WTRG

Business Context and Reporting Period

This summary covers the Form 10-Q filed by Aqua America, Inc. (Note: The request metadata listed "Essential Utilities, Inc.", but the filing text identifies the registrant as Aqua America, Inc.) for the quarterly period ended March 31, 2009. Aqua America is a holding company for regulated utilities providing water and wastewater services to approximately 3 million people across 13 states, including Pennsylvania, Ohio, North Carolina, and Texas.

Key Financial Metrics

Note: All figures in thousands of dollars except per share amounts.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by $15.2 million (10.9%) year-over-year. This was driven primarily by rate increases of $14.0 million and a larger customer base from acquisitions ($1.3 million), partially offset by the loss of revenue from sold utility systems ($0.8 million).
• Profitability: Net income attributable to common shareholders rose 28.3% to $18.4 million. Operating income increased 16.3% to $46.8 million.
• Expense Increases: Operations and maintenance expenses rose 4.2% due to higher water production costs, write-offs of deferred expenses related to a North Carolina rate filing, and acquisition-related costs. Depreciation increased 22.8% due to new utility plant placed in service and rate case adjustments.
• Cash Flow: Net cash provided by operating activities increased significantly to $62.7 million from $43.9 million, aided by a net decrease in receivables and inventory.

Guidance, Outlook, Risks, and Contingencies

Management Commentary and Outlook

Management expects internally generated funds, existing credit facilities, and proceeds from debt/equity issuance to be adequate for working capital and financing requirements. The company continues to pursue growth through acquisitions and capital improvements, though the 2008 credit crisis has increased the cost and reduced availability of credit.

Rate Cases and Regulatory Matters

• North Carolina & Florida: Rate increases granted in April 2009 are expected to increase annual operating revenues by approximately $13.2 million.
• Texas: A rate increase approved by the Texas Commission on Environmental Quality (TCEQ) in September 2008 is being appealed by two parties. The company has recognized $39.1 million in revenue subject to potential refund if the appeal succeeds. No reserve is currently deemed necessary.

Legal Proceedings and Contingencies

• Fort Wayne, Indiana Condemnation: The City of Fort Wayne is acquiring a portion of the company's utility system via eminent domain. The company received an initial payment of $16.9 million in 2008. Final valuation is pending a court ruling expected in the second half of 2009. The company may be required to refund part of the payment or receive additional proceeds.
• Florida Litigation: Lawsuits filed by residents near a wastewater treatment plant allege negligence and nuisance. The company believes claims are without foundation, but insurance coverage is not guaranteed.
• Indiana Plant Closure Dispute: Homeowners' associations claim an agreement exists to close a wastewater plant by April 2009. If enforced, the company may face liability or be required to construct a new plant. The company cannot currently estimate the financial impact.

Investor Verification Checklist

• Verify the status of the Texas rate case appeal and the potential impact of a $39.1 million revenue refund.
• Monitor the Fort Wayne, Indiana eminent domain proceedings for final valuation rulings expected in late 2009.
• Assess the impact of the credit market environment on the renewal of short-term credit lines ($139 million total) and the cost of future capital.
• Review the North Carolina rate case write-offs ($0.9 million) and their effect on future expense recognition.
• Confirm the timeline and cost implications of the Indiana wastewater plant closure dispute.