Summary of AQUA AMERICA INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
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 Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: our use of cash; projected capital expenditures; liquidity; possible acquisitions and other growth ventures; the completion of various construction projects; the projected timing and annual value of rate increases; the recovery of certain costs and capital investments through rate increase requests; the projected effects of recent accounting pronouncements, as well as information contained elsewhere in this report where statements are preceded by, followed by or include the words "believes," "expects," "anticipates," "plans," "intends," "will," "continue" or similar expressions. These statements are based on a number of assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside our control. Actual results may differ materially from such statements for a number of reasons, including the effects of regulation, abnormal weather, changes in capital requirements and funding, acquisitions, and our ability to assimilate acquired operations. In addition to these uncertainties or factors, our future results may be affected by the factors and risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
General Information Nature of Operations - Aqua America, Inc. ("we" or "us"), a Pennsylvania corporation, is the holding company for regulated utilities providing water or wastewater services to what we estimate to be approximately 3 million people in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, New York, Florida, Indiana, Virginia, Maine, Missouri, and South Carolina. Our largest operating subsidiary, Aqua Pennsylvania, Inc., provides water or wastewater services to approximately one-half of the total number of people we serve, which are located in the suburban areas north and west of the City of Philadelphia and in 23 other counties in Pennsylvania. Our other subsidiaries provide similar services in 12 other states. In addition, we provide water and wastewater service through operating and maintenance contracts with municipal authorities and other parties, and septage services, close to our utility companies' service territories. 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 1990's 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 1990's, our business strategy has been primarily directed toward the regulated water and wastewater utility industry and has extended the Company's regulated operations from southeastern Pennsylvania to include operations in 12 other states.

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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 During the first three months of 2009, we had $62,135 of capital expenditures, repaid debt and made sinking fund contributions and other loan repayments of $1,920, and repaid $473 of customer advances for construction. The capital expenditures were related to improvements to treatment plants, new and rehabilitated water mains, tanks, hydrants, and service lines, well and booster improvements, and other enhancements and improvements.
At March 31, 2009, we had $16,744 of cash and cash equivalents compared to $14,944 at December 31, 2008. During the first three months of 2009, we used the proceeds from the issuance of common stock, internally generated funds and available working capital, to fund the cash requirements discussed above and to pay dividends.
At March 31, 2009, our $95,000 unsecured revolving credit facility, that expires May 2012, had $18,946 available for borrowing. At March 31, 2009, we had short-term lines of credit of $139,000, of which $54,593 was available. One of our short-term lines of credit is an Aqua Pennsylvania $70,000 364-day unsecured revolving credit facility with two banks. This facility is used to provide working capital and was renewed in December 2008 on substantially similar terms as the expired credit facility. In addition, we renewed $33,000 of bank credit lines in the fourth quarter of 2008.
Our short-term lines of credit of $139,000 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, has 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.
The Company's consolidated balance sheet historically has had a negative working capital position whereby routinely our current liabilities exceed our current assets. Management believes that internally generated funds along with existing credit facilities and the proceeds from the issuance of long-term debt and common stock will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for the balance of the year and the reasonably foreseeable future.

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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 Analysis of First Quarter of 2009 Compared to First Quarter of 2008 Revenues for the quarter increased $15,204 or 10.9% primarily due to additional revenues associated with increased water and wastewater rates of $14,006 and additional wastewater and water revenues of $1,306 associated with a larger customer base due to acquisitions, offset partially by the loss of utility revenues of $830 associated with utility systems sold.
Operations and maintenance expenses increased by $2,685 or 4.2% primarily due to increases in water production costs of $1,304, additional expenses resulting from the write-off of previously deferred expenses related to our rate filing in North Carolina of $914, operating costs associated with acquisitions of $710, increased insurance and claims expense of $596, and normal increases in other operating costs. Offsetting these increases were decreases in fuel costs for our service vehicles of $438, reduced expenses of $406 associated with the dispositions of utility systems, and reduced bad debt expense of $294. The increased water production costs, principally purchased power, chemicals, and water were associated with vendor price increases and higher water production. Depreciation expense increased $4,906 or 22.8% reflecting the utility plant placed in service since March 31, 2008, and additional expense of $2,037 resulting from a rate case adjustment related to our rate filing in North Carolina.
Amortization increased $1,582 due to the amortization of the costs associated with, and other costs being recovered in, various rate filings, and additional expense of $394 resulting from a rate case adjustment related to our rate filing in North Carolina.
Taxes other than income taxes decreased by $519 or 4.3% primarily due to a reduction in the assessment of property taxes.
Interest expense decreased by $502 or 2.9% primarily due to decreased interest rates on short-term borrowings and long-term debt, offset partially by additional borrowings to finance capital projects.
Allowance for funds used during construction ("AFUDC") decreased by $331 primarily due to a decrease in the average balance of utility plant construction work in progress, to which AFUDC is applied.
Gain on sale of other assets totaled $133 in the first quarter of 2009 and $0 in the first quarter of 2008. The increase of $133 is due to the timing of sales of land and other property.

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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 effective income tax rate was 40.5% in the first quarter of 2009 and 40.4% in the first quarter of 2008. The effective income tax rate can vary over time due to changes in our expenses that are non tax-deductible.
Net income attributable to common shareholders for the quarter increased by $4,050 or 28.3%, in comparison to the same period in 2008 primarily as a result of the factors described above. On a diluted per share basis, earnings increased $0.03 reflecting the change in net income attributable to common shareholders and a 1.4% increase in the average number of common shares outstanding. The increase in the number of shares outstanding is primarily a result of the issuance of 1,000,000 shares related to the settlement of the forward equity sale agreement in June 2008, and the additional shares sold or issued through our dividend reinvestment plan, employee stock purchase plan, and equity compensation plan.
Impact of Recent Accounting Pronouncements We describe the impact of recent accounting pronouncements in Note 10, Recent Accounting Pronouncements, of the consolidated financial statements.

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AQUA AMERICA, INC. AND SUBSIDIARIES