Edgar Filing: AQUA AMERICA INC

wtr-20150930

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2015

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from_______________ to _______________

Commission File Number 1-6659

AQUA AMERICA, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania	23-1702594
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania	19010 -3489
(Address of principal executive offices)	(Zip Code)

(610) 527-8000
(Registrant’s telephone number, including area code)

(Former Name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12(b)-2 of the Exchange Act.:


Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐ (do not check if a smaller reporting company)	Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of

October 23, 2015: 176,428,025

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AQUA AMERICA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


	Page
Part I – Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets (unaudited) – September 30, 2015 and December 31, 2014	2

Consolidated Statements of Net Income (unaudited) – Three Months Ended September 30, 2015 and 2014	3

Consolidated Statements of Net Income (unaudited) – Nine Months Ended September 30, 2015 and 2014	4

Consolidated Statements of Comprehensive Income (unaudited) – Three and Nine Months Ended September 30, 2015 and 2014	5

Consolidated Statements of Capitalization (unaudited) – September 30, 2015 and December 31, 2014	6

Consolidated Statement of Equity (unaudited) – Nine Months Ended September 30, 2015	7

Consolidated Statements of Cash Flow (unaudited) – Nine Months Ended September 30, 2015 and 2014	8

Notes to Consolidated Financial Statements (unaudited)	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3. Quantitative and Qualitative Disclosures About Market Risk	30

Item 4. Controls and Procedures	30

Part II – Other Information

Item 1. Legal Proceedings		30

Item 1A. Risk Factors		30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31

Item 6. Exhibits		31

Signatures		32

Exhibit Index		33

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AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except per share amounts)

(UNAUDITED)



	September 30,		December 31,
Assets	2015		2014
Property, plant and equipment, at cost	$	5,985,452	$	5,707,017
Less: accumulated depreciation		1,379,940		1,305,027
Net property, plant and equipment		4,605,512		4,401,990
Current assets:
Cash and cash equivalents		4,071		4,138
Accounts receivable and unbilled revenues, net		111,076		96,999
Deferred income taxes		28,483		26,849
Inventory, materials and supplies		12,924		12,788
Prepayments and other current assets		11,753		11,748
Total current assets		168,307		152,522

Regulatory assets		799,858		725,591
Deferred charges and other assets, net		52,364		52,084
Investment in joint venture		41,397		43,334
Funds restricted for construction activity		-		47
Goodwill		33,907		31,184
Total assets	$	5,701,345	$	5,406,752
Liabilities and Equity
Aqua America stockholders' equity:
Common stock at $.50 par value, authorized 300,000,000 shares, issued 179,192,150 and 178,591,254 as of September 30, 2015 and December 31, 2014	$	89,596	$	89,296
Capital in excess of par value		768,428		758,145
Retained earnings		933,144		849,952
Treasury stock, at cost, 2,633,430 and 1,837,984 shares as of September 30, 2015 and December 31, 2014		(63,106)		(42,838)
Accumulated other comprehensive income		619		788
Total Aqua America stockholders' equity		1,728,681		1,655,343

Noncontrolling interest		-		40
Total equity		1,728,681		1,655,383

Long-term debt, excluding current portion		1,681,114		1,560,655
Commitments and contingencies (See Note 13)		-		-

Current liabilities:
Current portion of long-term debt		47,599		58,615
Loans payable		28,030		18,398
Accounts payable		45,077		63,035
Accrued interest		21,155		12,437
Accrued taxes		27,048		31,462
Other accrued liabilities		47,113		41,388
Total current liabilities		216,022		225,335

Deferred credits and other liabilities:
Deferred income taxes and investment tax credits		1,115,672		1,000,791
Customers' advances for construction		87,253		78,301
Regulatory liabilities		264,346		278,317
Other		98,043		109,692
Total deferred credits and other liabilities		1,565,314		1,467,101

Contributions in aid of construction		510,214		498,278
Total liabilities and equity	$	5,701,345	$	5,406,752

See notes to consolidated financial statements beginning on page 9 of this report.

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AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)


	Three Months Ended
	September 30,
	2015		2014
Operating revenues	$	221,051	$	210,535

Operating expenses:
Operations and maintenance		78,519		72,374
Depreciation		31,981		29,482
Amortization		816		806
Taxes other than income taxes		14,663		12,815
Total operating expenses		125,979		115,477

Operating income		95,072		95,058

Other expense (income):
Interest expense, net		19,239		18,990
Allowance for funds used during construction		(1,708)		(1,195)
Gain on sale of other assets		(170)		(75)
Equity loss in joint venture		698		736
Income from continuing operations before income taxes		77,013		76,602
Provision for income taxes		9,584		8,891
Income from continuing operations		67,429		67,711

Discontinued operations:
Income from discontinued operations before income taxes		-		472
Provision for income taxes		-		187
Income from discontinued operations		-		285
Net income attributable to common shareholders	$	67,429	$	67,996

Income from continuing operations per share:
Basic	$	0.38	$	0.38
Diluted	$	0.38	$	0.38

Income from discontinued operations per share:
Basic	$	-	$	0.00
Diluted	$	-	$	0.00

Net income per common share:
Basic	$	0.38	$	0.38
Diluted	$	0.38	$	0.38

Average common shares outstanding during the period:
Basic		176,704		176,900
Diluted		177,495		177,908

Cash dividends declared per common share	$	0.178	$	0.165

See notes to consolidated financial statements beginning on page 9 of this report.

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AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

(In thousands, except per share amounts)

(UNAUDITED)



	Nine Months Ended
	September 30,
	2015		2014
Operating revenues	$	617,137	$	588,514

Operating expenses:
Operations and maintenance		231,454		214,435
Depreciation		93,530		91,689
Amortization		2,589		2,685
Taxes other than income taxes		43,079		37,943
		370,652		346,752

Operating income		246,485		241,762

Other expense (income):
Interest expense, net		56,804		57,393
Allowance for funds used during construction		(3,930)		(3,299)
(Gain) loss on sale of other assets		(338)		133
Equity loss in joint venture		1,496		2,673
Income from continuing operations before income taxes		192,453		184,862
Provision for income taxes		19,097		19,932
Income from continuing operations		173,356		164,930

Discontinued operations:
Income from discontinued operations before income taxes		-		2,497
Provision for income taxes		-		1,003
Income from discontinued operations		-		1,494
Net income attributable to common shareholders	$	173,356	$	166,424

Income from continuing operations per share:
Basic	$	0.98	$	0.93
Diluted	$	0.98	$	0.93

Income from discontinued operations per share:
Basic	$	-	$	0.01
Diluted	$	-	$	0.01

Net income per common share:
Basic	$	0.98	$	0.94
Diluted	$	0.98	$	0.94

Average common shares outstanding during the period:
Basic		176,891		176,933
Diluted		177,670		177,872

Cash dividends declared per common share	$	0.508	$	0.469

See notes to consolidated financial statements beginning on page 9 of this report.

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AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of dollars)

(UNAUDITED)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Net income attributable to common shareholders	$	67,429	$	67,996	$	173,356	$	166,424
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on investments, net of tax (benefit) expense of $(120) and $(33) for the three months and $(90) and $73 for the nine months ended September 30, 2015 and 2014, respectively		(223)		(62)		(169)		136
Reclassification adjustment for loss reported in net income, net of tax benefit of $134 for the nine months ended September 30, 2014 (1)		-		-		-		249
Comprehensive income	$	67,206	$	67,934	$	173,187	$	166,809

(1) Amount of pre-tax loss of $383 reclassified from accumulated other comprehensive income to loss on sale of other assets on the consolidated statements of net income for the nine months ended September 30, 2014.

See notes to consolidated financial statements beginning on page 9 of this report.

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AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CAPITALIZATION

(In thousands of dollars, except per share amounts)

(UNAUDITED)



		September 30,		December 31,
		2015		2014
Aqua America stockholders' equity:
Common stock, $.50 par value		$	89,596	$	89,296
Capital in excess of par value			768,428		758,145
Retained earnings			933,144		849,952
Treasury stock, at cost			(63,106)		(42,838)
Accumulated other comprehensive income			619		788
Total Aqua America stockholders' equity			1,728,681		1,655,343

Noncontrolling interest			-		40

Total equity			1,728,681		1,655,383

Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range	Maturity Date Range
0.00% to 0.99%	2023 to 2033		5,148		5,653
1.00% to 1.99%	2016 to 2035		22,159		24,871
2.00% to 2.99%	2024 to 2031		18,597		15,578
3.00% to 3.99%	2016 to 2047		187,882		190,875
4.00% to 4.99%	2020 to 2054		483,837		484,168
5.00% to 5.99%	2016 to 2043		221,545		242,102
6.00% to 6.99%	2015 to 2036		64,960		64,944
7.00% to 7.99%	2022 to 2027		33,930		34,424
8.00% to 8.99%	2021 to 2025		18,607		18,907
9.00% to 9.99%	2018 to 2026		27,100		27,800
10.00% to 10.99%	2018		6,000		6,000
			1,089,765		1,115,322

Notes payable to bank under revolving credit agreement, variable rate, due 2017			105,000		72,000
Unsecured notes payable:
Bank notes at 1.921% and 1.975% due 2017 and 2018			100,000		50,000
Notes at 3.57% and 3.59% due 2027 and 2030			120,000		50,000
Notes ranging from 4.62% to 4.87%, due 2016 through 2024			144,400		144,400
Notes ranging from 5.20% to 5.95%, due 2016 through 2037			169,548		187,548
Total long-term debt			1,728,713		1,619,270

Current portion of long-term debt			47,599		58,615
Long-term debt, excluding current portion			1,681,114		1,560,655
Total capitalization		$	3,409,795	$	3,216,038

See notes to consolidated financial statements beginning on page 9 of this report.

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AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(In thousands of dollars)

(UNAUDITED)




									Accumulated
			Capital in						Other
	Common		Excess of		Retained		Treasury		Comprehensive		Noncontrolling
	Stock		Par Value		Earnings		Stock		Income		Interest		Total
Balance at December 31, 2014	$	89,296	$	758,145	$	849,952	$	(42,838)	$	788	$	40	$	1,655,383
Net income		-		-		173,356		-		-		-		173,356
Other comprehensive loss, net of income tax benefit of $90		-		-		-		-		(169)		-		(169)
Dividends		-		-		(89,842)		-		-		-		(89,842)
Sale of stock (14,441 shares)		7		337		-		-		-		-		344
Repurchase of stock (795,446 shares)		-		-		-		(20,268)		-		-		(20,268)
Equity compensation plan (319,839 shares)		160		(160)		-		-		-		-		-
Exercise of stock options (266,616 shares)		133		4,385		-		-		-		-		4,518
Stock-based compensation		-		4,728		(322)		-		-		-		4,406
Employee stock plan tax benefits		-		1,648		-		-		-		-		1,648
Other		-		(655)		-		-		-		(40)		(695)
Balance at September 30, 2015	$	89,596	$	768,428	$	933,144	$	(63,106)	$	619	$	-	$	1,728,681

See notes to consolidated financial statements beginning on page 9 of this report.

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AQUA AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(In thousands of dollars)

(UNAUDITED)



	Nine Months Ended
	September 30,
	2015		2014
Cash flows from operating activities:
Net income	$	173,356	$	166,424
Income from discontinued operations		-		1,494
Income from continuing operations		173,356		164,930
Adjustments to reconcile income from continuing operations
to net cash flows from operating activities:
Depreciation and amortization		96,119		94,374
Deferred income taxes		13,855		15,055
Provision for doubtful accounts		3,693		4,648
Stock-based compensation		4,728		5,145
(Gain) loss on sale of other assets		(338)		133
Net change in receivables, inventory and prepayments		(18,677)		(13,928)
Net change in payables, accrued interest, accrued taxes and other accrued liabilities		16,450		16,241
Other		(6,804)		(11,023)
Operating cash flows from continuing operations		282,382		275,575
Operating cash flows used in discontinued operations, net		-		(1,142)
Net cash flows from operating activities		282,382		274,433
Cash flows from investing activities:
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $1,015 and $1,033		(257,478)		(220,739)
Acquisitions of utility systems and other, net		(26,327)		(11,677)
Release of funds previously restricted for construction activity		47		-
Net proceeds from the sale of utility system and other assets		513		386
Other		(1,027)		513
Investing cash flows used in continuing operations		(284,272)		(231,517)
Investing cash flows from discontinued operations, net		-		(77)
Net cash flows used in investing activities		(284,272)		(231,594)
Cash flows from financing activities:
Customers' advances and contributions in aid of construction		4,286		4,510
Repayments of customers' advances		(2,332)		(2,107)
Net proceeds of short-term debt		9,632		(29,743)
Proceeds from long-term debt		313,440		221,058
Repayments of long-term debt		(203,851)		(128,395)
Change in cash overdraft position		(14,918)		(16,883)
Proceeds from issuing common stock		344		-
Proceeds from exercised stock options		4,518		4,870
Stock-based compensation windfall tax benefits		1,469		1,235
Repurchase of common stock		(20,268)		(13,973)
Dividends paid on common stock		(89,842)		(82,953)
Other		(655)		(580)
Financing cash flows from (used) in continuing operations		1,823		(42,961)
Financing cash flows used in discontinued operations, net		-		(93)
Net cash flows from (used) in financing activities		1,823		(43,054)
Net change in cash and cash equivalents		(67)		(215)
Cash and cash equivalents at beginning of period		4,138		5,058
Cash and cash equivalents at end of period	$	4,071	$	4,843

Non-cash investing activity:
Property, plant and equipment additions purchased at the period end, but not yet paid for	$	24,742	$	28,933

See notes to consolidated financial statements beginning on page 9 of this report.

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 1 – Basis of Presentation

The accompanying consolidated balance sheets and statements of capitalization of Aqua America, Inc. and subsidiaries (the “Company”) at September 30, 2015, the consolidated statements of net income and comprehensive income for the three and nine months ended September 30, 2015 and 2014, the consolidated statements of cash flow for the nine months ended September 30, 2015 and 2014, and the consolidated statement of equity for the nine months ended September 30, 2015 are unaudited, but reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in equity, the consolidated results of operations, and the consolidated cash flow for the periods presented. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations for interim periods may not be indicative of the results that may be expected for the entire year. The December 31, 2014 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2014 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.

Note 2 – Goodwill

The following table summarizes the changes in the Company’s goodwill, by business segment:



	Regulated
	Segment		Other		Consolidated
Balance at December 31, 2014	$	24,564	$	6,620	$	31,184
Goodwill acquired		-		12		12
Reclassifications from (to) utility plant acquisition adjustment, net		2,723		-		2,723
Other		-		(12)		(12)
Balance at September 30, 2015	$	27,287	$	6,620	$	33,907

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The reclassification from utility plant acquisition adjustment to goodwill represents the purchase price in excess of the fair market value of the net assets acquired, from a prior acquisition, which was originally accounted for as utility plant acquisition adjustment. The reclassification from goodwill to utility plant acquisition adjustment results from a mechanism approved by the applicable public utility commission. The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with certain acquisitions upon achieving certain objectives.

The Company tested the goodwill attributable for each of our reporting units for impairment as of July 31, 2015, in conjunction with the timing of our annual strategic business plan, and concluded that the estimated fair value of each reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount, indicating that none of the Company’s goodwill was impaired.

Note 3 – Acquisitions

In May 2015, the Company acquired the water utility systems assets of Mt. Jewett Borough water system located in Hamlin Township, Pennsylvania serving approximately 440 customers. The total purchase price consisted of $1,166 in cash.

In April 2015, the Company acquired the water and wastewater utility system assets of North Maine Utilities located in the Village of Glenview, Illinois serving approximately 7,400 customers. The total purchase price consisted of $23,079 in cash. The purchase price allocation for this acquisition consists primarily of acquired property, plant and equipment.

In December 2014, the Company acquired the water utility system assets of Lake Mohawk and Lake Tomahawk utilities located in Northeastern Ohio serving approximately 1,250 customers. The total purchase price consisted of $1,770 in cash.

In December 2014, the Company acquired a business that specializes in providing water distribution system services to prevent the contamination of potable water, including training to waterworks operators. The total purchase price consisted of $1,800 in cash, of which $700 was paid in the first quarter of 2015. This business is included in the Company’s market-based activities.

In September 2014, the Company acquired the water and wastewater utility system assets of Texas H2O, Inc. located in Mansfield, Texas serving approximately 1,100 customers. The total purchase price consisted of $2,796 in cash.

In September 2014, the Company acquired the water utility system assets of Lake Caroline Water Co. located in Caroline County, Virginia serving approximately 1,040 customers. The total purchase price consisted of $1,377 in cash.

In August 2014, the Company acquired a business that specializes in the inspection, cleaning and repair of storm and sanitary sewer lines. The total purchase price consisted of $3,010 in cash, of which a total of $810 is contingent upon satisfying certain annual performance targets over a three-year period. This business is included in the Company’s market-based activities.

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

In March 2014, the Company acquired the wastewater utility system assets of Penn Township located in Chester County, Pennsylvania serving approximately 800 customers. The total purchase price consisted of $3,668 in cash.

Note 4 – Discontinued Operations

In December 2014, we completed the sale of our water utility system in southwest Allen County, Indiana to the City of Fort Wayne, Indiana. The completion of this sale settled the dispute concerning the City of Fort Wayne’s valuation of the northern portion of our water and wastewater utility systems, which were acquired by the City of Fort Wayne in February 2008, by eminent domain. In addition, as a result of this transaction, Aqua Indiana will expand its sewer customer base by accepting new wastewater flows from the City of Fort Wayne.

In March 2014, we completed the sale of our wastewater treatment facility in Georgia.

The operating results and cash flows of the Company’s operations named above, during the periods owned, have been presented in the Company’s consolidated statements of net income and consolidated statements of cash flow as discontinued operations. These operations were included in the Company’s “Regulated” segment.

A summary of discontinued operations presented in the consolidated statements of net income include the following:



	Three Months Ended		Nine Months Ended
	September 30, 2014		September 30, 2014
Operating revenues	$	1,935	$	5,234
Total operating expenses		1,463		2,603
Operating income		472		2,631
Other expense:
Loss on sale		-		134
Income from discontinued operations before income taxes		472		2,497
Provision for income taxes		187		1,003
Income from discontinued operations	$	285	$	1,494

As of September 30, 2015 and December 31, 2014, there were no assets or liabilities associated with the Company’s discontinued operations.

]

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

Note 5 – Capitalization

In October 2015, the Company provided notice for the early redemption of $4,000 of first mortgage bonds at 8.14% that were originally maturing in 2025 and $95,985 of tax-exempt bonds at 5.00% that were originally maturing between 2035 and 2038. The Company anticipates refinancing this debt through the issuance of long-term debt during the fourth quarter of 2015.

In May 2015, the Company issued $70,000 of senior unsecured notes due in 2030 with an interest rate of 3.59%. The proceeds were used to repay existing indebtedness and for general corporate purposes.

In May 2015, Aqua Pennsylvania Inc., a subsidiary of the Company (“Aqua Pennsylvania”) entered into a $50,000 three-year unsecured loan at an interest rate of 1.975%. The proceeds from this loan were used for refinancing existing indebtedness and general working capital purposes.

In February 2015, the Company renewed its universal shelf registration, which had expired in February 2015, through a filing with the Securities and Exchange Commission (“SEC”) to allow for the potential future sale by the Company, from time to time, in one or more public offerings, of an indeterminate amount of our common stock, preferred stock, debt securities and other securities specified therein at indeterminate prices.

In February 2015, the Company filed a registration statement with the SEC to update an existing filing which permits the offering, from time to time, of an aggregate of $500,000 in shares of common stock and shares of preferred stock in connection with acquisitions. The form and terms of any securities issued under these shelf registration statements will be determined at the time of issuance.

Note 6 – Fair Value of Financial Instruments

The Company follows the Financial Accounting Standards Board’s (“FASB”) accounting guidance for fair value measurements and disclosures, which defines fair value and establishes a framework for using fair value to measure assets and liabilities. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in non-active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

Level 3: inputs that are unobservable and significant to the fair value measurement.

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AQUA AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(In thousands of dollars, except per share amounts)

(UNAUDITED)

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. There have been no changes in the valuation techniques used to measure fair value or asset or liability transfers between the levels of the fair value hierarchy for the quarter ended September 30, 2015.

Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented. The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments.

The fair value of funds restricted for construction activity and loans payable are determined based on their carrying amount and utilizing Level 1 methods and assumptions. As of September 30, 2015, the Company did not have any funds restricted for construction activity and as of December 31, 2014, the carrying amount of the Company’s funds restricted for construction activity was $47, which equates to its estimated fair value. As of September 30, 2015 and December 31, 2014, the carrying amount of the Company’s loans payable was $28,030 and $18,398, respectively, which equates to their estimated fair value. The fair value of cash and cash equivalents, which is comprised of a money market fund, is determined based on the net asset value per unit utilizing Level 2 methods and assumptions. As of September 30, 2015 and December 31, 2014, the carrying amounts of the Company's cash and cash equivalents was $4,071 and $4,138, respectively,