,627 18,077 9.50% to 9.99% 995 5,995 994 994 994 28,766 10.00% tc . 10.50% - - - - - 6,000

Total $31,155 $ I 23,961 $ ; 7,004 : $ 54,192 $ 26,998 ! $ 839,505

In March 2006, Aqua Pennsylvania issued $40,000 of unsecured notes at 5.95% of which $10,000 are due in 2023, 2024, 2033 and 2034. In September 2006, Aqua Pennsylvania issued $20,000 of unsecured notes at 5.64% with amounts due in 2014, 2016, 2020 and 2021, Proceeds from the sales of these notes were used to repay short-term borrowings. In December 2006, the Company issued $30,000 of unsecured notes with an interest rate of 5.54% of which $10,000 are due in 2013, 2017 and 2018. The proceeds of this financing were used to fund acquisitions. At various times during 2006, Aqua Pennsylvania and other operating subsidiaries issued other notes payable and first mortgage bonds in aggregate of $14,728 at a weighted average interest rate o f 3.64% due at various times ranging from 2016 to 2036. The proceeds from these issuances were used to reduce a portion of the balance of the short-term debt at each of the respective operating subsidiaries.

In February 2005, the Company issued $30,000 of unsecured notes of which $18,000 are due in 2015 with an interest rate of 5.01% and $12,000 ate due in 2020 with an interest rate of 5.20%. The proceeds of this financing were used to refinance existing short-term debt. In May 2005, Aqua Pennsylvania issued $72,000 of tax-exempt bonds secured by a supplement to its first mortgage indenture at the following terms: $22,000 at 4.87% due 2036, $25,000 at 4.88% due 2037 and $25,000 at 4.89% due 2038. Of the $72,000 in proceeds, $22,000 was used to retire previously issued tax-exempt bonds in August 2005 and the balance of proceeds are restricted to funding the costs of certain capital projects during the period 2005 through 2007. In December 2005, Aqua Pennsylvania issued $25,000 of tax-exempt bonds at 4.82% due 2035, which were secured by a lupplement to its first mortgage indenture. The proceeds are restricted to funding certain capital projects during die period i006 through 2008. At various times during 2005, Aqua Pennsylvania and other operating subsidiaries issued other notes payable, first mortgage bonds and tax-exempt bonds aggregating $24,677 at a weigh ted-average interest rate of 4.10% due at various times ranging from 2019 to 2035, The proceeds from these issuances were used to reduce a portion of the balance of

39



I n Deccmbet 2005, the Company filed a universal shelf registradon with the Securities and Exchange Commission to allow for • the potential future sale by us, from time to time, in one or more public offerings, of an indeterminant amount of our common stock, preferted stock, debt securities and other securities specified therein at indeterminant prices.

In August 2006, the Company entered into a forward equity sale agreement for 3,525,000 shares of common stock with a third-party (the "forward purchaser"). In connection with the forward equity sale agreement, the forward purchaser borrowed an equal number of shares of the Company's common stock from stock lenders and sold the borrowed shares to the public. The Company will not receive any proceeds from the sale of its common stock by the forward purchaser until settlement of the forward1 equity sale agreement. The actual proceeds to be received by the Company will vary depending upon the settlement date, the number of shares designated for settlement on that settlement date and the method of settlement Aqua America intends to use any proceeds received upon settlement of the forward equity sale agreement to fund the Company's future capital expenditure program and acquisitions, and for working capital and other general corporate purposes. The forward equity sale agreement is accounted for as an equity instrument and was recorded at a fair value of 50 at inception. I t will not be adjusted so long as the Company continues to meet the accounting requirements for equity instruments.

The Company may elect to settle the forward equity sale agreement by means o f a physical share settlement, net cash settlement, or net share settlement, on a settlement date or dates, no later than August t , 2008. The forward equity sale agreement provides that the forward sale price will be computed based upon the initial forward sale price of $21.857 per share. Under limited circumstances or certain unanticipated events, the forward purchaser also has the ability to require the Company to physically'settle the forward equity sale agreement in shares prior to the maturity date. The maximum number of shares that could be required to be issued by the Company to settie the forward equity sale agreement is 3,525,000 shares. As of December 31, 2006, a net cash settlement under the forward equity sale agreement would have resulted in a payment by the Company to the forward purchaser of 52,845 or a net share settlement would have resulted in the issuance of 124,876 shares

the Company to the forward purchaser. For each increase or decrease of one dollar in the average market price of Aqua merica common-stock above ot below the forward sale price on December 31, 2006, the cash settlement option from the

Company's perspective would decrease or increase by 53,525 and the net share settlement option would decrease by 161,846 shares or inctease by 148,234 shares, respectively.

During the last three years, the Company completed the following offerings of equity:

• In June 2006, the Company sold 1,750,000 shares of common stock in a public offering for proceeds of 537,400, net of expenses. In August 2006, the Company sold 500,000 shares of common stock in a public offering for proceeds of 510,700, net of expenses. The net proceeds from these offerings were used to fund the Company's capital expenditure program and acquisitions, and for working capital and other general corporate purposes.

• In November 2004, the Company issued 2,606,667 shares of common stock in a public offering for proceeds of $42,600, net of expenses. The net proceeds were used to repay a portion of the Company's short-term debt The indebtedness was incurred by Aqua America in connection with acquisitions.

In addition, the Company has a shelf registration statement filed with the Securities and Exchange Commission to permit the offering from time to time of shares of common stock and shares of preferred stock in connection with acquisitions. During 2005, 24,684 shares of common stock totaling $675 were issued by the Company ro acquire water and wastewater systems. The balance remaining available for use under the acquisition shelf registration as of December 31, 2006 is 2,194,262 shares. The form and terms o f 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 2006, 2005 and 2004, under the dividend reinvestment portion of the Plan, 405,107, 401,503 and 512,609 original issue shares of common stock were sold providing the Company with proceeds o f $9,341, $8,516 and $7,808, respectively.

he Board of Directors has authorized the Company to purchase its common stock, from time to time, in the open market or

rough privately negotiated transactions. The Company has not repurchased any shares under this authorization since 2000. As o f December 31, 2006, 548,278 shares remain available for repurchase.

41


Notes to Consolidated Finandal Statements (continued) (In thousands of dollars, except per share amounts)

Employee Stock.and Incentive Plan

Under the 2004 Equity Compensation Plan (the "2004 Plan"), as approved by the shareholders to replace the 1994 Equity Compensadon Plan (the "1994 Plan"), qualified and non-qualified stock options may be granted to officers, key employees and consultants at prices equal to the market price of the stock on the day of the grant. Officers and key employees may also be granted dividend equivalents and restricted stock. Restricted stock may also be granted to non-employee members of the Board of Directors. The 2004 Plan authorizes 4,900,000 shares for issuance under the plan. A maximum of 50% of the shares available for issuance under the 2004 Plan may be issued as restricted stock and the maximum number of shares that may be subject to grants under the plans to any one individual in any one year is 200,000. Awards under the 2004 Plan are made by a committee of the Board of Directors. A t December 31, 2006, 3,521,136 opdons underlying stock option and restricted stock awards were still available for grant under the 2004 Plan, although under the terms of the 2004 Plan, terminated, expired or forfeited grants under the 1994 Plan and shares withhdd to satisfy tax withholding requirements under the 1994 Plan may be re-issued under the plan.

Stock Opdons - Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment," which revised SFAS No. 123, "Accounting for Stock-based Compensation," and superseded APB No. 25, "Accounting for Stock Issued ,to Employees." Prior to January 1, 2006, the Company accounted for stock-based compensation using the intrinsic value method in accordance with APB Opinion No. 25. Accordingly, no compensation expense rdated to grantingof stock options had been recognized in the finandal statements prior to adoption of SFAS No. 123R for stock options that were granted, as the grant price equaled the market price on the date of grant.

The Company adopted this standard using the modified prospective method, and accordingly the financial statement amounts for the prior periods presented in this report have not been restated to reflect the fair value method of expensing share-based compensation. Under this transition method, compensation cost recognized in the year ended December 31, 2006 includes ompensation cost for all share-based payments granted prior to, but not vested as of January 1, 2006, and share-based ayrhentsigranted after January 1, 2006. For the year ended December 31, 2006, the impact of the adoption of SFAS No.

123R as compared to i f the Company had continued to account for share-based compensation under APB Opinion No. 25: increased operations and maintenance expense by $2,894, increased capitalized compensation costs within property, plant and equipment by $631, lowered income tax expense by $326, lowered net income by $2,568, lowered diluted net income per share by $0,019, and lowered basic net income per share by $0.02. SFAS 123R requires the Company to estimate forfeitures in calculating the compensation expense instead of recognizing these forfeitures and the resulting reduction in compensation.expense as they occur. As of January 1, 2006, the cumulative after-tax effect of this change in accounting for forfeitures, i f this adjustment was recorded, would have been to reduce stock-based compensation by $12. The estimate of forfeitures will be adjusted over the vesting period to die extent that actual forfeitures differ, or arc expected to differ, from such estimates. The adoption of this standard had 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 exceeded the associated compensation cost as determined under SFAS 123R. As of the date of adoption, the Company has calculated its pool of windfall tax benefits in accordance with the method outlined in SFAS 123R.

Options under the plans were issued at the market price of the stock on the day of the grant. Options are exercisable in installments1 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 is amortized into compensation expense on a straight-line basis over their respective 36 month vestirig period, net of estimated forfeitures. The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model. The pet share weighted-average fair value at the date of grant for stock options granted during the years ended December 31, 2006, 2005 and 2004 was $7.82, $4.54 and $4.07 per option, respectively. The application of this valuation model relies on the following assumptions that are judgmental and sensitive in the determination of the compensation expense for the periods reported:

2006 2005 2004

Expected term (years) 5.2 5.2 4.5

Risk-free interest rate 4.1% 4.0% 4.0%

Expected volatility 25.8% 27.8%) 29.9%

Dividend yield 1.76%) 2.40%) 2.23%)

43



Restricted 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 adoption of SFAS No. 123R had no impact on the Company's recognition of stock-based compensation expense associated with restricted stock awards. The Company expects forfeitures of restricted stock to be de minimus. There were no forfeitures prior to the adoption of SFAS 123R for the grants that were under restriction as of January 1, 2006. During the years ended December 31, 2006, 2005 and 2004, the company recorded stock-based compensation related to restricted stock awards as operations and maintenance expense in the amounts of $710, $495 and $439, respectively. The following table summarizes nonvested restricted stock transactions for the year ended December 31, 2006:

Number Weighted o f Average

Shares Fair Value Nonvested shares at beginning o f period 43,998 % 17.70

Granted 42,200 28.39 Vested (24,310) 19.11 Forfeited (5,000) 29.46

Nonvested shares at end o f period 56,888 $ 23.98

The following table summarizes the value of restricted stock awards at the date the restriction lapsed:

Years ended December 31, 2006 2005 2004

Intrinsic value o f restricted stock awards vested $ 660 $ 614 $ 449 Fair value o f restricted stock awards vested 465 500 360

As of December 31, 2006, $890 of unrecognized compensation costs related to restricted stock is expected to be recognized over a weighted-average period of 1.0 year. The aggregate intrinsic value of restricted stock as of December 31, 2006 was $1,296. The aggregate intrinsic value of restricted stock is based on the number of shares of restricted srock and the market value of the Company's common stock as of the period end date.

Pension Plans and Other Postretirement Benefits

The Company maintains a qualified, defined benefit pension plan that covers a majority of its full-time employees who were hired prior to April 1, 2003. Retirement benefits under the plan 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 plan annually at a level which is deductible for income tax purposes and which provides assets sufficient to meet its pension obligations. To offset certain limitations imposed by the Internal Revenue Code with respect to payments under qualified plans, the Company has a nonqualified Excess Benefit Plan for Salaried Employees in order to prevent certain employees from being penalized by these limitations. The Company also has non-qualified Supplemental Executive Retirement Plans for certain current and retired employees. The net pension costs and obligations o f the qualified and non-qualified plans are included in the tables which follow. Employees hired after April 1, 2003 may participate in a defined contribution plan that provides a Company matching contribution on amounts contributed by participants and an annual profit-sharing contribution based upon a percentage of the eligible participants' compensation.

In addition to providing pension benefits, the Company offers certain Postretirement 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 for eligible retirees and life insurance benefits for certain eligible retirees. The Company l^inds its gross PBOP cost through various trust accounts. The benefits of retired officers and certain other retirees are paid by the Company and not from plan assets due to limitations imposed by the Internal Revenue Code.

45



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:

Other

Change in benefit obligation: Benefit obligation at January 1, Service cosr Interest cost Plan amendments Actuarial (gain) loss Plan participants1 contributions Benefits paid Benefit obligation at December 31,

Change in plan assets: Fair value o f plan assets at January 1, Actual return on plan assets Employer contributions Benefits paid

Fair value o f plan assets at December 31,

Funded status o f plan: Funded status at December 31, Unrecognized actuarial loss Unrecognized prior service cost Unrecognized net transition obligation Net amount recognized

Pension Benefits Postretirement Benefits 2006 2005 2006 2005

$ 179,741 $ 171,076 $ 29,161 $ 32,804 4,784 4,847 1,002 1,223

10,094 9,805 1,581 1,882 406 - - (7,047)

(10,469) 420 (2,941) 1,317 - 249 •584

(6,272) (6,407) (842) (1,602)

178,284 179,741 28,210 29,161

117,671 115,292 18,942 16,606 8,757 7,790 933 675 6,521 996 1,367 2,678

(6,483) (6,407) (628) (1,017)

126,466 117,671 20,614 18,942

51,818 62,070 7,596 10,219 - (42,092) - (8,537)

- • (1,687) - 7,517

- 809 - (5,624) 5 51,818 S 19,100 % 7,596 $ 3,575

Company's pension plans had an accumulated benefit obligation of SI 50,999 and $148,629 at December 31, 2006 and 2005, respectively. The following table provides the net liability recognized on the Consolidated Balance Sheets at December 31:

Other Pension Benefits Postretirement Benefits

2006 2005 2006 2005 Current liability $ (131) % $ - $ -Noncurrent liability (51,687) - (7,596) Prepaid benefits cost - - - 555 Accrued benefit cost - (19,100) - (4,130) Additional minimum liability - (12,726) Intangible assets - 1,817 Regulatory asset -. 6,167 Accumulated other

comprehensive loss - 4,742 Net liability recognized $(51,818) $(19,100) $ (7,596) $ (3,575)

47



The significant assumptions related to the Company's pension and other postretirement benefit plans are as follows:

Other Pension Benefits Postretirement Benefits

2006 2005 2006 Weighted-average Assumptions Used

to Determine Benefit Obligations as o f December 31,

Discount rate

Rate o f compensation increase

Assumed Health Care Cost Trend Rates Used to Determine Benefit Obligations as o f 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

Weighted-average Assumptions Used to Determine Net Periodic Benefit Costs'for Years Ended December 31,

Discount rate Expected return on plan assets Rate o f 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 tliat the rate reaches the ultimate

trend rate

nf a— Assumption is not applicable to pension benefits.

5.90% 4.0-5.0%

5.65% 4.0-5.0%

5.90% 4.0%

n/a

n / a

n/a

n/a

n/a

n/a

9%

5%

2011

5.65% 8.0%

4.0-5.0%

5.75% 8.5%

4.0-5.0%

5.65% 5.33-8.0%

4.0%

n/a

n/a

n/a

n/a

n/a

n/a

10%

5%

2011

2005

5.65% 4.0%

10%

5%

2011

5.75% 6.0-9.0%

4.0%

10%

5%

2010

Assumed health-care trend rates have a significant effect on the expense and liabihties for other postretirement benefit plans. The health care trend rate is based on historical rates and expected market conditions. A one-percentage point change in the expected health-care cost trend rates would have the following effects:

Effect on the health-care component o f the accrued other postretirement benefit obligation

Effect on total service and interest cost components o f net periodic postretirement health-care benefit cost

1-Percentage- 1-Percentage-Point Point

Increase Decrease

% 1,516 $ (1,483)

f 150 % (150)

49



limitations. The Company's matching contribution, recorded as compensation expense, was $1,289, $1,236 and $1,160 for the years ended December 31, 2006, 2005 and 2004, respectively.

Water and Wastewater Rates

On June 22, 2006, the Pennsylvania Public Utility Commission ("PAPUC") granted the Company's operating subsidiary in Pennsylvania a $24,900 base water rate increase, on an annualized basis. The rates in effect at the time of the filing included $12,397 in Distribution System Improvement Charges ("DSIC") or 5.0% above the prior base rates. Consequently, the total base rates increased by $37,297 and the DSIC was reset to zero. On August 5, 2004, the PAPUC granted Aqua Pennsylvania, Inc. a $13,800 base rate increase. The rates in effect at the time of the filing included $11,200 in Distribution System Improvement Charges ("DSIC") or 5.0% above the prior base rates. Consequently, the total base rates increased by $25,000 and the DSIC was reset to zero.

In May 2004, the Company's operating subsidiary in Texas filed an application with the Texas Commission on Environmental Quality ("TCEQ") to increase rates, on an annualized basis, by $11,920 over a multi-year period. The application seeks to increase annual revenues in phases and is accompanied by a plan to defer and amortize a portion of the Company's depreciation, operating and other tax expense over a similar multi-j'ear period, such that the impact on operating income approximates the requested amount during the first years that the new rates are in effect. The application is currently pending before the TCEQ and several parties have joined the proceeding to challenge the rate request. The Company commenced billing for the requested rates and implemented the deferral plan in August 2004, in accordance with authorization from.the TCEQ in July 2004. The additional revenue billed and collected prior to the final ruling is subject to refund based on the ' outcome of the ruling. The revenue recognized and the expenses deferred by the Company reflect an estimate of the final outcome of the ruling. In the event the Company's request is denied completely or in part, the Company could be required' to refund some or all of the revenues billed to date, and write-off some or all of the regulatory asset for the expense deferral. In

ecember 2006, the TCEQ held hearings and issued a rate schedule tliat provided further ciarification and an indication of the xpected outcome of the rate proceeding. Based on the Company's review of the present circumstances and as a result of the

December 2006 hearings, the Company has revised its estimates of the final outcome of the TCEQ proceeding. During the fourth quarter of 2006, rhe revenue reserve was adjusted and additional revenues were recognized of $1,487 and the regulatory asset was increased resulting in lower expenses recognized of $1,199. As of December 31, 2006, \ e have deferred $12,382 of operating costs and $2,804 of rate case expenses and recognized $14,859 of revenue that is subject to refund based on the outcome of the final commission order.

The Company's other operating subsidiaries were allowed annual rate increases of $7,366 in 2006, $5,142 in 2005 and $6,673 in 2004, represented by thirty-two, twenty-three and fourteen rate decisions, respectively. Revenues from these increases realized in the year o f grant were approximately $3,580, $3,144 and $3,995 in 2006, 2005 and 2004, respectively.

Six states in which the Company operates permit water utilities, and in two 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 York, Indiana and Missouri allow for the use of infrastructure rehabihtation surcharges. These mechanisms typically adjust periodically based on additional qualified capital expenditures completed or anticipated in a future period. The infrastrucrure rehabilitation surcharge is capped as a percentage of base rates, generally at 5% to 9% of base rates, and is reset to zero when new base rates that reflect the costs of those additions become effective or when a utility's earnings exceed a regulatory benchmark. Infrastructure rehabilitation surcharges provided revenues in 2006, 2005 and 2004 of $7,873, $10,186 and $7,817, respectively.

51

Selected Quarterly Financial Data (Unaudited) (In thousands of dollars, except per share amounts)

Aqua America, Inc. and Subsidiaries

First Second Third Fourth

Quarter Quarter Q uarter Q uarter Year 2006 Operating revenues % 117,949 S 131,749 $ 146,950 S 136,843 $ 533,491 Operations and maintenance expense 51,316 55,433 59,127 53,684 219,560 Operating income 40,622 50,089 59,523 55,313 205,547

Net income 16,564 22,386 27,331 25,723 92,004

Basic net income per common share 0.13 0.17 0.21 0.19 0.70

Diluted net income per common share 0.13 0.17 0.21 0.19 0.70 Dividend paid per common share 0.1069 0.1069 0.1150 0.1150 0.4438 Dividend declared per common share 0.1069 0.1069 0.2300 - 0.4438 Price range o f common stock - high 29.79 27.82 23.93 24.94 29.79 - low 26.50 20.13 21.13 21.54 20.13

2005 Operating revenues % 113,988 J 123,100 $ 136,783 $ 122,908 % 496,779 Operations and maintenance expense 47,309 50,891 52,666 52,222 203,088 Operating income 42,771 48,593 59,091 46,052 196,507

Net income 18,871 22,218 27,917 22,150 91,156 Basic net income per common share 0.15 0.17 0.22 0.17 0.72 Diluted net income per common share 0.15 0.17 0.21 0.17 0.71 Dividend paid per common share 0.0975 0.0975 0.0975 0.1069 0.3994 Dividend declared per common share 0.0975 0.0975 0.2044 - 0.3994 Price range o f common stock

- high 19.37 23.24 29.15 29.22 29.22 .- low 17.49 18.03 21.61 22.88 17.49

High and low prices of the Company's common stock are as reported on the New York Stock Exchange Composite Tape. The cash dividends paid in December 2006 of $0,115 and December 2005 of $0.1069 were declared in September 2006 and August 2005, respectively.

53

AQUA AMERICA, INC. AND SUBSIDIARIES • INVESTOR RELATIONS INFORMATION

Financial Reports and Investor Relations

•ies of the company's public financial reports, including annual reports and Forms 10-K and 10-Q, are available on line can be downloaded from the investor relations section of our Web site at www.aquaamerica.com. You may also obtain

these reports by writing to us at: ATTN: Investor Relations Aqua America, Inc. 762 W. Lancaster Avenue Bryn Mawr, PA 19010-3489 www.aquaamerica.com

Corporate Governance We are committed to maintaining high standards of corporate governance and are in compliance with the corporate 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 Web site www.aquaamerica.com or requests-may be directed to rhc address above. Amendments to the Code, and any grant of waiver from a provision of the Code requiring disclosure under applicable SEC rules will be disclosed on our Web site. As required under Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a) under the Securities and Exchange Act of 1934, Aqua America's chief execurive officer and chief financial officer have performed the required certification for 2006 without exception and their certifications were filed as Exhibits 31.1 and 31.2 to our Form 10-K for 2006. You may access this report and our other SEC filings from our Web site. In addition, in 2006 the company's chief executive officer provided to the New York Srock Exchange the Annual CEO certification regarding the company's compliance with the New York Stock Exchange's corporate governance listing standards.

Annual Meeting 10:00 a.m. Eastern Daylight Time Thursday, May 24, 2007

•ingfield Country Club I WestSproui Road

Springfield, PA 19064

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 St. Philadelphia, PA 19103-7042

Stock Exchanges The Common Stock of the company is listed on the New York Stock Exchange and the Philadelphia Stock Exchange under the ticker symbol WTR. The daily closing price is printed in The Wall Street Journal as AquaAmer. Listings might vary in other major newspapers.

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

percent discount from a price based on the market value of the stock. In addition, shareholders may purchase additional !tres 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.coni. Please read the prospectus carefully before you invest.

55

U C 5 ]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

. WASHINGTON DC 20549

FORM 10-Q (Mark One)

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

For the quarterly period ended June 30, 2007

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

For the transition period from to

Commission File Number 1-6659

AQUA AMERICA. INC. (Exact name of registrant as specified in its charter)

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12bT2 of the Exchange Act.

Large Accelerated Filer X Accelerated Filer Non-Accelerated Filer

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

^^idicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 23, 2007.

132,967.789.

Page


TABLE OF CONTENTS .

Part I - Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets (unaudited) - June 30, 2007 and December 31, 2006 2

Consolidated Statements of Income and Comprehensive Income (unaudited) -Six Months Ended June 30, 2007 and 2006 3

Consolidated Statements of Income and Comprehensive Income (unaudited) -Three Months Ended June 30, 2007 arid 2006 4

Consolidated Statements of Capitalization (unaudited) -June 30, 2007 and December 3 f, 2006 5

Consolidated Staternent.of Common Stockholders' Equity (unaudited) -Six Months Ended June 30, 2007 6

Consolidated Statements of Cash Flow (unaudited) -

Six Months Ended June 30, 2007 and 2006 7

Notes to Consolidated Financial Statements (unaudited) 8

Item 2. Management's Discussion and Analysis of Financial

Condition and Results of Operations ' 19

Item 3. Quantitative and Qualitative Disclosures About Market Risk 24

Item 4. Controls and.Procedures 24

Part II - Other Information

Item 1. Legal Proceedings 25

Item 1 A.Risk Factors - 25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26

Item 4. Submission of Matters to a Vote of Security Holders 27

Item 6. Exhibits 27 ignatures 28

Exhibit Index 29

Part I - Financial Information Item 1. Financial Statement AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (In thousands of dollars, except per 'share amounts)

(UNAUDITED)

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 Materials and supplies Prepayments and other current assets Total current assets

Regulatory assets Deferred charges and other assets, net Funds restricted for construction activity Goodwill

Liabilities and Stockholders' Equity Common stockholders' equity:

Common stock at $.50 par value, authorized 300,000,000 shares, issued 133,601,217 and 133,017,325 in 2007 and 2006

Capital in excess of par value Retained earnings Treasury stock, 688,746 and 691,746 shares in 2007 and 2006 Accumulated other comprehensive income Total common stockholders' equity

Minority interest Long-term debt, excluding current portion Commitments and contingencies

Current liabilities: Current portion of long-term debt Loans payable Accounts payable Accrued interest Accrued taxes Other accrued liabilities 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 notes to consolidated financial statements beginning on page 8 ofthis report.

June 30, December 31, 2007 2006

$ 3,398,777 $ 3,185,111 751,999 679,116

2,646,778 2,505,995

11,498 44,039 89,432 72,149 9,859 8,359 8,310 10,153

119,099 134,700

177,542 165,063 39,724 38,075 58,898 11,490 34,493 22,580

$ 3,076,534 $ 2,«77,i)03

$ 66,801 $ 66,509 560,742 548,806 329,225 319,113 (12,914) (12,992)

412 194 944,266 921,630

1,858 1,814 1,040,069 951,660

34,169 31,155 175,451 119,150 26,729 49,406 15,701 • 14,050 11,878 19,350 20,857 22,500 284,785 255,611

287,104 273,199 76,892 76,820 12,519 11,592 85,213 64,879 461,728 426,490

343,828 320,698

$ • 3,076,534 $ 2,877,903


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share amounts)

(UNAUDITED) '

Operating revenues

Costs and'expenses: Operations and maintenance Depreciation Amortization Taxes other than income taxes

Six Months Ended June 30,

Operating income

Other expense (income): Interest expense, net Allowance for funds used during construction Gain on sale of other assets


Net income Other comprehensive income, net of tax:

Unrealized holding gain on-investments Comprehensive' income

Net income per common share: -Basic Diluted


Cash dividends declared per common share

2007 2006

$ 287,925 $ 249,698

123,629 106,749 40,592 34,085 2,442 2,002 22,747 16,151 189,410 158,987

98,515 90,711

32,990 28,916 . (1,463) (2,198)

(388) (743) 67,376 64,736 26,791 25,786

$ 40,585 3 J 38,950

$ 40,585 3 38,950

218 199 $ 40,803 5 39,149

$ 0.31 J 0.30 $ 0.30 J 0.30

132,504 129,522 133,404 130,734

$ 0.2300 $ 0.2138

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


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share amounts)

(UNAUDITED)

Three Months Ended June 30,

Operating revenues

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


Net income Other comprehensive income, net of tax: Unrealized holding gain.on investments

Comprehensive income

Net income per common share: Basic Diluted


Cash dividends declared per common share

2007 2006

$ 150,624 : $ 131,749

63,334 55,433 • 20,456 17,255

1,233 888 10,831 . 8,084 95,854 81,660

54,770 50,089

16,441 14,744 (742) (1,280) (319) • (476)

39,390 37,101 15,663. 14,715

$ 23,727 * E 22,386

$ 23,727 3 3 22,386

213 199 $ 23,940 3 ! 22,585

$. 0.18 3 ; cn S 0.18 3 > 0.17

132,652 129,860 133,520 130,952

$ 0.1150 3 ; 0.1069



CONSOLDDATED STATEMENTS OF CAPITALIZATION (In thousands of dollars, except per share amounts)

(UNAUDITED)

Common stockholders' equity: Common stock, $.50 par value Capital in excess of par value Retained earnings Treasury stock Accumulated other comprehensive income

Total common stockholders' equity

Long-term debt: Long-term debt of subsidiaries (substantially secured by utii

Interest Rate Range 0.00% to 2.49% 2.50% to 2.99% 3.00% to 3.49% 3.50% to 3.99% 4.00% to 4.99% 5.00% to 5.49% 5.50% to 5.99% 6.00% to 6.49% 6.50% to 6.99% 7.00% to 7.49% 7.50% to 7.99% 8.00% to 8.49% 8.50% to 8.99% 9.00%) to 9.49% 9.50% to 9.99% 10.00% to 10.50%

Unsecured notes payable, 4.87%), maturing in various installments 2010 through 2023

Unsecured notes payable, 5.95%, due in 2023 through 2034 Unsecured notes payable, 5.64%, due in 2014 through 2021 Unsecured notes payable, 5.54%, due in 2013 through 2018 Unsecured notes payable, 5.01%, due 2015 Unsecured notes payable, 5.20%, due 2020 Unsecured notes payable, 5.63%, due 2022 Unsecured notes payable, 5.83%), due 2037 Unsecured notes payable, 5.50%, due 2017 Notes payable, 6.05%, maturing in 2007 and 2008

Current portion of long-term debt Long-term debt, excluding current portion Total capitalization

June 30, December 31 2007 2006

$ 66,801 $ 66,509 560,742 548,806 329,225 319,113 (12,914) (12,992)

412 194 944,266 921,630

29,655 25,740 25,538 25,272 5;089 17,220 5,532 6,073

80,615 30,645 274,610 262,496 86,500 79,000 97,730 94,360 22,000 22,000 10,979 13,288 24,656 24,778 26,174 26,288 9,000 9,000

43,968 46,101 38,244 38,738 6,000 6,000

786,290 726,999

135,000 135,000 40,000 40,000 20,000 20,000 30,000 30,000 18,000 18,000 12,000 12,000 15,000 -15,000 -2,132 -

816 816 1,074,233 982,815

34,169 31,155 1,040,069 951,660

JS 1,984,335 $ 1,873,290



CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY (In thousands of dollars)

(UNAUDITED)

Capital in

Common excess of Retained

Stock par value earnings

Accumulated

Other

Treasury Comprehensive

Stock Income Balance at December 31,2006 Net income Other comprehensive income:

unrealized holding gain on investments, net of income tax of $ 117

Dividends paid Sale of.stock (232,439 shares) Repurchase of stock (11,049 shares) Equity Compensation Plan (55,000 shares) Exercise of stock options (310,502 shares) Stock-based compensation Employee stock plan tax benefits Balance at June 30, 2007

66,509 $ 548,806 $319,113 $(12,992) $ 40,585

(30,473) 109

28 155

4,612

(28) 3,755 2,626

971

330 (252)

Total 194 $

218

921,630 40,585

218 (30,473)

5,051 (252)

3,910 2,626

971 $ 66,801 $ 560,742 $329,225 $(12,914) $ 412 $ 944,266



CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands of dollars)

(UNAUDITED)

Cash flows from operating activities: Net income Adjustments to reconcile net income to net . cash flows from operating activities: Depreciation and amortization Deferred income taxes Gain on sale of other assets Stock-based compensation Net increase'in receivables, inventory and prepayments Net decrease in payables, accrued interest, accrued

taxes and other accrued liabilities Other

Net cash flows from operating activities Cash flows from investing activities:

Property, plant and equipment additions, including allowance for funds used during construction of $1,463 and $2,198

Acquisitions of utility systems and other, net Proceeds from the sale of other assets Additions to funds restricted for construction activity Release of funds previously restricted for construction activity Other'

Net cash flows used in investing activities Cash flows from financing activities:

Customers' advances and contributions in aid of construction Repayments of customers' advances Net proceeds (repayments) of short-term debt Proceeds from long-term debt Repayments of long-term debt Change in cash overdraft position Proceeds from exercised stock options Stock-based compensation windfall tax benefits Proceeds from issuing common stock Repurchase of common stock Dividends paid on common stock

Net cash flows from financing activities

Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period


2007 2006

$ 40,585 $ 38,950

43,034 36,087 4,797 4,863 (388) (743)

2,344 1,929 (14,875) (7,631)

(19,807) (29,941) 5,250 4,527

60,940 48,041

(107,669) (121,936) (41,346) (2,804)

1,067 753 (49,890) (1,544)

4,159 21,166 1,880 (256)

(191,799) (104,621)

5,308 5,367 (2,324) (1,908) 56,301 (7,266) 85,990 45,814

(19,242) (20,130) (6,646) 11,257 3,910 5,405

695 1,501 5,051' 42,308 (252) (692)

(30,473) (27,649) 98,318 54,007

(32,541) (2,573) 44,039 11,872

$ 11,498 $ 9,299

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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 1 • Basis of Presentation

The accompanying consolidated balance sheets and statements of capitalization of Aqua America, Inc. (the "Company") at June 30, 2007, the consolidated statements of income and comprehensive income for the six months and three months ended June 30, 2007 and 2006, the consolidated statements of cash flow for the six months ended June 30,2007 and 2006, and the consolidated statement of common stockholders' equity for the six months ended June 30, 2007, are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in common st6ckholders, equity, the consolidated results of operations, and the consolidated cash flow for the periods presented. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial. statements and, therefore, should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2006 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2007. The results of operations for interim periods may not be indicative of the results tliat may be expected for the entire year.

ote 2 Goodwill

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

Regulated Segment Other Consolidated

Balance at December 31, 2006 $ 18,537 : $ 4,043 $ 22,580 Goodwill acquired during year 11,848 - .11,848 Reclassifications to utility plant

acquisition adjustment (12) - (12) Other (3) 80 77 Balance at June 30, 2007 $ 30,370 I B 4,123 $ 34,493

In January 2007, the Company recorded goodwill of $10,808 upon completing its acquisition of New York Water Service Corporation. In April 2007, the Company recorded goodwill of $1,040 upon completing the acquisition of Aquarion Water Company of Sea Cliff, Inc. .


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 3 Long-term Debt and Loans Payable

In January 2007, the Company's Pennsylvania operating subsidiary, Aqua Pennsylvania, Inc., issued $50,000 of tax-exempt bonds secured by a supplement to its first mortgage indenture at the following terms: $25,000.at 4,43% due 2040 and $25,000 at 4.44% due 204 L The proceeds are restricted to funding certain capital projects during the period 2007 through 2009. In March 2007, the Company issued $30,000 of unsecured notes of which $15,000 are due in 2022 with an interest rate of 5.63% and $15,000 are due in 2037 with an interest rate of 5.83%. Proceeds from the sales of these notes were used to repay short-term borrowings. During the first half of 2007, our operating subsidiaries issued notes payable in aggregate of $7,851 at rates ranging from 1.0% to 5.5% due from 2017 to 2035.

Note 4 Acquisitions

i

Pursuant to our strategy to grow through acquisitions, on January 1, 2007 the Company \ completed the acquisition of the capital stock of New York Water Service Corporation ("New j York Water") for $28,866 in cash, as adjusted pursuant to the purchase agreement primarily [ based on working capital at closing, and the assumption of $23,000 of long-term debt. The ! acquired operation provides water service to 44,792 customers in several water systems ' located in Nassau County, Long Island, New York. The operating results of New York Water i have been included in our consolidated financial statements beginning January 1, 2007. j Under the purchase method of accounting, the purchase price is allocated to the net tangible | and intangible assets based upon their estimate fair values at the date of the acquisition. The Company is in the process of finalizing the allocation of the purchase price. The purchase price allocation is as follows, subject to final adjustments: j

j January 1,

2007

Property, plant and equipment, net $ 42,057 Current assets 9,207 Other long-term assets 14,384 Goodwill 10,808 Total assets acquired 76,456

Current liabilities 1,852 Long-term debt 23,000 Other long-term liabilities 22,738 Total liabilities assumed 47,590

Net assets acquired $ 28,866



(UNAUDITED)

Note 5 Net Income per Common Share

Basic net income per common share is based on the weighted average number of common shares outstanding. Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The dilutive effect of employee stock options and shares issuable under the forward equity sale agreement (from the date the Company entered into the forward equity sale agreement to the settlement date) is included in the computation of diluted net income per common share. The dilutive effect of stock options and shares issuable under the forward equity sale agreement is calculated using the treasury stock method and expected proceeds upon exercise of the stock options and settlement of the forward equity sale agreement. The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share:

Six Months Ended Three Months Ended June 30, June 30,

2007 2006 2007 2006 Average common shares outstanding during

the period for basic computation Effect of dilutive securities:

132,504 129,522 132,652 129,860

Employee stock options Forward equity shares

839 61

1,212 819 49

1,092

Average common shares outstanding during the period for diluted computation 133,404 130,734 133,520 130,952

For the six months and three months ended June 30, 2007, employee stock options to purchase 1,151,700 shares of common stock 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. For the six months and three months ended June 30, 2006, employee stock options to purchase 610,100 shares of common stock 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.

10



(UNAUDITED)

Note 6 Stockholders' Equity

In August 2006, the Company entered into a forward equity sale agreement for 3,525,000 shares of common stock with a third-party (the "forward purchaser"). In connection with the forward equity sale agreement, the forward purchaser borrowed an equal number of shares of the Company's common stock from stock lenders and sold the borrowed shares to the public. The Company will not receive any proceeds from the sale of its common stock by the forward purchaser until settlement of the forward equity sale agreement. The actual proceeds to be received by the Company will vary depending upon the settlement date, the number of shares designated for settlement on that settlement date, and the method of settlement. The Company intends to use any proceeds received upon settlement of the forward equity sale agreement to fund the Company's future capital expenditure program and acquisitions, and for working capital and other general corporate purposes. The forward equity sale agreement is accounted for as an equity instrument and was recorded at a fair value of $0 at inception. It will not be adjusted so long as the Company continues to meet the accounting requirements for equity instruments.

The Company may elect to settle the forward equity sale agreement by means of a physical share settlement, net cash settlement, or net share settlement, on a settlement date or dates, no later than August 1, 2008. The forward equity sale agreement provides that the forward sale price will be computed based upon the initial forward sale price of $21.857 per share. Under limited circumstances or certain unanticipated events, the forward purchaser also has the ability to require the Company to physically settle the forward equity sale agreement in shares prior to the maturity date. The maximum number of shares that could be required to be issued by the Company to settle the forward equity sale agreement is 3,525,000 shares.

. As of June 30, 2007, a net cash settlement under the forward equity sale agreement would have resulted in a payment by the Company to the forward purchaser of $1,008 or a net share settlement would have resulted in the issuance of 44,827 shares by the Company to the forward purchaser. For each increase or decrease of one dollar in the average market price of the Company's common stock above or below the forward sale price on June 30, 2007, the cash settlement option from the Company's perspective would decrease or increase by $3,525 and the net share settlement option would decrease by 150,064 shares or increase by 164,030 shares, respectively.

11



(UNAUDITED)

Note 7 Stock-based Compensation

Under the Company's 2004 Equity Compensation Plan (the "2004 Plan"), as approved by the shareholders to replace the 1994 Equity Compensation Plan (the "1994 Plan"), qualified and nonqualified stpck options may be granted to officers, key employees and "consultants at prices equal to the market price of the stock on the day of the grant. Officers and key employees may also be granted dividend equivalents and restricted stock. Restricted stock may also be granted to non-employee members of the Board of Directors. The 2004 Plan authorizes 4,900,000 shares for issuance under the plan. A maximum of 50% of the shares available for issuance under the 2004 Plan may be issued as restricted stock and the maximum number of shares that may be subject to grants under the plans to any one individual in any one year is 200,000. Awards under the 2004 Plan-are made by a committee of the Board of Directors. At June 30, 2007, 2,910,837 shares underlying stock option and restricted stock awards were still available for grant under the 2004 Plan, although under the terms of the 2004 Plan, terminated, expired or forfeited grants under the 1994 Plan and shares withheld to satisfy tax withholding requirements under the plan may be re-issued under the plan.

Siock Options-During the six months ended June 30, 2007 and 2006, the Company recognized compensation cost associated with stock options as a component of operations and maintenance expense of $1,634 and $1,490, respectively. During the three months ended June 30,2007 and 2006, the Company recognized compensation cost associated with stock options as a component of operations and maintenance expense of $867 and $828, respectively. For the six months ended June 30,2007 and 2006, the Company recognized income tax benefits . associated with stock options in its income statement of $239 and $ 183, respectively. For the three months ended June 30, 2007 and 2006, the Company recognized income tax benefits associated with stock options in its income statement of $ 132 and $21, respectively. In addition, the Company capitalized compensation costs associated with stock options within property, plant and equipment of $284 and $222 during the six months ended June 30, 2007 and 2006; and $132 and $125 during the three months ended June 30, 2007 and 2006, respectively.

The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model. The per share weighted-average fair value at the date of grant for stock options granted during the six months ended June 30, 2007 and 2006 was $5.52 and $7.82 per option, respectively. There were no stock options granted during the three months ended June 30, 2007 and 2006. The following assumptions were used in the application of this valuation model:

2007 2006 Expected term (years) 5.2 5.2 Risk-free interest rate 4.7% 4.7% Expected volatility 22.5% 25.8% Dividend yield 1.95% 1.76%

12



(UNAUDITED)

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

The following table summarizes, stock option transactions for the six months ended June 30, 2007:

Shares

Weighted' Average Exercise

Price Options:

Outstanding at beginning of period Granted Forfeited Expired Exercised

Outstanding at end of period

Exercisable at end of period

Weighted Average

Remaining Life (years)

Aggregate Intrinsic Value

3,364,778 613,850 (44,808) (20,742)

(310,502)

16.72 23.26 24.42 23.68 12.59

3,602,576 %—YXW 6.8 $ 20,290

2,393,671 $ 14.97 5.7 $ 19,286

Restricted Stock-During the six months ended June 30, 2007 and 2006, the Company recorded stock-based compensation related to restricted stock awards as operations and maintenance expense in the amounts of $710 and $439, respectively. During the three months ended June 30,2007 and 2006, the Company recorded stock-based compensation related to restricted stock awards as operations and maintenance expense in the amounts of $513 and $334, respectively. The following table summarizes nonvested restricted stock transactions for the six months ended June 30, 2007:

Number Weighted of Average

Shares Fair Value

Nonvested shares at beginning of period Granted Vested Forfeited

Nonvested shares at end of period

56,888 55,000

(37,443)

23.98 23.27 21.85

74,445 $ 24.53

13



(UNAUDITED)

NoteS Pension Plans and Other Postretirement Benefits

The Company maintains qualified defined benefit pension plans, nonqualified pension plans and other postretirement benefit plans for certain of its employees. The net periodic benefit cost is based on estimated values provided by independent actuaries. The following tables provide the components of net periodic benefit costs:

Pension Benefits Six Months Ended

June 30, Three Months Ended

June 30, • • 2007 2006 2007 2006

Service cost $ 2,478 $ 2,550 $ 1,221 $ 1,275 Interest cost 5,782 5,132 2,856 2,566 Expected return on plan assets (5,587) (4,750) (2,876) (2,375) Amortization of transition asset (87) (106) (58) (53) Amortization of prior service cost 95 116 64 . 58 Amortization of actuarial loss 794 960 533 480 Capitalized costs (l;290) (998) (697) (526) Net periodic benefit cost $ 2,185 $ 2,904 $ 1,043 % 1,425

Other Postretirement Benefits


Three Months Ended June 30,

2007 2006 2007 2006 Service cost 3 570 3 ' 560 $ 299 1 E 280 Interest cost 1,007 836 516 418 Expected return on plan assets (751) (640) (374) (320) Amortization of transition obligation 221 406 197 203 Amortization of prior service cost (199) (366) (177) (183) Amortization of actuarial loss 95 176 84 88 Amortization of regulatory asset 76 76 38 38 • Capitalized costs (454) (398) (244) (210) Net periodic benefit cost $ 565 $ 650 S 339 3 ; 314

The Company contributed $805 in April 2007 and $1,421 in July 2007 to its defined benefit pension plans and intends to contribute $6,202 during the balance of 2007. In addition, the Company expects to contribute approximately $3,382 for the funding of its other postretirement benefits during 2007.

14



(UNAUDITED)

Note 9 Water and Wastewater Rates

During the first six months of 2007, certain of the Company's operating divisions in New Jersey, Ohio, Virginia and four other states were granted rate increases designed to increase total operating revenues on an annual basis by approximately $5,321.

In December 2006, the Company's operating subsidiaries in Florida filed an application with the Florida Public Service Commission ("FPSC") designed to increase water and wastewater rates by $7,298 on an annual basis. The application is currently pending before the FPSC and in April 2007 the Company commenced billing for a portion of the requested rates, in accordance with authorization from the FPSC. The additional revenue billed and collected prior to the final ruling is subject to refund based on the outcome of the ruling. The revenue recognized by the Company reflects an estimate of the final outcome of the ruling. As of June 30, 2007, the Company has deferred $2,073 of rate case .expenses and recognized $571 of revenue that is subject to refund based on the outcome of the final commission order. In the event the Company's request is denied completely or in part, it could be required to

refund some or all of the revenue billed to date, and write-off some or all of the rate case expense deferral. Based on the Company's review of the present circumstances, no additional reserve or change in estimate adjustments are required for the revenue recognized to date or to the deferred rate case expense.

In 2004, the Company's operating subsidiaries in Texas filed an application with the Texas Commission on Environmental Quality ("TCEQ") to increase rates by $11,920 over a multi-year period. The application seeks to increase annual revenues in phases and is accompanied by a plan to defer and amortize a portion of the Company's depreciation, operating and other tax expense over a similar multi-year period, such that the impact on operating income approximates the requested amount during the first years that the new rates are in effect. The application is currently pending before the TCEQ and several parties have joined the proceeding to challenge the rate request. The Company commenced billing for the requested rates and implemented the deferral plan in 2004. The additional revenue billed and collected prior to the final ruling is subject to refund based on the outcome of the ruling. The revenue recognized and the expenses deferred by the Company reflect an estimate of the final outcome of the ruling. As of June 30, 2007, the Company has deferred $12,382 of operating costs and $3,169 of rate case expenses and recognized $20,247 of revenue that is subject to refund based on.the outcome of the final commission order. Based on the Company's review of the present circumstances, no additional reserve or change in estimate adjustments are required for the revenue recognized to date or to the deferred rate case expense.

15



(UNAUDITED)

Note 10 Taxes Other than Income Taxes

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

Six Months Ended Three Months Ended June 30, June 30,

2007 2006 2007 2006

Property $ 12,080 $ 6,835 $ 5,642 $ 3,557 Capital Stock 1,711 1,825 854 921 Gross receipts, excise and franchise 3,934 3,394 2,059 1,863 Payroll 3,635 . . 3,190 1,569 1,261 Other 1,387 907 707 482 Total taxes other than income $ 22,747 $ 16,151 $ 10,831 $ 8,084

Property taxes increased during the six months and three months ended June 30, 2007 primarily as a result of the acquisition of New York Water and the associated property taxes of $3,462 and $1,731, respectively.

16


NOTES TO CONSOLIDATE!) FINANCIAL STATEMENTS (continued) (In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 11 Segment Information

The Company has identified fourteen operating segments and has one reportable segment named the Regulated segment. The reportable segment is comprised of thirteen operating segments for our water and wastewater regulated utility companies which are organized by the states where we provide these services. In addition, one segment is not quantitatively significant to be reportable and is comprised of the businesses that provide on-site septic tank pumping, sludge hauling services and certain other non-regulated water and wastewater services. This segment is included as a component of "Other" in the tables below. Also included in "Other" are corporate costs that have not been allocated to the Regulated segment and intersegment eliminations.

The following tables present information about the Company's reportable segment:

Three Months Ended June 30, 2007

Three Months Ended June 30, 2006

Regulated Other Consolidated Regulated Other Consolidated Operating revenues $147,026 $ 3,598 $ 150,624 $130,746 $ 1,003 $ 131,749 Operations and

maintenance expense 60,932 2,402 63,334 54,428 1,005 55,433 Depreciation 20,911 (455) 20,456 17,947 (692) 17,255 Operating income 53,408 1,362 54,770 49,366 723 50 089 Interest expense,

net of AFUDC 15,136 563 1.5,699 10,549 2,915 13,464 Income tax 15,707 (44) 15,663 15,775 (1,060) 14,715 Net income 22,874 853 23,727 23,518 (1,132) 22,386

Six Months Ended Six Months Ended June 30, 2007 June 30, 2006

Regulated Other Consolidated Regulated Other Consolidated Operating revenues $281,614 5 6,311 $ 287,925 $247,784 $ 1,914 $ 249,698 Operations and

maintenance expense 118,520 5,109 123,629 106,601 148 106,749 Depreciation 41,495 (903) 40,592 35,475 (U390) 34,085 Operating income 97,086 1,429 98,515 87,868 2,843 90,711 Interest expense,

net of AFUDC 29,881 1,646 31,527 21,220 5,498 26,718 Income tax 27,591 (800) . 26,791 27,227 (1,441) 25,786 Net income 39,954 631 40,585 40,164 (1,214) 38,950 Capital expenditures 105,946 1,723 107,669 121,586 350 121,936

17



(UNAUDITED)

June 30, 2007

December 31, 2006

Total assets: Regulated $ 3,053,623 $ 2,819,385 Other 22,911 58,518 Consolidated $ 3,076,534 $ 2,877,903

Note 12 Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109," which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted the provisions of FIN 48 as of January 1, 2007 and has analyzed filing positions in its federal and state jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions.' The Company's reserve for uncertain tax positions was insignificant upon adoption of FIN 48 and the Company did not record a cumulative effect adjustment related to the adoption of FIN 48. The Company believes its income tax filing positions and deductions will be sustained under audit and it believes it does not have significant uncertain tax positions that, in the event of adjustment, will result in a material effect on its results of operations or financial position. The Company has elected to recognize accrued interest and penalties related to uncertain tax positions as income tax expense. As of June 30, 2007, the Company's Federal income tax'returns for all years through 2002 have been closed. Tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions to which we are subject, however, 2004 and 2005 Federal income tax returns have been settled through examination.

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


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Forward-looking Statements

This Mamgement's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of1995. These forward-looking statements address, among other things: our use of cash; projected capital expenditures; liquidity; possible acquisitions and other growth ventures; the completion of various construction projects; the projected timing and annual value of rate increases; the recovery of certain costs and capital investments through rate increase requests; the projected effects of recent accounting pronouncements, as well as information contained elsewhere in this report where statements are preceded by, followed by or include the words "believes," "expects," "anticipates," "plans," "intends," "will," "continue" or similar expressions. These statements are based on a number of assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside our control. Actual results may differ materially from such statements for a number of reasons, including the effects of regulation, abnormal weather, changes in capital requirements and funding, acquisitions, and our ability to assimilate acquired operations. In addition to these uncertainties or factors, our future results may be affected by the factors and risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

General Infonnation

Nature of Operations - Aqua America, Inc. ("we" Or "us"), a Pennsylvania corporation, is the holding company for regulated utilities providing water or wastewater services to what we estimate to be approximately 2.8 million people in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, New York, Florida, Indiana, Virginia, Maine, Missouri, and South Carolina. Our largest operating subsidiaiy, Aqua Pennsylvania, Inc., provides water or wastewater services to approximately one-half of the total number of people we serve, which are located in the suburban areas north and west of the City of Philadelphia and in 23 other counties in Pennsylvania. Our other subsidiaries provide similar services in 12 other states. In addition, we provide water and wastewater service through operating and maintenance contracts with municipal authorities and other parties, and septage hauling services, close to our utility companies' service territories.

19


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)


Financial Condition

During the first half of2007, we had $107,669 of capital expenditures, acquired water and wastewater systems for $41,346, repaid $2,324 of customer advances for construction and repaid debt and made sinking fiind contributions and other loan repayments of $19,242. The capital expenditures were related to improvements to treatment plants, new and rehabilitated water mains, . tanks, hydrants, and service lilies, well and booster improvements, and other.

At June 30, 2007, we had $11,498 of cash and cash equivalents compared to $44,039 at December 31, 2006. During the first half of 2007, we used the proceeds from the issuance of long-term debt, the proceeds from the issuance of common stock, internally generated funds and available working capital to fund the cash requirements discussed above and to pay dividends. In January 2007, our Pennsylvania operating subsidiary. Aqua Pennsylvania, Inc., issued $50,000 of tax-exempt bonds secured by a supplement to its first mortgage indenture with a weighted-average maturity of 33.5 years and with a weighted-average interest rate of 4.435%. The proceeds are restricted to funding certain capital projects during the period 2007 through 2009. In March 2007, the Company issued $30,000 of unsecured notes with a weighted-average maturity of 22.5 years and a weighted-average interest rate of 5.73%. We used the proceeds from the sales of these notes to repay short-term borrowings. During the first half of 2007, our operating subsidiaries issued notes payable in aggregate of $7,851 at rates ranging from 1.0% to 5.5% due from 2017 to 2035. At June 30, 2007, we had short-term lines of credit of $237,500, of which $62,049 was available.

Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt and common stock will be adequate to meet our financing requirements for the balance of the year and beyond.

Results of Operations

Analysis of First Six Months of 2007 Compared to First Six Months of 2006

Revenues for the first six months increased $38,227 or 15.3% primarily due to additional revenues of $20,483 resulting from increased water and wastewater rates implemented in various operating subsidiaries, additional revenues of $15,447 associated with acquisitions, and $1,171 of additional sewer revenues. Acquisitions provided additional operating revenues in the Regulated segment of $11,350, primarily from the New York Water Service acquisition, and $4,097 of additional revenues in Other as provided by the acquisition of several septage businesses during 2006.

Operations and maintenance expenses increased by $16,880 or 15.8% primarily due to additional expenses associated with acquisitions of $8,072, increased water production costs of $2,101, additional bad debt expense of $865, the receipt in the first quarter of 2006 of $1,500 relating to a

20




waiver of certain contractual rights without a corresponding amount in the current year, and normal increases in other operating costs. Of the total acquisition expenses, $4,338 was associated with the New York Water Service acquisition that was completed on January 1, 2007 and other acquisitions, in the Regulated segment. The receipt of the $1,500 was a one-time payment recognized in the first quarter of 2006 as a reduction to operations and maintenance expense. The increased water production costs, principally purchased power and chemicals, were associated with vendor price

. increases.

Depreciation expense increased $6,507 or 19.1% reflecting the utility plant placed in service since June 30,2006, including.the assets acquired through system acquisitions.

Amortization increased $440 or.22.0% due to the amortization of the costs associated with, and otiier costs being recovered in, various rate filings.

Taxes other than income taxes increased by $6,596 or 40.8% due to additional property taxes associated with the acquired operations of New York Water Service of $3,462, and additional state and local taxes incurred in the first half of 2007.

Interest expense increased by $4,074 or 14.1% primarily due to additional borrowings to finance capital projects and increased interest rates on short-term borrowings.

Allowance for funds used during construction ("AFUDC") decreased by $735 primarily due to a decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied; offset partially by an increase in the AFUDC rate which is based on short-term interest rates.

Gain on sale of other assets totaled $388 in the first half of 2007 and $743 in the first half of 2006. The decrease of $355 is due to the timing of sales of land.

Our effective income tax rate was 39.8% in the first half of 2007 and 2006. The effective income tax rate can vary over time due to changes in our expenses that are not tax-deductible.

Net income for the first six months increased by $ 1,635 or 4.2%, in comparison to the same period in 2006 primarily as a result of the factors described aboye. On a diluted per share basis, earnings were unchanged reflecting the change in net income and a 2.0% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through the employee stock and incentive plan, dividend reinvestment plan and the 2,250,000 additional shares issued by us in public offerings in June and August 2006.

21

- AQUA AMERICA, INC. AND SUBSIDIARIES

. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)


Analysis of Second Quarter of 2007 Compared to Second Quarter of 2006

Revenues for the quarter increased $ 18,875 or 14.3% primarily due to additional revenues of $ 10,144 resulting from increased water and wastewater rates implemented in various operating subsidiaries, additional revenues of $8,522 associated with acquisitions, and $406 of additional sewer revenues. Acquisitions provided additional operating revenues in the Regulated segment of $6,100, primarily from the New York Water Service acquisition, and $2,422 of additional revenues in Other as provided by the acquisition of several septage businesses during 2006.

Operations and maintenance expenses increased by $7,901 or 14.3% primarily due to additional expenses associated with acquisitions of $4,803, increased water production costs of $921, additional bad debt expense of $410 and normal increases in other operating costs. Of the total acquisition expenses, $2,844 were associated with the New York Water Service acquisition that was completed on January 1, 2007 and other acquisitions in the Regulated segment. The increased water production costs, principally purchased power and chemicals, were associated with vendor price increases.

Depreciation expense increased $3,201 or 18.6% reflecting the utility plant placed in service since June 30, 2006, including the assets acquired through system acquisitions.

Amortization increased $345 or 38.9% due to the amortization of the costs associated with, and other costs being recovered in, various rate filings.

Taxes other than income taxes increased by $2,747 or 34.0% due to additional property taxes associated with the acquired operations of New York Water Service of $1,731, and additional state and local taxes incurred in the second quarter of 2007.

Interest expense increased by $1,697 or 11.5% primarily due to additional borrowings to finance capital projects and increased interest rates on short-term borrowings.

Allowance for funds used during construction ("AFUDC") decreased by $538 primarily due to a •decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied; offset partially by an increase in the AFUDC rate which is based on short-term interest rates.

Gain on sale of other assets totaled $319 in the second quarter of 2007 and $476 in the second quarter of 2006. The decrease of $157 is due to the timing of sales of land.

Our effective income tax rate was 39.8% in the second quarter of 2007 and 39.7% in the second quarter of2006. The change was due to a decrease in our expenses that are not tax-deductible.

Net income for the quarter increased by $1,341 or 6.0%, in comparison to the same period in 2006 primarily as a result of the factors described above. On a diluted per share basis, earnings increased

22




$0.01 reflecting the change in net income and a 2.0% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the additional shares sold or issued through the employee stock and incentive plan, dividend reinvestment plan and the 2,250,000 additional shares issued by us in public offerings in June and August 2006.

Impact of Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation " No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109," which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We adopted the provisions of FIN 48 as of on January 1, 2007 and have analyzed filing positions in its federal and state jurisdictions where we. are required to file income tax returns, as well as for all open tax years in these jurisdictions. Our reserve for uncertain tax positions was insignificant upon adoption of FIN 48 and we did not record a cumulative effect adjustment related to the adoption of FIN 48. We believe our income tax filing positions and deductions will be sustained under audit and we believe we do not have significant uncertain tax positions that, in the event of adjustment, will result in a material effect on our results of

• operations or financial position. We have elected to recognize accrued interest and penalties related to uncertain tax positions as income tax expense. As of June 30, 2007, our Federal income tax returns for all years through 2002 have been closed. Tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions to which we are subject, however, 2004 and 2005 Federal income tax returns have been settled through examination.

Recent Events

The City of Fort Wayne, Indiana has authorized the acquisition, by eminent domain or otherwise, ofa portion of the utility assets of one of the operating subsidiaries that the Company acquired in connection with the AquaSource acquisition in 2003. We had challenged whether the City is following the correct legal procedures in connection with the City's attempted condemnation and a recent Indiana Supreme Court ruling supported the City's position. We continue to challenge the City's valuation of this portion of our system. The portion of the system under consideration represents approximately 1% of our total customer base. While we continue to discuss this matter with officials from the City of Fort Wayne, we continue to legally protect our interests in this proceeding.

23


Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. There have been no significant changes in our exposure to market risks since December 31,2006. Refer to Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2006 for additional information.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

(b) Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

24


Part 0. Other Infonnation

Item 1. • Legal Proceedings

In December 2006, the Company's operating subsidiaries in Florida filed an application with the Florida Public Service Commission ("FPSC"). The application is currently pending before the FPSC and in April 2007 the Company commenced billing for a portion of the requested rates, in accordance with authorization from the FPSC. The additional revenue billed and collected prior to the final ruling is subject to refund based on the outcome of the ruling. The revenue recognized by the Company reflects an estimate of the final outcome of the ruling. In the event the Company's request is denied completely or in part, it could be required to refund some or all of the revenue billed to date, and write-off some or all of the rate case expense deferral. For more information, refer to <cNote 9 - Water and Wastewater Rates" to the Consolidated Financial Statements of Aqua' America, Inc. and subsidiaries in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

In 2004, our subsidiaries in Texas filed an application with the Texas Commission on Environmental Quality to increase rates over a multi-year period. In accordance with authorization from the Texas Commission on Environmental Quality, oiir subsidiaries commenced billing for the requested rates and deferred recognition of certain expenses for financial statement purposes. Several parties have joined the proceeding to challenge the rate request. In the event our request is denied completely or in part, we could be required to refund some or all of the revenue billed to-date, and write-off some or all of the regulatory asset for the expense deferral. For more information, see the description under the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2006, and refer to "Note 9 - Water and Wastewater Rates" to the Consolidated Financial Statements of Aqua America, Inc. and subsidiaries in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

There are no other pending legal proceedings lo which we or any of our subsidiaries is a pany or to which any of their properties is the subject that are material or are expected to have a material effect on our financial position, results of operations or cash flows.

Item 1 A. Risk Factors

There have been no material changes to the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006 ("Form 10-K") under "Part 1, Item 1A - Risk Factors". The risks described in our Form 10-K are not the only risks facing the Company. Additional risks that "we do not presently know or that we currently believe are immaterial could also impair our business or financial position.

25


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

The following table summarizes Aqua America's purchases of its common stock for the quarter ended June 30, 2007:

Issuer Purchases of Equity Securities

Total Maximum Number of Number of

Shares Shares Purchased that May as Part of Yet be

Total Publicly Purchased Number Average Announced Under the

of Shares Price Paid Plans or Plan or Period Purchased (1) per Share Programs Programs (2)

April 1 - 30, 2007 4,510 $ 22.58 - 548,278 May 1 -31,2007 - $ - - 548,278 June 1 -30, 2007 2,094 $ 22.26 - 548,278 Total 6,604 $ 22.48 - 548,278

(1) These amounts consist of shares we purchased from our employees who elected to pay the exercise price of their stock options (and then hold shares of the stock) upon exercise by delivering to us (and, thus, selling) shares of Aqua America common stock in accordance with the terms of our equity compensation plans that were previously approved by our shareholders and disclosed in our proxy statements. This feature of our equity compensation plans is'available to all employees who receive option grants under the plans. We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day prior to the option exercise.

(2) On August 5, 1997, our Board of Directors authorized a common stock repurchase program that was publicly announced on August 7, 1997, for up to 1,007,351 shares. No repurchases have been made under this program since 2000. The program has no fixed expiration date. The number of shares authorized for purchase was adjusted as a result of the stock splits effected in the form of stock distributions since the authorization date.

26


Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders of Aqua America, Inc. was held on May 24, 2007 at the Springfield Country Club, 400 West Sproul Road, Springfield, Pennsylvania, pursuant to the Notice sent on or about April 10, 2007 to all shareholders of record at the close of business on April 2, 2007. At that meeting the following nominees were elected as directors of Aqua America, Inc. for terms expiring in the year 2010 and received the votes set forth after their names below:

Name of Nominee For Withheld William P. Hankowsky 105,619,666 3,052,078 Richard L. Smoot 102,036,674 6,635,069

- Andrew!. Sordoni, UI 106,864,317 1,807,426

Since the Board of Directors is divided into three classes with one class elected each year to hold office for a three-year term, the term of office for the following directors continued after .the Annual Meeting: Mary C. Carroll; Nicholas DeBenedictis; Richard H. Glanton, Esq.; Lon R. Greenberg; Dr. Constantine Papadakis; and Ellen T. Ruff.

em 6. Exhibits

Exhibit No. Description

31.1 Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934.

31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934.

32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.

32.2 Certification of Chief Financial Officer, pursuant to118 U.S.C. Section 1350.

27

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to he-executed on its behalf by the undersigned thereunto duly authorized.

August 6, 2007

AOUA AMERICA, INC.-Registrant

NICHOLAS DEBENEDICTIS Nicholas DeBenedictis Chairman, President and Chief Executive Officer

DAVID P. SMELTZER David P. Smeltzer Chief Financial Officer

28

EXHIBIT INDEX

Exhibit No. Description

31.1 Certification of Chief Executive Officer, pursuant to Rule I3a-14(a) under the Securities and Exchange Act of 1934.

31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934.

32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.

32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.

29