Note 15 – Pension Plans and Other Post-retirement Benefits

The Company maintains qualified, defined benefit pension plans that cover a substantial portion of its full-time employees who were hired prior to April 1, 2003. Retirement benefits under the plans are generally based on the employee’s total years of service and compensation during the last five years of employment. The Company’s policy is to fund the plans annually at a level which is deductible for income tax purposes and which provides assets sufficient to meet its pension obligations over time. To offset certain limitations imposed by the Internal Revenue Code with respect to payments under qualified plans, the Company has a non-qualified Supplemental Pension Benefit Plan for Salaried Employees in order to prevent certain employees from being penalized by these limitations. The Company also has non-qualified Supplemental Executive Retirement Plans for certain current and retired employees. The net pension costs and obligations of the qualified and non-qualified plans are included in the tables which follow. Employees hired after April 1, 2003 may participate in a defined contribution plan that provides a Company matching contribution on amounts contributed by participants and an annual profit-sharing contribution based upon a percentage of the eligible participants’ compensation.

In addition to providing pension benefits, the Company offers certain Post-retirement Benefits other than Pensions (“PBOPs”) to employees hired before April 1, 2003 and retiring with a minimum level of service. These PBOPs include continuation of medical and prescription drug benefits, or a cash contribution toward such benefits, for eligible retirees and life insurance benefits for certain eligible retirees. The Company funds its gross PBOP cost through various trust accounts. The benefits of retired officers and certain other retirees are paid by the Company and not from plan assets due to limitations imposed by the Internal Revenue Code.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated:



			Other
	Pension		Post-retirement
	Benefits		Benefits
Years:
2013	$	10,574	$	1,557
2014		11,478		1,782
2015		12,420		1,940
2016		13,356		2,173
2017		14,314		2,394
2018 - 2022		84,914		14,142

The changes in the benefit obligation and fair value of plan assets, the funded status of the plans and the assumptions used in the measurement of the company’s benefit obligation are as follows:



					Other
	Pension Benefits				Post-retirement Benefits
		2012		2011		2012		2011

Change in benefit obligation:
Benefit obligation at January 1,	$	237,087		209,459		50,189		43,956
Service cost		4,920		4,127		1,309		1,092
Interest cost		12,728		12,052		2,482		2,414
Actuarial loss		34,750		19,000		5,218		3,701
Plan participants' contributions		-		-		199		219
Benefits paid		(9,329)		(7,967)		(1,160)		(1,193)
Plan amendments		-		416		(392)		-
Acquisition		23,652		-		5,188		-
Settlements		(731)		-		-		-
Benefit obligation at December 31,		303,077		237,087		63,033		50,189

Change in plan assets:
Fair value of plan assets at January 1,		148,912		145,524		28,131		26,739
Actual return on plan assets		17,153		(1,871)		2,019		562
Employer contributions		15,256		13,226		1,905		1,790
Benefits paid		(9,329)		(7,967)		(941)		(960)
Acquisition		18,823		-		2,940		-
Settlements		(731)		-		-		-
Fair value of plan assets at December 31,		190,084		148,912		34,054		28,131

Funded status of plan:
Net amount recognized at December 31,	$	112,993	$	88,175	$	28,979	$	22,058

The Company’s pension plans had an accumulated benefit obligation of $267,400 and $210,511 at December 31, 2012 and 2011, respectively. The following table provides the net liability recognized on the consolidated balance sheets at December 31,:



					Other
	Pension Benefits				Post-retirement Benefits
		2012		2011		2012		2011

Current liability	$	222	$	217	$	-	$	-
Noncurrent liability		112,771		87,958		28,979		22,058
Net liability recognized	$	112,993	$	88,175	$	28,979	$	22,058

At December 31, 2012 and 2011, the Company’s pension plans had benefit obligations in excess of its plan assets. The following tables provide the projected benefit obligation, the accumulated benefit obligation and fair market value of the plan assets as of December 31,:



	Projected Benefit
	Obligation Exceeds
	the Fair Value of
	Plan Assets
		2012		2011

Projected benefit obligation	$	303,077	$	237,087
Fair value of plan assets		190,084		148,912

	Accumulated Benefit
	Obligation Exceeds
	the Fair Value of
	Plan Assets
		2012		2011

Accumulated benefit obligation	$	267,400	$	210,511
Fair value of plan assets		190,084		148,912

The following table provides the components of net periodic benefit costs for the years ended December 31,:



								Other
		Pension Benefits						Post-retirement Benefits
		2012		2011		2010		2012		2011		2010

Service cost	$	4,920	$	4,127	$	4,008	$	1,309	$	1,092	$	1,016
Interest cost		12,728		12,052		11,386		2,482		2,414		2,151
Expected return on plan assets		(13,588)		(11,731)		(10,206)		(1,950)		(1,689)		(1,540)
Amortization of transition
obligation (asset)		-		-		-		-		104		104
Amortization of prior service cost		277		253		245		(299)		(268)		(268)
Amortization of actuarial loss		6,568		3,578		3,852		1,024		783		638
Amortization of regulatory asset		-		-		-		69		137		137
Settlement loss		304		-		-		90		-		-
Capitalized costs		(3,696)		(3,499)		(3,216)		(671)		(668)		(470)
Net periodic benefit cost	$	7,513	$	4,780	$	6,069	$	2,054	$	1,905	$	1,768

The Company records the underfunded status of its pension and other post-retirement benefit plans on its consolidated balance sheets and records a regulatory asset for these costs that would otherwise be charged to stockholders’ equity, as the Company anticipates recoverability of the costs through customer rates. The Company’s pension and other post-retirement benefit plans were underfunded at December 31, 2012 and 2011. Changes in the plans’ funded status will affect the assets and liabilities recorded on the balance sheet. Due to the Company’s regulatory treatment, the recognition of the funded status is recorded as a regulatory asset pursuant to the FASB’s accounting guidance for regulated operations.

The following table provides the amounts recognized in regulatory assets that have not been recognized as components of net periodic benefit cost as of December 31,:



						Other
		Pension Benefits				Post-retirement Benefits
		2012		2011		2012		2011

Net actuarial loss	$	106,980	$	83,008	$	21,315	$	15,937
Prior service cost (credit)		1,297		1,554		(977)		(923)
Transition obligation (asset)		-		-		-		74
Total recognized in regulatory assets	$	108,277	$	84,562	$	20,338	$	15,088

The estimated net actuarial loss, prior service cost and transition asset for the Company’s pension plans that will be amortized in 2013 from the regulatory assets into net periodic benefit cost are $8,064, $229, and $0, respectively. The estimated net actuarial loss, prior service credit and transition obligation for the Company’s other post-retirement benefit plans that will be amortized in 2013 from regulatory assets into net periodic benefit cost are $1,382, $299, and $0, respectively.

Accounting for pensions and other post-retirement benefits requires an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover and medical costs. Each assumption is reviewed annually with assistance from the Company’s 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 post-retirement benefit expense that the Company recognizes.

The significant assumptions related to the Company’s benefit obligations are as follows:



			Other
	Pension Benefits		Post-retirement Benefits
	2012	2011	2012	2011
Weighted Average Assumptions Used
to Determine Benefit Obligations
as of December 31,
Discount rate	4.17%	5.0%	4.17%	5.0%
Rate of compensation increase	4.0-4.5%	4.0-4.5%	4.0%	4.0%

Assumed Health Care Cost Trend
Rates Used to Determine Benefit
Obligations as of December 31,
Health care cost trend rate	n/a	n/a	8.0%	8.5%
Rate to which the cost trend is assumed
to decline (the ultimate trend rate)	n/a	n/a	5.0%	5.0%
Year that the rate reaches the ultimate
trend rate	n/a	n/a	2019	2019

n/a – Assumption is not applicable to pension benefits.

The significant assumptions related to the Company’s net periodic benefit costs are as follows:



				Other
	Pension Benefits			Post-retirement Benefits
	2012	2011	2010	2012	2011	2010
Weighted Average Assumptions Used
to Determine Net Periodic Benefit
Costs for Years Ended December 31,
Discount rate	5.0%	5.75%	5.91%	5.0%	5.75%	5.91%
Expected return on plan assets	7.75%	7.75%	8.0%	5.17-7.75%	5.17-7.75%	5.33-8.0%
Rate of compensation increase	4.0-4.5%	4.0-4.5%	4.0-4.5%	4.0%	4.0%	4.0%

Assumed Health Care Cost Trend
Rates Used to Determine Net Periodic
Benefit Costs for Years Ended December 31,
Health care cost trend rate	n/a	n/a	n/a	8.5%	9.0%	8.0%
Rate to which the cost trend is assumed
to decline (the ultimate trend rate)	n/a	n/a	n/a	5.0%	5.0%	5.0%
Year that the rate reaches the ultimate
trend rate	n/a	n/a	n/a	2019	2019	2016

n/a – Assumption is not applicable to pension benefits.

Assumed health-care trend rates have a significant effect on the expense and liabilities for other post-retirement benefit plans. The health care trend rate is based on historical rates and expected market conditions. A one-percentage point change in the assumed health-care cost trend rates would have the following effects:



		1-Percentage-		1-Percentage-
		Point		Point
		Increase		Decrease
Effect on the health-care component of the
accrued other post-retirement benefit
obligation	$	4,009	$	(3,713)
Effect on aggregate service and interest cost
components of net periodic post-retirement
health-care benefit cost	$	186	$	(185)

The Company’s discount rate assumption was determined by selecting a hypothetical portfolio of high quality corporate bonds appropriate to provide for the projected benefit payments of the plan. The selected bond portfolio was derived from a universe of Aa-graded corporate bonds, all of which were noncallable (or callable with make-whole provisions), and have at least $50,000 in outstanding value. The discount rate was then developed as the single rate that equates the market value of the bonds purchased to the discounted value of the plan’s benefit payments. The Company’s pension expense and liability (benefit obligations) increases as the discount rate is reduced. A 25 basis-point reduction in this assumption would have increased 2012 pension expense by $887 and the pension liabilities by $8,956.

The Company’s expected return on assets is determined by evaluating the asset class return expectations with its 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. The Company’s pension expense increases as the expected return on assets decreases. A 25 basis-point reduction in this assumption would have increased 2012 pension expense by $449. For 2012, the Company used a 7.75% expected return on assets assumption and will lower this assumption to 7.50% for the calculation of pension expense for 2013. The Company believes its actual long-term asset allocation on average will approximate the targeted allocation. The Company’s investment strategy is to earn a reasonable rate of return while maintaining risk at acceptable levels through the diversification of investments across and within various asset categories. Investment returns are compared to benchmarks that include the S&P 500 Index, the Barclays Capital Intermediate Government/Credit Index, and a combination of the two indices. The Pension Committee meets semi-annually to review plan investments and management monitors investment performance quarterly through a performance report prepared by an external consulting firm.

The Company’s pension plan asset allocation and the target allocation by asset class are as follows:



	2013	Percentage of Plan
	Target	Assets at December 31,
	Allocation	2012	2011
Asset Class:
Equity securities	50 to 75%	64%	66%
Debt securities	25 to 50%	23%	24%
Cash	0%	13%	10%
Total	100%	100%	100%

The fair value of the Company’s pension plans’ assets at December 31, 2012 by asset class are as follows:



Asset Class:		Total		Level 1		Level 2		Level 3
Equity securities (a)
Common stocks	$	121,902	$	121,902	$	-	$	-
Mutual funds		898		898		-		-
Debt securities (b)
U.S. Treasury and government
agency bonds		12,156		-		12,156		-
Corporate and foreign bonds		5,975		-		5,975		-
Mutual funds		24,928		24,928		-		-
Cash (c)		24,225		-		24,225		-
Total pension assets	$	190,084	$	147,728	$	42,356	$	-

The fair value of the Company’s pension plans’ assets at December 31, 2011 by asset class are as follows:



Asset Class:		Total		Level 1		Level 2		Level 3
Equity securities (a)
Common stocks	$	95,909	$	95,909	$	-	$	-
Mutual funds		3,507		3,507		-		-
Debt securities (b)
U.S. Treasury and government
agency bonds		14,236		-		14,236		-
Corporate and foreign bonds		4,898		-		4,898		-
Mutual funds		15,072		15,072		-		-
Cash (c)		15,290		-		15,290		-
Total pension assets	$	148,912	$	114,488	$	34,424	$	-

(a)	Investments in common stocks are valued using unadjusted quoted prices obtained from active markets. Investments in mutual funds, which invest in common stocks, are valued using the net asset value per unit as obtained from quoted market prices for the mutual funds.

(b)

Investments in U.S. Treasury and government agency bonds and corporate and foreign bonds are valued by a pricing service which utilizes pricing models that incorporate available trade, bid, and other market information to value the fixed income securities. Investments in mutual funds, which invest in bonds, are valued using the net asset value per unit as obtained from quoted market prices in active markets for the mutual fund.

(c)	Cash is comprised of money market funds, which are valued utilizing the net asset value per unit based on the fair value of the underlying assets as determined by the fund’s investment managers.

Equity securities include Aqua America, Inc. common stock in the amounts of $12,596 or 6.6% and $10,610 or 6.4% of total pension plans’ assets as of December 31, 2012 and 2011, respectively.

The asset allocation for the Company’s other post-retirement benefit plans and the target allocation by asset class are as follows:



	2013	Percentage of Plan
	Target	Assets at December 31,
	Allocation	2012	2011
Asset Class:
Equity securities	50 to 75%	46%	56%
Debt securities	25 to 50%	26%	34%
Cash	0%	28%	10%
Total	100%	100%	100%

The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2012 by asset class are as follows:




Asset Class:		Total		Level 1		Level 2		Level 3
Equity securities (a)
Common stocks	$	9,170	$	9,170	$	-	$	-
Mutual funds		6,465		6,465		-		-
Debt securities (b)
U.S. Treasury and government
agency bonds		4,751		-		4,751		-
Corporate and foreign bonds		2,735		-		2,735		-
Mutual funds		1,398		1,398		-		-
Cash (c)		9,535		-		9,535		-
Total other post-retirement assets	$	34,054	$	17,033	$	17,021	$	-

The fair value of the Company’s other post-retirement benefit plans’ assets at December 31, 2011 by asset class are as follows:



Asset Class:		Total		Level 1		Level 2		Level 3
Equity securities (a)
Common stocks	$	9,010	$	9,010	$	-	$	-
Mutual funds		6,524		6,524		-		-
Debt securities (b)
U.S. Treasury and government
agency bonds		4,904		-		4,904		-
Corporate and foreign bonds		3,042		-		3,042		-
Mutual funds		1,420		1,420				-
Cash (c)		3,231		-		3,231		-
Total other post-retirement assets	$	28,131	$	16,954	$	11,177	$	-

(a)	Investments in common stocks are valued using unadjusted quoted prices obtained from active markets. Investments in mutual funds, which invest in common stocks, are valued using the net asset value per unit as obtained from quoted market prices for the mutual funds.

(b)

(c)	Cash is comprised of money market funds, which are valued utilizing the net asset value per unit based on the fair value of the underlying assets as determined by the fund’s investment managers.

Funding requirements for qualified defined benefit pension plans are determined by government regulations and not by accounting pronouncements. In accordance with funding rules and the Company’s funding policy, during 2013 our pension contribution is expected to be approximately $15,954. The Company’s funding of its PBOP cost during 2013 is expected to approximate $2,875.

The Company has 401(k) savings plans that cover substantially all employees. The Company makes matching contributions that are initially invested in Aqua America, Inc. common stock based on a percentage of an employee’s contribution, subject to certain limitations. Participants may diversify their Company matching account balances into other investments offered under the 401(k) savings plans. The Company’s matching contribution and annual profit-sharing contribution, recorded as compensation expense, was $2,741, $2,496, and $2,035, for the years ended December 31, 2012, 2011, and 2010, respectively.