Exhibit 13.1

SELECTED PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2009

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In thousands of dollars, except per share amounts)

FORWARD-LOOKING STATEMENTS

This report by Aqua America, Inc. (“Aqua America,” “we” or “us”) contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks, uncertainties and other factors, that may be outside our control and that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you can identify forward-looking statements where statements are preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “plans,” “future,” “potential” or the negative of such terms or similar expressions. Forward-looking statements in this report, include, but are not limited to, statements regarding:

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recovery of capital expenditures and expenses in rates;

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projected capital expenditures;

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availability and cost of capital financing;

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dividend payment projections;

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future financing plans;

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future pension contributions;

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

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acquisition-related costs and synergies;

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

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

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the impact of conservation awareness of customers and more efficient plumbing fixtures and appliances on water usage;

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the availability and cost of key production necessities, including power, chemicals and purchased water or wastewater services;

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the availability of qualified personnel;

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the return performance of our defined benefit pension plan assets;

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general economic conditions; and

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the impact of accounting pronouncements.

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:

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

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changes in government regulations and policies, including environmental and public utility regulations and policies;

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the decisions of governmental and regulatory bodies, including decisions on rate increase requests;

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our ability to file rate cases on a timely basis to minimize regulatory lag;

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

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abnormal weather conditions;

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changes in, or unanticipated, capital requirements;

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changes in our credit rating or the market price of our common stock;

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

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our ability to manage the expansion of our business;

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

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the effect of the loss of major customers;

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our ability to retain the services of key personnel and to hire qualified personnel as we expand;

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increasing difficulties in obtaining insurance and increased cost of insurance;

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

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changes in accounting pronouncements; and

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civil disturbance or terroristic threats or acts.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this report with the understanding that our actual future results, performance and achievements may be materially different from what we expect. These forward-looking statements represent our estimates and assumptions only as of the date of this report. Except for our ongoing obligations to disclose material information under the federal securities laws, we are not obligated to update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements. As you read this report, you should pay particular attention to the “Risk Factors” included in our Annual Report on Form 10-K.

OVERVIEW

The Company

Aqua America, Inc. is the holding company for regulated utilities providing water or wastewater services to what we estimate to be approximately 3.0 million people in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, New York, Florida, Indiana, Virginia, Maine, Missouri, South Carolina, and Georgia. Our largest operating subsidiary, Aqua Pennsylvania, Inc., accounted for approximately 52% of our operating revenues for 2009 and, as of December 31, 2009, provided water or wastewater services to approximately one-half of the total number of people we serve located in the suburban areas in counties north and west of the City of Philadelphia and in 25 other counties in Pennsylvania. Our other subsidiaries provide similar services in 13 other states. In addition, we provide water and wastewater service through operating and maintenance contracts with municipal authorities and other parties close to our utility companies’ service territories, as well as sludge hauling, septage and grease services, and backflow prevention services.

Aqua America, which prior to its name change in 2004 was known as Philadelphia Suburban Corporation, was formed in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania, Inc., formerly known as Philadelphia Suburban Water Company. In the early 1990s we embarked on a growth through acquisition strategy focused on water and wastewater operations. Our most significant transactions to date have been the merger with Consumers Water Company in 1999, the acquisition of the regulated water and wastewater operations of AquaSource, Inc. in 2003, the acquisition of Heater Utilities, Inc. in 2004, and the acquisition of New York Water Service Corporation in 2007. Since the early 1990s, our business strategy has been primarily directed toward the regulated water and wastewater utility industry and has extended our regulated operations from southeastern Pennsylvania to include operations in 13 other states.

Industry Mission

The mission of the investor-owned water utility industry is to provide quality and reliable water service at an affordable price to customers, while earning a fair return for shareholders. A number of challenges face the industry, including:

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strict environmental, health and safety standards;

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the need for substantial capital investment;

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economic regulation by state, and /or, in some cases, local government; and

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the impact of weather and drought conditions on water sales demand.

Economic Regulation

Most of our water and wastewater utility operations are subject to regulation by their respective state regulatory commissions, which have broad administrative power and authority to regulate rates and charges, determine franchise areas and conditions of service, approve acquisitions and authorize the issuance of securities. The regulatory commissions also establish uniform systems of accounts and approve the terms of contracts with affiliates and customers, business combinations with other utility systems, loans and other financings, and the franchise areas that we serve. The policies of the regulatory commissions often differ from state to state, and may change over time. A small number of our operations are subject to rate regulation by county or city government. The profitability of our utility operations is influenced to a great extent by the timeliness and adequacy of rate allowances in the various states in which we operate.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Rate Case Management Capability — We strive to achieve the industry’s mission by effective planning and efficient use of our resources. We maintain a rate case management capability to pursue timely and adequate returns on the capital investments that we make in improving or replacing water mains, treatment plants and other infrastructure. This capability is important to our continued profitability and in providing a fair return to our shareholders, and thus providing access to capital markets to help fund these investments. Accordingly, the objective of our rate case management strategy is to provide that the rates of our utility operations reflect, to the extent practicable, the timely recovery of increases in costs of operations, capital, taxes, energy, materials and compliance with environmental regulations. In pursuing our rate case strategy, we consider the amount of utility plant additions and replacements made since the previous rate decision, the changes in the cost of capital, changes in the capital structure and changes in operating and other costs. Based on these assessments, our utility operations periodically file rate increase requests with their respective state regulatory commissions or local regulatory authorities. In general, as a regulated enterprise, our water and wastewater rates are established to provide recovery of utility operating costs, taxes, interest on debt used to finance capital investments and a return on equity used to finance capital investments. Our ability to recover our expenses in a timely manner and earn a return on equity employed in the business determines the profitability of the Company.

Our water and wastewater operations are comprised of approximately 140 rate divisions, each of which requires a separate rate filing for the evaluation of the cost of service and recovery of investments in connection with the establishment of tariff rates for that rate division. Eight of the states in which we operate permit some form of consolidated rates in varying degrees for the rate divisions in that state, and two states currently permit us to fully consolidate rate filings state-wide. Due to the length of time since the last rate increase for some of our 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. Also, as a result of the condition of some of the systems acquired and the time needed to make the capital investments required to maintain compliance prior to requesting rates, some divisions have experienced or are experiencing longer periods of regulatory lag. 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. We are currently in active rate proceedings in 10 of our 14 states.

Revenue Surcharges — Six states in which we operate water utilities, and two states in which we operate wastewater utilities, permit us to add a surcharge to water or wastewater bills to offset the additional depreciation and capital costs associated with certain capital expenditures related to replacing and rehabilitating infrastructure systems. In all other states, water and wastewater utilities absorb all of the depreciation and capital costs of these projects between base rate increases without the benefit of additional revenues. The gap between the time that a capital project is completed and the recovery of its costs in rates is known as regulatory lag. The infrastructure rehabilitation surcharge mechanism is intended to substantially reduce regulatory lag, which often acts as a disincentive to water and wastewater utilities to rehabilitate their infrastructure. In addition, certain states permit our subsidiaries to use a surcharge or credit on their bills to reflect certain allowable changes in costs, such as changes in state tax rates, other taxes and purchased water, until such time as these changes in costs are fully incorporated in base rates.

Effects of Inflation — Recovery of the effects of inflation through higher water 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. Even during periods of moderate inflation, as has been experienced in 2009, 2008, and 2007, the effects of inflation on our operating results are noticeable. Two states allow annual inflationary index filings to help offset the effects of inflation on our operating costs.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Growth-Through-Acquisition Strategy

Part of our strategy to meet the industry challenges is to actively explore opportunities to expand our utility operations through acquisitions of water and wastewater utilities either in areas adjacent to our existing service areas or in new service areas, and to explore acquiring non-regulated businesses that are complementary to our regulated water and wastewater operations. To complement our growth strategy, we routinely evaluate the operating performance of our individual utility systems and in instances where limited customer-growth opportunities exist or where we are unable to achieve favorable operating results or a return on equity that we consider acceptable, we will seek to sell the utility system and reinvest the proceeds in other utility systems. Our growth-through-acquisition strategy allows us to operate more efficiently by sharing operating expenses over more utility customers and provides new locations for possible future growth. The ability to successfully execute this strategy and meet the industry challenges is largely due to our qualified and trained workforce, which we strive to retain by treating employees fairly and providing our employees with development and growth opportunities.

During 2009, we completed 18 acquisitions and other growth ventures which, along with the organic growth in our existing systems, represent 4,484 new customers. During 2008, we completed 9 acquisitions and other growth ventures which, along with the organic growth in our existing systems, represent 9,941 new customers. During 2007, we completed 26 acquisitions which, along with the organic growth in our existing systems, represent 23,909 new customers. In addition on January 1, 2007, we completed the acquisition of the capital stock of New York Water Service Corporation for $26,664 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 operating results of New York Water Service Corporation have been 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 and these customers are included in our customer count as of December 31, 2006. The acquisition was funded through the issuance of long-term debt that was issued in 2006.

In addition to acquisitions, from time to time, we sell utility systems or relinquish ownership in systems through condemnation. In February 2008, through a condemnation proceeding we turned over the northern portion of our Fort Wayne, Indiana system representing 10,921 customers. In addition, pursuant to our plan to evaluate and dispose of underperforming utility systems, we sold the following utility systems: in June 2009, we sold a water and wastewater utility system in Texas representing 561 customers, in August 2008 we sold a water and wastewater utility system in Illinois representing 11,598 customers, and in December 2007 we sold a water utility system in Virginia representing 1,304 customers.

We believe that utility acquisitions will continue to be the primary source of customer growth for us. With approximately 52,000 community water systems in the U.S., 83% of which serve less than 3,300 customers, the water industry is the most fragmented of the major utility industries (telephone, natural gas, electric, water and wastewater). In the states where we operate, we believe there are approximately 23,000 community water systems of widely-varying size, with the majority of the population being served by government-owned water systems.

Although not as fragmented as the water industry, the wastewater industry in the U.S. also presents opportunities for consolidation. According to the U.S. Environmental Protection Agency’s (EPA) most recent survey of wastewater treatment facilities (which includes both government-owned and privately-owned facilities) in 2004, there are approximately 16,600 such facilities in the nation serving approximately 75% 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 10,200 wastewater facilities in operation or planned in the 14 states where we operate. We also intend to explore opportunities in the non-regulated wastewater and septage businesses when they complement our utility companies.

Because of the fragmented nature of the water and wastewater utility industries, we believe that there are many potential water and wastewater system acquisition candidates throughout the United States. We believe the factors driving the consolidation of these systems are:

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the benefits of economies of scale;

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increasingly stringent environmental regulations;

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the need for substantial capital investment;

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limited access to cost-effective financing; and

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the need for technological and managerial expertise.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

We are actively exploring opportunities to expand our water and wastewater utility operations through acquisitions or otherwise. We intend to continue to pursue acquisitions of government-owned and privately-owned water and wastewater systems of all sizes that provide services in areas near our existing service territories or in new service areas. We continue to explore opportunities for the acquisition of other non-regulated wastewater service and septage businesses that are located near our existing markets, growing our existing revenue base in this business by offering the wastewater services to nearby residents with on-site sewer systems, adding new customers to this business and expanding the services that are provided to them.

Sendout

“Sendout” represents the quantity of treated water delivered to our distribution systems. We use sendout as an indicator of customer demand. Weather conditions tend to impact water consumption, particularly in our northern service territories during the late spring and summer months when nonessential and recreational use of water is at its highest. Consequently, a higher proportion of annual operating revenues is realized in the second and third quarters. In general during this period, an extended period of dry weather increases water consumption, while above average rainfall decreases water consumption. Also, an increase in the average temperature generally causes an increase in water consumption. Conservation efforts, construction codes which require the use of low flow plumbing fixtures, as well as mandated water use restrictions in response to drought conditions can adversely affect water consumption. We believe an increase in conservation awareness by our customers, including the increased use of more efficient plumbing fixtures and appliances, may result in a structural trend of decline in water usage per customer.

On occasion, drought warnings and water use restrictions are issued by governmental authorities for portions of our service territories in response to extended periods of dry weather conditions regardless of our ability to meet unrestricted customer water demands. The timing and duration of the warnings and restrictions can have an impact on our water revenues and net income. In general, water consumption in the summer months is affected by drought warnings and restrictions to a higher degree because discretionary and recreational use of water is highest during the summer months, particularly in our northern service territories. At other times of the year, warnings and restrictions generally have less of an effect on water consumption.

The geographic diversity of our utility customer base reduces the effect on Aqua America of our exposure to extreme or unusual weather conditions in any one area of our service territory. During the year ended December 31, 2009, our operating revenues were derived principally from the following states: 52% in Pennsylvania, 8% in Texas, 6% in Ohio, 6% in Illinois, and 6% in North Carolina.

Performance Measures Considered by Management

We consider the following financial measures to be the fundamental basis by which we evaluate our operating results: earnings per share, operating revenues, net income attributable to common shareholders and the dividend rate on common stock. In addition, we consider other key measures in evaluating our utility business performance within our Regulated segment: our number of utility customers, the ratio of operations and maintenance expense compared to operating revenues (this percentage is termed “operating expense ratio” or “efficiency ratio”); return on revenues (net income attributable to common shareholders divided by operating revenues); and return on equity (net income attributable to common shareholders divided by Aqua America stockholders’ equity). We review these measurements regularly and compare them to historical periods, to our operating budget as approved by the Aqua America, Inc. Board of Directors, and to other publicly-traded water utilities.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Our operating expense ratio is one measure that we use to evaluate our operating efficiency and management effectiveness in light of the changing nature of our company. During the past five years, our operating expense ratio has been effected over time due to a number of factors, including the following:

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Acquisitions — In general, acquisitions in certain areas may increase our operating expense ratio if the operating revenues generated by these operations are accompanied by a higher ratio of operations and maintenance expenses as compared to other operational areas of the company which are more densely-populated and have integrated operations. In these cases, the acquired operations are characterized as having relatively higher operating costs to fixed capital costs, in contrast to the majority of the Aqua America operations which generally consist of larger, interconnected systems, with higher fixed capital costs (utility plant investment) and lower operating costs per customer. In addition, in 2006 we completed several acquisitions of companies that provide on-site septic tank pumping and sludge hauling services. The cost-structure of these businesses differs from our utility companies in that these businesses have a much higher ratio of operations and maintenance expenses to operating revenues and lower capital investment and consequently a lower ratio of fixed capital costs versus operating revenues. As a result, the ratio of operating income compared to operating revenues is not comparable between the businesses. The non-regulated wastewater and septage service business is not a component of our Regulated segment.

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Regulatory lag — The efficiency ratio is influenced by regulatory lag (increases in operations and maintenance expenses not yet recovered in rates or a gap between the time that a capital project is completed and the start of its cost recovery in rates), or decreases in operating revenues without a commensurate decrease in operations and maintenance expense, such as changes in customer water consumption as impacted by adverse weather conditions or conservation trends.

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New accounting pronouncements — Beginning in 2006, our results reflect the effects of the adoption of the Financial Accounting Standards Board’s (FASB) accounting guidance for stock compensation, as we began to record compensation expense for the fair value of stock options granted. The effect of recording compensation expense for stock options increased our operations and maintenance expense by $2,531 in 2009, $2,997 in 2008, $3,223 in 2007 and $2,894 in 2006. Prior to 2006, no compensation expense related to granting of stock options had been recognized in the financial statements.

We continue to evaluate initiatives to help control operating costs and improve efficiencies.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Consolidated Selected Financial and Operating Statistics

Our selected five-year consolidated financial and operating statistics follow:

Years ended December 31,		2009 (a)				2008 (b)				2007 (c)				2006 (d)				2005
Utility customers:
Residential water			796,926				791,929				796,591				780,828				724,954
Commercial water			38,781				38,334				37,330				36,280				33,975
Industrial water			1,270				1,299				1,317				1,337				1,356
Other water			17,191				16,466				16,509				15,587				15,584
Wastewater			99,269				97,512				97,631				92,791				89,025
Total			953,437				945,540				949,378				926,823				864,894
Operating revenues:
Residential water		$	392,054			$	374,572			$	360,542			$	317,770			$	295,473
Commercial water			94,149				90,062				85,553				76,076				73,455
Industrial water			19,437				19,873				19,548				18,752				18,364
Other water			70,374				58,504				58,274				51,263				50,827
Wastewater			70,226				58,873				52,891				48,907				42,176
Other utility			12,665				13,278				12,935				13,525				13,161
Regulated segment total			658,905				615,162				589,743				526,293				493,456
Other			11,634				11,810				12,756				7,198				3,323
Consolidated		$	670,539			$	626,972			$	602,499			$	533,491			$	496,779
Operations and maintenance expense		$	270,060			$	262,122			$	253,092			$	219,560			$	203,088
Net income attributable to common shareholders		$	104,353			$	97,918			$	95,014			$	92,004			$	91,156
Capital expenditures		$	283,584			$	267,418			$	238,140			$	271,706			$	237,462
Operating Statistics
Selected operating results as a percentage of operating revenues:
Operations and maintenance			40.3	%			41.8	%			42.0	%			41.2	%			40.9	%
Depreciation and amortization			17.1	%			15.0	%			14.6	%			14.1	%			13.2	%
Taxes other than income taxes			7.2	%			7.1	%			7.5	%			6.2	%			6.4	%
Interest expense, net			10.2	%			10.9	%			11.1	%			10.9	%			10.4	%
Net income			15.6	%			15.6	%			15.8	%			17.2	%			18.3	%
Return on average Aqua America stockholders’ equity			9.6	%			9.6	%			10.0	%			10.6	%			11.7	%
Effective tax rates			39.4	%			39.7	%			38.9	%			39.6	%			38.4	%

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

RESULTS OF OPERATIONS

Our net income has grown at an annual compound rate of approximately 5.5% during the five-year period ended December 31, 2009. During the past five years, operating revenues grew at a compound rate of 8.7% and total expenses, exclusive of income taxes, grew at a compound rate of 9.9%.

Operating Segments

We have identified fifteen operating segments and we have one reportable segment based on the following:

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Fourteen segments are comprised of our water and wastewater regulated utility operations in the fourteen states where we provide these services. These operating segments are aggregated into one reportable segment since each of these operating segments has the following similarities: economic characteristics, nature of services, production processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment. Our single reportable segment is named the Regulated segment.

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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 addition to corporate costs that have not been allocated to the Regulated segment and intersegment eliminations. Corporate costs include certain general and administrative expenses, and interest expense.

Unless specifically noted, the following discussion and analysis provides information on our consolidated results of operations. The following table provides the Regulated segment and consolidated information for the years ended December 31, 2009, 2008, and 2007:

		2009												2008
						Other and												Other and
		Regulated				Eliminations				Consolidated				Regulated				Eliminations				Consolidated
Operating revenues		$	658,905			$	11,634			$	670,539			$	615,162			$	11,810			$	626,972
Operations and maintenance expense			260,587				9,473				270,060				251,799				10,323				262,122
Taxes other than income taxes			44,698				3,383				48,081				43,323				1,426				44,749
Earnings (losses) before interest, taxes, depreciation and amortization		$	353,620			$	(1,222	)			352,398			$	320,040			$	61				320,101
Depreciation and amortization											114,939												94,300
Operating income											237,459												225,801
Interest expense, net of AFUDC											65,736												64,898
Gain on sale of other assets											(472	)											(1,599	)
Provision for income taxes											67,842												64,584
Net income										$	104,353											$	97,918

		2007
						Other and
		Regulated				Eliminations				Consolidated
Operating revenues		$	589,743			$	12,756			$	602,499
Operations and maintenance expense			243,755				9,337				253,092
Taxes other than income taxes			44,011				1,369				45,380
Earnings before interest, taxes, depreciation and amortization		$	301,977			$	2,050				304,027
Depreciation and amortization											88,011
Operating income											216,016
Interest expense, net of AFUDC											63,968
Gain on sale of other assets											(3,494	)
Provision for income taxes											60,528
Net income										$	95,014

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Consolidated Results

Operating Revenues — The growth in revenues over the past five years is a result of increases in water rates, our customer base, and the acquisition of non-regulated operations. Rate increases implemented during the past three years have provided additional operating revenues of approximately $55,711 in 2009, $28,898 in 2008, and $25,658 in 2007. Offsetting our revenue growth from water rate increases in 2009 was a decrease in customer water consumption, which is largely due to unfavorable weather conditions in many of our service territories during 2009 that reduced water usage. The number of customers increased at an annual compound rate of 2.7% in the past five years primarily as a result of acquisitions of water and wastewater systems, including the January 1, 2007 acquisition of New York Water Service Corporation. If adjusted for the utility system dispositions during the past five years, the annual compound customer growth rate would have been 3.2%. The operating revenues and financial results of New York Water Service Corporation have been included in our consolidated financial statements beginning January 1, 2007. Acquisitions in our Regulated segment have provided additional water and wastewater revenues of approximately $4,637 in 2009, $5,859 in 2008, and $28,578 in 2007. Excluding the effect of acquisitions and dispositions, our customer base increased at a five-year annual compound rate of 1.3%. We believe the economy and its effect on our customer growth rate and water usage have affected the revenue comparison for 2009.

On November 18, 2009 our operating subsidiary in Pennsylvania filed an application with the Pennsylvania Public Utility Commission (“PAPUC”) designed to increase water rates by $43,200 or 11.8% on an annual basis. The Company anticipates a final order to be issued by August 2010.

On July 31, 2008, the PAPUC granted our operating subsidiary in Pennsylvania a water rate increase designed to increase total operating revenues by $34,428, on an annualized basis. The rates in effect at the time of the filing included $14,269 in Distribution System Improvement Charges (“DSIC”) or 5% above prior base rates. Consequently, the total base rates increased by $48,697 and the DSIC was reset to zero.

In May 2008, our operating subsidiary in Florida filed an application with the Florida Public Service Commission (“FPSC”) designed to increase water and wastewater rates by $8,374 on an annual basis. On April 1, 2009, the FPSC granted our operating subsidiary in Florida a $5,524 water and wastewater rate increase. In December 2006, our operating subsidiary in Florida had filed a rate application with the FPSC designed to increase water and wastewater rates by $7,298 on an annual basis. In April 2007, we had commenced billing for a portion of the requested rates, in accordance with authorization from the FPSC. However, during the third quarter of 2007 we reached a settlement agreement that, among other stipulations, resulted in us voluntarily withdrawing our application, and agreeing to refund the interim revenue billed that was associated with this rate application. As a result of this agreement, the Company wrote-off rate case expenses of $2,385 in 2007.

On September 23, 2008, the Texas Commission on Environmental Quality (“TCEQ”) issued its final ruling approving the rate application that was filed in 2004 by our operating subsidiary to increase rates, on an annualized basis, by $11,920 over a multi-year period beginning in 2004. The application sought to increase annual revenues in phases and was accompanied by a plan to defer and amortize a portion of our depreciation, operating and other tax expense over a similar multi-year period, such that the impact on operating income approximated the requested amount during the first years that the new rates were in effect. We commenced billing for the requested rates and implemented the deferral plan in 2004. As a result of the final order in 2008, the regulatory asset for the deferred operating costs and rate case expenses was set at $13,697. As of February 1, 2009, recovery of the regulatory assets for the deferred operating costs and rate case expenses began through two surcharge mechanisms. The final order had been appealed to the TCEQ by two parties, and the TCEQ has exercised its legal authority to take no action within the required period. As a result, the parties have filed suit against the TCEQ in an effort to appeal the order. The additional revenues billed and collected in connection with the case are subject to refund based on the outcome of the appeal. The revenue recognized and the expenses deferred by us reflect an estimate of the final outcome of the case. As of December 31, 2009, we have deferred $5,769 of operating costs and $1,449 of rate case expenses, and recognized $47,187 of revenue that is subject to refund based on the outcome of the appeal. Based on our review of the present circumstances, no reserve is considered necessary for the revenue recognized to date.

Our operating subsidiaries located in other states received rate increases representing estimated annualized revenues of $10,606 in 2009 resulting from seven rate decisions, $18,310 in 2008 resulting from twenty-two rate decisions, and $5,596 in 2007 resulting from twenty-three rate decisions. Revenues from these increases realized in the year of grant were approximately $7,561 in 2009, $7,531 in 2008, and $4,636 in 2007. As of December 31, 2009, our operating subsidiaries located in other states, currently have filed nine rate requests which are being reviewed by the state regulatory commissions, proposing an aggregate increase of $17,163 in annual revenues. During 2010, we intend to file nine additional rate requests proposing an aggregate of approximately $23,295 of increased annual revenues; however we can provide no assurance that the full amount of the requested rate increases will be granted.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Currently, Pennsylvania, Illinois, Ohio, New York, Indiana and Missouri allow for the use of infrastructure rehabilitation surcharges. In Pennsylvania, this mechanism is referred to as a DSIC. These surcharge mechanisms typically adjust periodically based on additional qualified capital expenditures completed or anticipated in a future period. The infrastructure rehabilitation surcharge is capped as a percentage of base rates, generally at 5% to 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 of $16,901 in 2009, $11,771 in 2008, and $11,507 in 2007.

Our Regulated segment also includes certain non-regulated operating revenues of $12,665 in 2009, $13,278 in 2008, and $12,935 in 2007. These operating revenues are associated with contract operations that are integral to the regulated utility business and operations. These amounts vary over time according to the level of activity associated with the utility contract operations.

In addition to the Regulated segment operating revenues, we had other non-regulated revenues that were primarily associated with non-regulated wastewater, septage, and operating and maintenance contracts of $11,634 in 2009, $11,810 in 2008, and $12,756 in 2007. The decrease in 2008 compared to 2007 resulted from eliminating certain data processing services in 2008 and the associated reduction in service fees. Acquisitions outside our Regulated segment have provided additional operating revenues of $0 for operations acquired in 2009 and 2008, and $4,765 for operations acquired in 2007.

Operations and Maintenance Expenses — Operations and maintenance expenses totaled $270,060 in 2009, $262,122 in 2008, and $253,092 in 2007. Most elements of operating costs are subject to the effects of inflation and changes in the number of customers served. Several elements are subject to the effects of changes in water consumption, weather and the degree of water treatment required due to variations in the quality of the raw water. The principal elements of operating costs are labor and employee benefits, electricity, chemicals, maintenance expenses and insurance and claims costs. Electricity and chemical expenses vary in relationship to water consumption, raw water quality, and price increases. Maintenance expenses are sensitive to extremely cold weather, which can cause water mains to rupture.

Operations and maintenance expenses increased in 2009 as compared to 2008 by $7,938 or 3.0% primarily due to the effect of the absence of the third quarter 2008 gain on the sale of a utility system of $4,118, additional operating costs associated with acquisitions of $2,475, and normal increases in other operating expenses, offset partially by lower water production costs of $1,103 due to a decrease in consumption, the gain on sale of a utility system in the second quarter of 2009 of $1,009, and reduced expenses of $963 associated with the dispositions of our utility systems sold. In the consolidated statement of income for 2009, the gain on sale of utility system is reported as a component of operations and maintenance expense.

Operations and maintenance expenses increased in 2008 as compared to 2007 by $9,030 or 3.6% primarily due to additional operating costs associated with acquisitions of $3,677, higher water production costs of $1,702 due to price increases principally on purchased water, additional bad debt expense of $1,399, an increase in fuel costs to fuel our service vehicles of $1,380, the effect of the absence of the 2007 gain on the sale of a utility system of $1,095 in the fourth quarter of 2007, rate case expenses resulting from the final Texas rate case order of $859, and normal increases in other operating costs, offset partially by the gain on sale of a utility system of $4,118 in the third quarter of 2008, reduced expenses of $2,872 associated with the dispositions of our utility systems sold, and the absence of the charges that occurred in the third quarter of 2007 upon the withdrawal of the Florida rate case application of $2,385. In the consolidated statement of income for 2008, the gain on sale of utility system is reported as a component of operations and maintenance expense.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Depreciation and Amortization Expenses — Depreciation expense was $103,001 in 2009, $88,785 in 2008, and $83,178 in 2007, and has increased principally as a result of the significant capital expenditures made to expand and improve our utility facilities, our acquisitions of new utility systems, and additional expense of $2,037 resulting from a rate case adjustment related to our rate filing in North Carolina.

Amortization expense was $11,938 in 2009, $5,515 in 2008, and $4,833 in 2007, and has increased due to the amortization of the costs associated with, and other costs being recovered in, various rate filings. Expenses associated with filing rate cases are deferred and amortized over periods that generally range from one to three years.

Taxes Other than Income Taxes — Taxes other than income taxes was $48,081 in 2009, $44,749 in 2008, and $45,380 in 2007. The increase in 2009 is primarily due to an increase in gross receipts, excise and franchise taxes of $1,299, an increase in other of $889 associated with an increase in the local assessment of water pumping fees in Texas, an increase in property taxes of $687 associated with properties acquired through acquisition, and an increase in payroll taxes of $520 associated with a decrease in our capitalized labor rate in our operating subsidiary in Pennsylvania. The decrease in 2008 is primarily due to a reduction in capital stock taxes of $300 associated with a decrease in the capital stock tax rate imposed on our operating subsidiary in Pennsylvania, a reduction in gross receipts tax of $290, a decrease in payroll taxes of $264 associated with an increase in our capitalized labor rate in our operating subsidiary in Pennsylvania, and a reduction in property taxes of $219 associated with the dispositions of utility systems, offset primarily by an increase in public utility commission assessment taxes on our operating subsidiary in Pennsylvania.

Interest Expense, net — Net interest expense was $68,607 in 2009, $68,572 in 2008, and $66,921 in 2007. Interest income of $1,149 in 2009, $2,310 in 2008, and $3,569 in 2007 was netted against interest expense. Interest expense increased in 2009 and 2008 primarily due to additional borrowings to finance capital projects and acquisitions. The increases were offset partially by the effects of decreased interest rates on short-term borrowings and long-term debt. Interest income decreased in 2009 and 2008 due to lower investment income earned on the proceeds from the issuance of tax-exempt bonds while being held by trustees pending completion of projects financed with the issuances and from lower income earned on overnight cash sweeps. The interest income earned on the proceeds from the issuance of tax-exempt bonds is capitalized through our allowance for funds used during construction, a reduction to net interest expense. Interest expense on long-term debt during 2009 and 2008 was favorably impacted by a reduction in the weighted cost of long-term debt from 5.58% at December 31, 2007 to 5.35% at December 31, 2008 and to 5.25% at December 31, 2009.

Allowance for Funds Used During Construction — The allowance for funds used during construction (AFUDC) was $2,871 in 2009, $3,674 in 2008, and $2,953 in 2007 and has varied over the years as a result of changes in the average balance of utility plant construction work in progress (CWIP), to which AFUDC is applied, and to changes in the AFUDC rate which is based predominantly on short-term interest rates. The decrease in 2009 is due to a decrease in short-term interest rates, which are a component of the applied AFUDC rate, as well as a decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied. The increase in 2008 is due to an increase in capital expenditures eligible for AFUDC.

Gain on Sale of Other Assets — Gain on sale of other assets totaled $472 in 2009, $1,599 in 2008, and $3,494 in 2007 and consisted of gains on properties and marketable securities sales. Gain on sale of properties totaled $472 in 2009, $1,278 in 2008, and $1,831 in 2007. Gain on sale of marketable securities totaled $0 in 2009, $321 in 2008 and $1,663 in 2007. The gain realized on the following sales of utility systems was reported in the consolidated statement of income as a component of the line titled operations and maintenance expense: June 2009 gain on sale of $1,009, August 2008 gain on sale of $4,118, and a December 2007 gain on sale of $1,095.

Income Taxes — Our effective income tax rate was 39.4% in 2009, 39.7% in 2008, and 38.9% in 2007. The decrease in the effective tax rate for 2009 was due to an increase in the tax deduction for qualified domestic production activities, which was offset by a decrease in the tax deductible portion of our stock-based compensation expense. The change in the effective tax rate in 2008 was due to a decrease in the tax deduction for qualified domestic production activities that increased our tax provision by approximately $763 in 2008 as compared to 2007.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Summary — Operating income was $237,459 in 2009, $225,801 in 2008, and $216,016 in 2007 and net income attributable to common shareholders was $104,353 in 2009, $97,918 in 2008, and $95,014 in 2007. Diluted income per share was $0.77 in 2009, $0.73 in 2008, and $0.71 in 2007. The changes in the per share income in 2009 and 2008 over the previous years were due to the aforementioned changes in income and impacted by a 1.1% increase in the average number of common shares outstanding during 2009 and a 0.8% increase in the average number of common shares outstanding during 2008. The increase in the number of shares outstanding in 2009 is primarily a result of the full year impact in 2009 of the 1,000,000 shares issued in June 2008 related to the final settlement of the forward equity sale agreement, the additional shares sold or issued through our dividend reinvestment plan, equity compensation plan, and the additional shares issued in August 2009 in connection with an acquisition. The increase in the number of shares outstanding in 2008 is primarily a result of the additional shares sold or issued through our dividend reinvestment plan, the issuance of 1,000,000 shares in June 2008 associated with the final settlement of the forward equity sale agreement, and our employee stock and incentive plan.

Although we have experienced increased income in the recent past, continued adequate rate increases reflecting increased operating costs and new capital investments are important to the future realization of improved profitability.

Fourth Quarter Results — The following table provides our fourth quarter results:

		Three Months Ended
		December 31,
		2009				2008
Operating revenues		$	167,893			$	159,840
Operations and maintenance			66,034				65,929
Depreciation and amortization			29,296				25,391
Taxes other than income taxes			12,189				10,638
			107,519				101,958
Operating income			60,374				57,882
Interest expense, net			17,914				17,365
Allowance for funds used during construction			(931	)			(642	)
Gain on sale of other assets			(97	)			(514	)
Income before income taxes			43,488				41,673
Provision for income taxes			16,829				16,008
Net income		$	26,659			$	25,665

The increase in operating revenues was a result of additional revenues of $6,001 from an increase in water and wastewater rates implemented in various operating subsidiaries, and an increase in infrastructure rehabilitation surcharge revenue of $4,428, offset by a decrease in water consumption. The higher operations and maintenance expense is due primarily to $363 of additional operating costs associated with acquisitions, and normal increases in other operating expenses, offset by a decrease in water production costs of $956 associated with the decrease in water consumption, and a decrease in fuel costs for our service vehicles of $234. The increased depreciation expense reflects the utility plant placed in service since the fourth quarter of 2008. The increase in other taxes is primarily due to increases in property taxes of $585 associated with utility systems acquired, gross receipts, excise and franchise taxes of $424, capital stock taxes of $356 associated with an increase in the capital stock tax imposed on our operating subsidiary in Pennsylvania, and in the local assessment of water pumping fees in Texas of $142. The increased interest expense is due to additional borrowings to finance capital projects. The decrease in gain on sale of other assets is due to reduced gains on the sales of land and other assets of $417. The decrease in customer water consumption is largely due to unfavorable weather conditions in many of our service territories during the fourth quarter of 2009 that reduced water usage. We believe the economy and its effect on water usage have affected the revenue comparison for the fourth quarter.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

FINANCIAL CONDITION

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, 2009 were as follows:

		Net Operating				Common				Capital
		Cash Flow				Dividends				Expenditures				Acquisitions
2005		$	199,674			$	51,139			$	237,462			$	11,633
2006			170,726				58,023				271,706				11,848
2007			194,168				63,763				238,140				51,226
2008			221,506				68,504				267,418				14,659
2009			258,590				74,729				283,584				3,373
		$	1,044,664			$	316,158			$	1,298,310			$	92,739

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 $47,348 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 presented in the above table. In addition, during this period, we have made sinking fund contributions and repaid debt in the amount of $206,455, and have refunded $23,997 of customer advances for construction. Common 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 2010 capital program, exclusive of the costs of new mains financed by advances and contributions in aid of construction, is estimated to be $338,100 of which $135,240 is for infrastructure rehabilitation surcharge-qualified projects. Our planned capital program includes spending for infrastructure rehabilitation that qualifies for infrastructure rehabilitation surcharge mechanisms, and should these mechanisms be discontinued for any reason, which is not anticipated, we would re-evaluate the magnitude of our capital program. Our 2010 capital program, along with $59,577 of sinking fund obligations and debt maturities, and $140,328 of other contractual cash obligations, as reported in the section captioned “Contractual Obligations”, has been or is expected to be financed through internally-generated funds, our revolving credit facilities, the issuance of equity, and the issuance of long-term debt.

Future utility construction in the period 2011 through 2014, including recurring programs, such as the ongoing replacement or rehabilitation of water meters, water mains, water treatment plant upgrades, storage facility renovations, and additional transmission mains to meet customer demands, exclusive of the costs of new mains financed by advances and contributions in aid of construction, is estimated to require aggregate expenditures of approximately $1,270,000. We anticipate that approximately one-half of these expenditures will require external financing with debt and the additional issuance of common stock through our dividend reinvestment and stock purchase plans and the issuance of equity through public offerings. We expect to refinance $249,452 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.

Our primary sources of liquidity are cash flows from operations, borrowings under various short-term lines of credit and other credit facilities, and customer advances and contributions in aid of construction. Our cash flow from operations, or internally-generated funds, is impacted by the timing of rate relief and water consumption. We fund our capital and acquisition programs through internally-generated funds, supplemented by short-term borrowings. Over time, we refinance our short-term borrowings with long-term debt and proceeds from the issuance of common stock. The ability to finance our future construction programs, as well as our acquisition activities, depends on our ability to attract the necessary external financing and maintain internally-generated funds. Rate orders permitting compensatory rates of return on invested capital and timely rate adjustments will be required by our operating subsidiaries to achieve an adequate level of earnings and cash flow to enable them to secure the capital they will need to operate and to maintain satisfactory debt coverage ratios.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Acquisitions

During the past five years, we have expended cash of $92,739 and issued 314,459 shares of common stock, valued at $5,584 at the time of the acquisition, related to the acquisition of utility systems, both water and wastewater utilities, and non-regulated businesses that provide wastewater and septage services. We included the operating results of these acquisitions in our consolidated financial statements beginning on the respective acquisition dates. During 2009, we completed 18 acquisitions of water and wastewater systems in five of the states in which we operate, including expanding our operations into one new state. The 2009 acquisitions were completed for $3,373 in cash and the issuance of 164,052 shares of common stock valued at $2,909 at the time of the acquisition. During 2008, we completed 9 acquisitions of water and wastewater systems in four of the states in which we operate. The 2008 acquisitions were completed for $14,659 in cash and the issuance of 125,723 shares of common stock valued at $2,000 at the time of the acquisition.

On January 1, 2007 we completed the acquisition of the capital stock of New York Water Service Corporation for $26,664 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 operating results of New York Water Service Corporation have been 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 accounted for as a purchase and was funded through the issuance of long-term debt that was issued in December 2006. In addition to New York Water Service, during 2007, we completed 26 acquisitions for $24,562 in cash. The acquisitions completed in 2007 included both water and wastewater systems in ten of the states in which we operate.

During 2006, we completed 27 acquisitions for $11,848 in cash. The acquisitions completed in 2006 included both water and wastewater systems in seven of the states in which we operate, and the acquisition of several non-regulated companies that provide on-site septic tank pumping, sludge hauling services and other wastewater services to customers in eastern Pennsylvania, New Jersey, Delaware, New York and Maryland.

During 2005, we completed 30 acquisitions for $11,633 in cash and the issuance of 24,684 shares of common stock. The acquisitions completed in 2005 included both water and wastewater systems in seven of the states in which we operate.

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

We routinely review and evaluate areas of our business and operating divisions and over time may sell certain utility systems or portions of systems. In June 2009, we sold a water and wastewater utility system for net proceeds of $1,601, which was in excess of the book value for these assets. The proceeds were used to pay-down short-term debt and the sale resulted in the recognition in 2009 of a gain on the sale of these assets, net of expenses of $1,009. The gain is reported in the 2009 consolidated statement of income as a reduction to operations and maintenance expense. These utility systems represented approximately 0.02% of Aqua America’s total assets.

In August 2008, we sold a water and wastewater utility system for net proceeds of $10,500, which consisted of $1,900 in cash and the issuance of a 25-year note receivable of $8,600 that bears interest at 7.25% and provides for semi-annual principal and interest payments. The sale resulted in the recognition of a gain on the sale of these assets, net of expenses, of $4,118. The gain is reported in the consolidated statement of income as a reduction to operations and maintenance expense. These utility systems represented approximately 0.20% of Aqua America’s total assets.

In December 2007, we sold a water utility system for net proceeds of $1,498, 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 2007 of a gain on the sale of these assets, net of expenses, of $1,095. The gain is reported in the 2007 consolidated statement of income as a reduction to operations and maintenance expense. This utility system represented approximately 0.01% of Aqua America’s total assets.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

The City of Fort Wayne, Indiana (the “City”) has authorized the acquisition by eminent domain of the northern portion of the utility system of one of the operating subsidiaries that we acquired in connection with the AquaSource acquisition in 2003. We challenged whether the City was following the correct legal procedures in connection with the City’s condemnation, but the Indiana Supreme Court, in an opinion issued in June 2007, supported the City’s position. In October 2007, the City’s Board of Public Works approved proceeding with its process to condemn the northern portion of our utility system at a preliminary price based on the City’s valuation. We filed an appeal with the Allen County Circuit Court challenging the Board of Public Works’ valuation on several bases. In November 2007, the City Council authorized the taking of the northern portion of our system and the payment of $16,911 based on the City’s valuation of this portion of the system. In January 2008, we reached a settlement with the City to transition the northern portion of the system in February 2008 upon receipt of the City’s initial valuation payment of $16,911. The settlement agreement specifically states that the final valuation of the northern portion of our system will be determined through a continuation of the legal proceedings that were filed challenging the City’s valuation. On February 12, 2008, we turned over the northern portion of our system to the City upon receipt of the initial valuation payment. The Indiana Utility Regulatory Commission also reviewed and acknowledged the transfer of the Certificate of Territorial Authority for the northern portion of the system to the City. The proceeds received are in excess of the book value of the assets relinquished. No gain has been recognized due to the contingency over the final valuation of the assets. On March 16, 2009 oral argument was held on certain procedural aspects with respect to the valuation evidence that may be presented and whether we are entitled to a jury trial. Depending upon the ultimate outcome of the legal proceeding in the Allen County Circuit Court we may be required to refund a portion of the initial valuation payment, or may receive additional proceeds. The northern portion of the utility system relinquished represents approximately 0.50% of our total assets.

The Company is routinely involved in other legal matters, including both asserted and unasserted legal claims, during the ordinary course of business. See Note 9 — Commitments and Contingencies for a discussion of the Company’s legal matters. It is not always possible for management to make a meaningful estimate of the potential loss or range of loss associated with such litigation. Also, unanticipated changes in circumstances and/or revisions to the assessed probability of the outcomes of legal matters could result in expenses being incurred in future periods as well as an increase in actual cash required to resolve the legal matter.

Despite these transactions, our primary strategy continues to be to acquire additional water and wastewater systems, to maintain our existing systems where there is a business or a strategic benefit, and to actively oppose unilateral efforts by municipal governments to acquire any of our operations.

Sources of Capital

Since net operating cash flow plus advances and contributions in aid of construction have not been sufficient to fully fund cash requirements, we issued approximately $772,394 of long-term debt and obtained other short-term borrowings during the past five years. At December 31, 2009, we have a $95,000 long-term revolving credit facility that expires in May 2012, of which $13,991 was designated for letter of credit usage, $16,860 was available for borrowing and $64,149 of borrowings was outstanding at December 31, 2009. In addition, we had short-term lines of credit of $137,000, of which $109,513 was available. One of our credit facilities of $70,000 has a 364 day term and the balance of our short-term lines of credit are payable on demand. These short-term lines of credit are subject to renewal on an annual basis. Although we believe we will be able to renew these facilities, there is no assurance that they will be renewed, or what the terms of any such renewal will be. The United States credit and liquidity crisis that started in 2008 which caused substantial volatility in capital markets, including credit markets and the banking industry, increased the cost and significantly reduced the availability of credit from financing sources, which may continue or worsen in the future. If in the future, our credit facilities are not renewed or our short-term borrowings are called for repayment, we would have to seek alternative financing sources, although there can be no assurance that these alternative financing sources would be available on terms acceptable to us. In the event we are not able to obtain sufficient capital, we may need to reduce our capital expenditures and our ability to pursue acquisitions that we may rely on for future growth could be impaired.

Our consolidated balance sheet historically has had a negative working capital position whereby routinely our current liabilities exceed our current assets. Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt and common stock will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

We are obligated to comply with covenants under some of our loan and debt agreements. These covenants contain a number of restrictive financial covenants, which among other things limit, subject to certain exceptions, the Company’s ratio of consolidated total indebtedness to consolidated total capitalization, and require a minimum level of earnings coverage over interest expense. During 2009, we were in compliance with our debt covenants under our credit facilities. Failure to comply with our debt covenants could result in an event of default, which could result in us being required to repay or finance our borrowings before their due date, possibly limiting our future borrowings, and increasing our borrowing costs.

We maintain a universal shelf registration on file with the SEC 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, preferred stock, debt securities and other securities specified therein at indeterminant prices.

In August 2006, we entered into a forward equity sale agreement for 3,525,000 shares of common stock with a third party (“forward purchaser”) and as of the completion of the following transactions in June 2008, no shares remain under contract. In connection with the forward equity sale agreement, the forward purchaser borrowed an equal number of shares of our common stock from stock lenders and sold the borrowed shares to the public. We did not receive any proceeds from the sale of our common stock by the forward purchaser until settlement of the shares underlying the forward equity sale agreement. In March and June 2008, we elected to perform a net cash settlement under the forward equity sale agreement of an aggregate 2,525,000 shares of the Company’s common stock, which resulted in payments of $11,011 by the forward purchaser to the Company. No shares were issued in connection with the net cash settlement and the payments received were recorded as an increase to common stockholders’ equity. Also in June 2008, we settled the remaining 1,000,000 shares under the forward equity sale agreement by physical settlement. As a result, we issued 1,000,000 shares of common stock and received proceeds from the forward purchaser of $22,318. The forward equity sale agreement has now been completely settled and there are no additional shares subject to the forward equity sale agreement. The proceeds received by us upon settlement of the forward equity sale agreement were used to fund our future capital expenditure program and acquisitions, and for working capital and other general corporate purposes.

In addition, we have a shelf registration statement filed with the SEC to permit the offering from time to time of shares of common stock and shares of preferred stock in connection with acquisitions. During 2009, we issued 164,052 shares of common stock totaling $2,909 to acquire a water system. During 2008, we issued 125,723 shares of common stock totaling $2,000 to acquire a wastewater system. During 2007 we did not issue any shares under the acquisition shelf registration. The balance remaining available for use under the acquisition shelf registration as of December 31, 2009 is 1,904,487 shares. We will determine the form and terms of any securities issued under these shelf registrations at the time of issuance.

We offer a Dividend Reinvestment and Direct Stock Purchase Plan (Plan) that provides a convenient and economical way to purchase shares of Aqua America, Inc. Under the direct stock purchase portion of the Plan, shares are sold throughout the year. The dividend reinvestment portion of the Plan offers a 5% discount on the purchase of shares of common stock with reinvested dividends. As of the December 2009 dividend payment, holders of 15.0% of the common shares outstanding participated in the dividend reinvestment portion of the Plan. The shares issued under the Plan are either original issue shares or shares purchased by the Company’s transfer agent in the open-market. During the past five years, we have sold 2,542,003 original issue shares of common stock for net proceeds of $49,438 through the dividend reinvestment portion of the Plan and we used the proceeds to invest in our operating subsidiaries, to repay short-term debt, and for general corporate purposes.

The Board of Directors has authorized us to purchase our common stock, from time to time, in the open market or through privately negotiated transactions. We have not purchased any shares under this authorization since 2000. As of December 31, 2009, 548,278 shares remain available for repurchase. Funding for future stock purchases, if any, is not expected to have a material impact on our financial position.

Off-Balance Sheet Financing Arrangements

We do not engage in any off-balance sheet financing arrangements. We do not have any interest in entities referred to as variable interest entities, which includes special purpose entities and other structured finance entities.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Contractual Obligations

The following table summarizes our contractual cash obligations as of December 31, 2009:

						Payments Due By Period
						Less than				1 - 3				3 - 5				More than
		Total				1 year				years				years				5 years
Long-term debt (a)		$	1,446,134			$	59,577			$	128,018			$	121,434			$	1,137,105
Interest on fixed-rate, long-term debt (b)			1,210,776				75,320				140,338				133,685				861,433
Operating leases (c)			24,960				3,427				4,390				2,215				14,928
Unconditional purchase obligations (d)			101,896				12,451				21,218				16,682				51,545
Other purchase obligations (e)			35,320				35,320				—				—				—
Pension and other postretirement benefit plans’ obligations (f)			20,197				13,057				3,870				3,270				—
Other obligations (g)			18,388				753				1,646				4,646				11,343
Total		$	2,857,671			$	199,905			$	299,480			$	281,932			$	2,076,354

In addition to these obligations, we pay refunds on Customers’ Advances for Construction over a specific period of time based on operating revenues related to developer-installed water mains or as new customers are connected to and take service from such mains. After all refunds are paid, any remaining balance is transferred to Contributions in Aid of Construction. The refund amounts are not included in the above table because the refund amounts and timing are dependent upon several variables, including new customer connections, customer consumption levels and future rate increases, which cannot be accurately estimated. Portions of these refund amounts are payable annually through 2024 and amounts not paid by the contract expiration dates become non-refundable.

We will fund these contractual obligations with cash flows from operations and liquidity sources held by or available to us.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Market Risk

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. The exposure to changes in interest rates is a result of financings through the issuance of fixed rate, long-term debt. Such exposure is typically related to financings between utility rate increases, because generally our rate increases provide a revenue level to allow recovery of our current cost of capital. Interest rate risk is managed through the use of a combination of long-term debt, which is at fixed interest rates and short-term debt, which is at floating interest rates. As of December 31, 2009, the debt maturities by period and the weighted average interest rate for long-term debt are as follows:

																														Fair
		2010				2011				2012				2013				2014				Thereafter				Total				Value
Long-term debt:
Fixed rate		$	55,428			$	28,472			$	39,546			$	34,325			$	87,109			$	1,137,105			$	1,381,985			$	1,251,805
Variable rate			4,149				—				60,000				—				—				—				64,149				64,149
Total		$	59,577			$	28,472			$	99,546			$	34,325			$	87,109			$	1,137,105			$	1,446,134			$	1,315,954
Weighted average interest rate*			5.89	%			6.17	%			2.51	%			5.43	%			5.31	%			5.43	%			5.25	%

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, 2009, our carrying value of certain investments was $2,288, which reflects the market value of such investments and is in excess of our original cost.

Capitalization

The following table summarizes our capitalization during the past five years:

December 31,		2009				2008				2007				2006				2005
Long-term debt*			56.6	%			54.3	%			55.9	%			51.6	%			52.7	%
Aqua America stockholders’ equity			43.4	%			45.7	%			44.1	%			48.4	%			47.3	%
			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%

Over the past five years, the changes in the capitalization ratios primarily resulted from the issuance of common stock, and the issuance of debt to finance our acquisitions and capital program. In 2007, the conversion of a short-term line of credit into a $95,000 long-term revolving credit facility caused a shift in the capitalization ratio. It is our goal to maintain an equity ratio adequate to support the current Standard and Poors corporate credit rating of “A+” and the senior secured debt rating of “AA-” for Aqua Pennsylvania, our largest operating subsidiary.

Dividends on Common Stock

We have paid common dividends consecutively for 65 years. Our Board of Directors authorized an increase of 7.4% in the quarterly dividend over the amount we paid in the previous quarter for the December 1, 2009 dividend. As a result of this authorization, beginning with the dividend payment in December 2009, the annualized dividend rate increased to $0.58 per share from $0.54 per share. This is the 19^th dividend increase in the past 18 years and the eleventh 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 65.8% of net income attributable to common shareholders.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial condition and results of operations are impacted by the methods, assumptions, and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to our financial condition or results of operations, and require estimates or other judgments of matters of uncertainty. Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the financial statements. We believe our most critical accounting policies include revenue recognition, the use of regulatory assets and liabilities, the valuation of our long-lived assets which consist primarily of utility plant in service, regulatory assets, and goodwill, our accounting for 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 is determined.

In some operating divisions, we commence the billing of our utility customers, under new rates, upon authorization from the respective regulatory commission and before the final commission rate order is issued. The revenue recognized reflects an estimate based on our judgment of the final outcome of the commission’s ruling. We monitor the applicable facts and circumstances regularly, and revise the estimate as required. The revenue billed and collected prior to the final ruling is subject to refund based on the commission’s final ruling. 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 — We defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the rate-making process in a period different from when the costs and credits were incurred. These deferred amounts, both assets and liabilities, are then recognized in the income statement in the same period that they are reflected in our rates charged for water 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 the change in our assessment or change in regulatory approval.

Valuation of Long-Lived Assets, Goodwill and Intangible Assets — We review our long-lived assets for impairment, including utility plant in service. We also review regulatory assets for the continued application of the FASB’s accounting guidance for regulated operations. Our review determines whether there have been changes in circumstances or events that have occurred that require adjustments to the carrying value of these assets. Adjustments to the carrying value of these assets would be made in instances where their inclusion in the rate-making process is unlikely.

We test the goodwill attributable to each of our reporting units for impairment at least annually on July 31, or more often, if certain circumstances indicate a possible impairment may exist. We evaluate goodwill for impairment 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. If 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 2009 concluded that none of our goodwill was impaired.

Accounting for Postretirement Benefits — We maintain qualified defined benefit pension plans 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 rate, expected return on plan assets, the rate of future compensation increases received by our employees, mortality, turnover and medical costs. Each assumption is reviewed annually with assistance from our actuarial consultant who provides guidance in establishing the assumptions. The assumptions are selected to represent the average expected experience over time and may differ in any one year from actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of pension and other postretirement benefit expense that we recognize.

AQUA AMERICA, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
(In thousands of dollars, except per share amounts)

Our discount rate assumption was determined using a yield curve that was produced from a universe containing approximately 250 U.S.-issued 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 single rate that would produce the same present value as if we used spot rates, for various time periods, to discount the projected pension benefit payments. Our pension expense and liability (benefit obligations) increases as the discount rate is reduced. A 25 basis-point reduction in this assumption would have increased 2009 pension expense by $680 and the pension liabilities by $7,080. The present values of Aqua America’s future pension and other postretirement obligations were determined using discount rates of 5.91% at December 31, 2009, and 6.11% at December 31, 2008. Our expense under these plans is determined using the discount rate as of the beginning of the year, which was 6.11% for 2009, and will be 5.91% for 2010.

Our expected return on assets is determined by evaluating the asset class return expectations with our advisors as well as actual, long-term, historical results of our asset returns. The Company’s market related value of plan assets is equal to the fair value of the plan assets as of the last day of its fiscal year, and is a determinant for the expected return on assets which is a component of net pension expense. Our pension expense increases as the expected return on assets decreases. A 25 basis-point reduction in this assumption would have increased 2009 pension expense by $290. For 2009, we used an 8.0% expected return on assets assumption which will remain unchanged for 2010. The expected return on assets is based on a targeted allocation of 50% to 75% equities and 25% to 50% fixed income. We believe that our actual long-term asset allocation on average will approximate the targeted allocation. Our targeted allocation is driven by the investment strategy to earn a reasonable rate of return while maintaining risk at acceptable levels through the diversification of investments across and within various asset categories.

Funding requirements for qualified defined benefit pension plans are determined by government regulations and not by accounting pronouncements. In accordance with funding rules and our funding policy, during 2010 our pension contribution is expected to be approximately $11,563. Future years’ contributions will be subject to economic conditions, plan participant data and the funding rules in effect at such time as the funding calculations are performed, though we expect future changes in the amount of contributions and expense recognized to be generally included in customer rates. During 2010, our funding of other postretirement benefit plans are expected to approximate $1,494.

Accounting for Income taxes — We estimate the amount of income tax payable or refundable for the current year and the deferred income tax liabilities and assets that results from estimating temporary differences resulting from the treatment of certain items, such as depreciation, for tax and financial statement reporting. These differences result in the recognition of a deferred tax asset or liability on our consolidated balance sheet and require us to make judgments regarding the probability of the ultimate tax impact of the various transactions we enter into. Based on these judgments we may record tax reserves or adjustments to valuation allowances on deferred tax assets to reflect the expected realization of future tax benefits. Actual income taxes could vary from these estimates and changes in these estimates can increase income tax expense in the period that these changes in estimates occur.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

We describe the impact of recent accounting pronouncements in Note 1 — Summary of Significant Accounting Policies, of the consolidated financial statements.

AQUA AMERICA, INC. AND SUBSIDIARIES

Management’s Report On Internal Control Over Financial Reporting

Management of Aqua America, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In assessing the effectiveness of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. As a result of management’s assessment and based on the criteria in the framework, management has concluded that, as of December 31, 2009, the Company’s internal control over financial reporting was effective.

The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Nicholas DeBenedictis   Nicholas DeBenedictis		David P. Smeltzer   David P. Smeltzer
Chairman, President and Chief Executive Officer		Chief Financial Officer
February 26, 2010

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
of Aqua America, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, of capitalization, of equity and of cash flows present fairly, in all material respects, the financial position of Aqua America, Inc. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we consider necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 26, 2010

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share amounts)
Years ended December 31, 2009, 2008, and 2007

		2009				2008				2007
Operating revenues		$	670,539			$	626,972			$	602,499
Operating costs and expenses:
Operations and maintenance			270,060				262,122				253,092
Depreciation			103,001				88,785				83,178
Amortization			11,938				5,515				4,833
Taxes other than income taxes			48,081				44,749				45,380
			433,080				401,171				386,483
Operating income			237,459				225,801				216,016
Other expense (income):
Interest expense, net			68,607				68,572				66,921
Allowance for funds used during construction			(2,871	)			(3,674	)			(2,953	)
Gain on sale of other assets			(472	)			(1,599	)			(3,494	)
Income before income taxes			172,195				162,502				155,542
Provision for income taxes			67,842				64,584				60,528
Net income attributable to common shareholders		$	104,353			$	97,918			$	95,014
Net income attributable to common shareholders		$	104,353			$	97,918			$	95,014
Other comprehensive income, net of tax:
Unrealized holding gains on investments			289				195				1,121
Reclassification adjustment for (gains) losses reported in net income			5				(209	)			(1,315	)
			294				(14	)			(194	)
Comprehensive income		$	104,647			$	97,904			$	94,820
Net income per common share:
Basic		$	0.77			$	0.73			$	0.72
Diluted		$	0.77			$	0.73			$	0.71
Average common shares outstanding during the period:
Basic			135,816				134,302				132,814
Diluted			136,129				134,705				133,602
Cash dividends declared per common share		$	0.55			$	0.51			$	0.48

See accompanying notes to consolidated financial statements.

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 2009 and 2008

		2009				2008
Assets
Property, plant and equipment, at cost		$	4,141,690			$	3,848,419
Less: accumulated depreciation			914,396				851,036
Net property, plant and equipment			3,227,294				2,997,383
Current assets:
Cash and cash equivalents			21,869				14,944
Accounts receivable and unbilled revenues, net			78,742				84,523
Inventory, materials and supplies			9,519				9,822
Prepayments and other current assets			11,441				11,752
Total current assets			121,571				121,041
Regulatory assets			226,351				234,980
Deferred charges and other assets, net			59,468				50,603
Funds restricted for construction activity			84,830				52,931
Goodwill			43,083				41,007
		$	3,762,597			$	3,497,945
Liabilities and Equity
Aqua America stockholders’ equity:
Common stock at $.50 par value, authorized 300,000,000 shares, issued 137,148,749 and 136,053,467 in 2009 and 2008		$	68,574			$	68,026
Capital in excess of par value			642,786				623,407
Retained earnings			409,402				379,778
Treasury stock, at cost, 662,410 and 683,958 shares in 2009 and 2008			(12,138	)			(12,751	)
Accumulated other comprehensive income			280				(14	)
Total Aqua America stockholders’ equity			1,108,904				1,058,446
Noncontrolling interest			560				2,181
Total Equity			1,109,464				1,060,627
Long-term debt, excluding current portion			1,386,557				1,248,104
Commitments and contingencies (See Note 9)			—				—
Current liabilities:
Current portion of long-term debt			59,577				7,297
Loans payable			27,487				80,589
Accounts payable			57,862				50,044
Accrued interest			16,265				16,070
Accrued taxes			18,813				15,362
Other accrued liabilities			21,003				23,809
Total current liabilities			201,007				193,171
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits			408,583				355,166
Customers’ advances for construction			76,913				72,955
Regulatory liabilities			28,812				27,894
Other			114,490				120,333
Total deferred credits and other liabilities			628,798				576,348
Contributions in aid of construction			436,771				419,695
		$	3,762,597			$	3,497,945

See accompanying notes to consolidated financial statements.

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 2009 and 2008

						2009				2008
Aqua America stockholders’ equity:
Common stock, $.50 par value						$	68,574			$	68,026
Capital in excess of par value							642,786				623,407
Retained earnings							409,402				379,778
Treasury stock, at cost							(12,138	)			(12,751	)
Accumulated other comprehensive income							280				(14	)
Total Aqua America stockholders’ equity							1,108,904				1,058,446
Noncontrolling interest							560				2,181
Total Equity							1,109,464				1,060,627
Long-term debt:
Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range			Maturity Date Range
0.00% to 0.99%			2012 to 2034				6,868				3,606
1.00% to 1.99%			2011 to 2035				21,917				22,076
2.00% to 2.99%			2019 to 2027				12,935				13,683
3.00% to 3.99%			2010 to 2025				28,455				30,437
4.00% to 4.99%			2020 to 2041				271,346				196,150
5.00% to 5.99%			2011 to 2043				384,694				318,913
6.00% to 6.99%			2011 to 2036				121,876				121,552
7.00% to 7.99%			2012 to 2025				31,236				32,245
8.00% to 8.99%			2021 to 2025				34,543				34,806
9.00% to 9.99%			2010 to 2026				69,983				71,301
10.00% to 10.99%			2018				6,000				6,000
							989,853				850,769
Notes payable to bank under revolving credit agreement, variable rate, due May 2012							64,149				62,500
Unsecured notes payable:
Notes ranging from 4.72% to 4.87%, due 2010 through 2023							185,000				135,000
Notes ranging from 5.00% to 5.99%, due 2013 through 2037							207,132				207,132
							1,446,134				1,255,401
Current portion of long-term debt							59,577				7,297
Long-term debt, excluding current portion							1,386,557				1,248,104
Total capitalization						$	2,496,021			$	2,308,731

See accompanying notes to consolidated financial statements.

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)

																		Accumulated
						Capital in												Other
		Common				excess of				Retained				Treasury				Comprehensive				Noncontrolling
		stock				par value				earnings				stock				Income				Interest				Total
Balance at December 31, 2006		$	66,509			$	548,806			$	319,113			$	(12,992	)		$	194			$	1,814			$	923,444
Net income			—				—				95,014				—				—				233				95,247
Purchase of subsidiary shares from noncontrolling interest			—				—				—				—				—				(68	)			(68	)
Other comprehensive income:
Unrealized holding gain on investments, net of income tax of $603			—				—				—				—				1,121				—				1,121
Reclassification adjustment for gains reported in net income, net of income tax of $708			—				—				—				—				(1,315	)			—				(1,315	)
Dividends			—				—				(63,763	)			—				—				—				(63,763	)
Sale of stock (482,785 shares)			227				9,483				—				689				—				—				10,399
Repurchase of stock (35,486 shares)			—				—				—				(863	)			—				—				(863	)
Equity Compensation Plan (50,000 shares)			25				(25	)			—				—				—				—				—
Exercise of stock options (577,272 shares)			289				7,036				—				—				—				—				7,325
Stock-based compensation			—				4,871				—				—				—				—				4,871
Employee stock plan tax benefits			—				1,879				—				—				—				—				1,879
Balance at December 31, 2007			67,050				572,050				350,364				(13,166	)			—				1,979				978,277
Net income			—				—				97,918				—				—				241				98,159
Purchase of subsidiary shares from noncontrolling interest			—				—				—				—				—				(39	)			(39	)
Net cash settlement of a portion of forward equity sale agreement			—				11,011				—				—				—				—				11,011
Other comprehensive income:
Unrealized holding gain on investments, net of income tax of $105			—				—				—				—				195				—				195
Reclassification adjustment for gains reported in net income, net of income tax of $112			—				—				—				—				(209	)			—				(209	)
Dividends			—				—				(68,504	)			—				—				—				(68,504	)
Stock issued for acquisitions (125,723 shares)			63				1,937																—				2,000
Sale of stock (1,621,726 shares)			792				31,693				—				812				—				—				33,297
Repurchase of stock (19,827 shares)			—				—				—				(397	)			—				—				(397	)
Equity Compensation Plan (46,250 shares)			23				(23	)			—				—				—				—				—
Exercise of stock options (195,487 shares)			98				2,183				—				—				—				—				2,281
Stock-based compensation			—				4,243				—				—				—				—				4,243
Employee stock plan tax benefits			—				313				—				—				—				—				313
Balance at December 31, 2008			68,026				623,407				379,778				(12,751	)			(14	)			2,181				1,060,627
Net income			—				—				104,353				—				—				39				104,392
Purchase of subsidiary shares from noncontrolling interest			—				—				—				—				—				(1,660	)			(1,660	)
Other comprehensive income:
Unrealized holding gain on investments, net of income tax of $156			—				—				—				—				289				—				289
Reclassification adjustment for losses reported in net income, net of income tax of $2			—				—				—				—				5				—				5
Dividends			—				—				(74,729	)			—				—				—				(74,729	)
Stock issued for acquisitions (164,052 shares)			82				2,827				—				—				—				—				2,909
Sale of stock (732,229 shares)			348				10,627				—				917				—				—				11,892
Repurchase of stock (15,137 shares)			—				—				—				(304	)			—				—				(304	)
Equity Compensation Plan (70,000 shares)			35				(35	)			—				—				—				—				—
Exercise of stock options (165,686 shares)			83				1,609				—				—				—				—				1,692
Stock-based compensation			—				3,677				—				—				—				—				3,677
Employee stock plan tax benefits			—				674				—				—				—				—				674
Balance at December 31, 2009		$	68,574			$	642,786			$	409,402			$	(12,138	)		$	280			$	560			$	1,109,464

See accompanying notes to consolidated financial statements.

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years ended December 31, 2009, 2008, and 2007

		2009				2008				2007
Cash flows from operating activities:
Net income attributable to common shareholders		$	104,353			$	97,918			$	95,014
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization			114,939				94,300				88,011
Deferred income taxes			47,240				45,768				21,993
Provision for doubtful accounts			5,924				6,811				5,407
Stock-based compensation			3,603				3,871				4,320
Gain on sale of utility system			(1,009	)			(4,118	)			(1,095	)
Gain on sale of other assets			(472	)			(1,599	)			(3,494	)
Net increase in receivables, inventory and prepayments			(1,704	)			(10,081	)			(12,642	)
Net decrease in payables, accrued interest, accrued taxes and other accrued liabilities			(8,521	)			(6,428	)			(7,382	)
Other			(5,763	)			(4,936	)			4,036
Net cash flows from operating activities			258,590				221,506				194,168
Cash flows from investing activities:
Property, plant and equipment additions, including allowance for funds used during construction of $2,871, $3,674, and $2,953			(283,584	)			(267,418	)			(238,140	)
Acquisitions of utility systems and other, net			(3,373	)			(14,659	)			(51,226	)
Release of funds previously restricted for construction activity			102,560				46,885				53,988
Additions to funds restricted for construction activity			(134,473	)			(23,195	)			(117,442	)
Net proceeds from the sale of utility system and other assets			2,171				20,831				6,981
Other			(3,965	)			(1,215	)			1,795
Net cash flows used in investing activities			(320,664	)			(238,771	)			(344,044	)
Cash flows from financing activities:
Customers’ advances and contributions in aid of construction			4,619				6,365				9,605
Repayments of customers’ advances			(2,549	)			(5,928	)			(5,560	)
Net proceeds (repayments) of short-term debt			(53,102	)			23,671				(62,232	)
Proceeds from long-term debt			197,855				52,741				275,757
Repayments of long-term debt			(20,789	)			(39,038	)			(46,987	)
Change in cash overdraft position			4,284				1,951				(4,691	)
Proceeds from issuing common stock			11,892				33,297				10,399
Proceeds from forward equity agreement			—				11,011				—
Proceeds from exercised stock options			1,692				2,281				7,325
Stock-based compensation windfall tax benefits			130				219				1,387
Repurchase of common stock			(304	)			(397	)			(863	)
Dividends paid on common stock			(74,729	)			(68,504	)			(63,763	)
Net cash flows from financing activities			68,999				17,669				120,377
Net increase (decrease) in cash and cash equivalents			6,925				404				(29,499	)
Cash and cash equivalents at beginning of year			14,944				14,540				44,039
Cash and cash equivalents at end of year		$	21,869			$	14,944			$	14,540
Cash paid during the year for:
Interest, net of amounts capitalized		$	65,501			$	64,368			$	62,113
Income taxes		$	19,444			$	20,984			$	41,472