WTR Welcomes New Cost Recovery Bill

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Aqua America Inc. (WTR) has welcomed the enactment of a new law, the House Bill 710, which will allow proper recovery of costs incurred by the utilities for the upgrade of water and sewer systems in North Carolina. The bill will enable utility providers to recoup their infrastructure investments from customers via a surcharge on bill.

As per a report published by the U.S. Environmental Protection Agency earlier this month, the U.S. based utilities need to invest $384 billion through 2030 to refurbish and upgrade drinking water systems. Another report from Economic Development Research Group Inc. suggests an alarming gap between water infrastructural requirement and actual investments projected for the coming years. The gap is expected to reach $84 billion in 2020 and widen to $144 billion in 2040. The report also revealed that without proper renewal or replacement, nearly 44% of the existing pipelines will become too weak for operation by 2020.

To overcome this situation, most of the water utility providers spend substantial amount on their ageing infrastructure. Aqua America’s peer American Water Works Company Inc. (AWK) spent $101 million for the completion of its Pittsburg System Upgrade project.

Aqua America invested $59.2 million during first-quarter 2013 under its capital spending program for improving regulated infrastructure including pipe replacement and plant upgrade. In 2013, the company intends to invest $325 - $340 million in various projects to ensure the safety and reliability of its water operations.

The infrastructure upgrade program will enable Aqua America to provide uninterrupted water supply to its customers and strengthen system competence. These factors will subsequently improve reliability, consumer confidence, and public safety while maintaining government water quality regulations.

It is evident from Aqua America’s capital spending program that the company currently expands its water distribution assets through improvement of existing operation, installation of modern systems and acquisitions. In Mar 2013, the company acquired the water and wastewater system assets of Total Environmental Solutions, Inc.

Previously, North Carolina did not have a constructive recovery mechanism for water utility providers. With the introduction of this bill, the regulated utility providers can effectively recoup their earlier invested funds. Also, we believe the bill will further give confidence to the utilities to invest more for infrastructure upgrades. These enhancement initiatives will enable the company to provide high quality water utility services to its existing customers, which will lead to customer retention and also attract new customers.

Aqua America currently has a Zacks Rank #3 (Hold). We however prefer Middlesex Water Co. (MSEX) with a Zacks Rank #1 (Strong Buy), and American States Water Company (AWR) with a Zacks Rank #2 (Buy).

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