Aqua America, Inc. (NYSE: WTR) announced today that it intends to adopt the repair tax accounting change for its Pennsylvania subsidiary on Aqua America’s 2012 federal income tax return to be filed in September 2013. This change, which the company previously announced it was evaluating, allows a tax deduction for investments that were formerly capitalized for tax purposes. The company will use flow-through accounting for the tax benefits of the repair tax accounting change per its previously disclosed Pennsylvania rate order from June 2012. The proposed action is a frequently implemented tax benefit that has been used by numerous companies, including utilities in recent years.
“We believe that the use of this tax policy is a ‘win-win’ for customers and shareholders as the rate order should allow Aqua Pennsylvania to continue its infrastructure improvement program without increasing customer rates in 2013, while still providing the company with the opportunity to continue its strong financial performance,” said Aqua America Chairman Nicholas DeBenedictis. As a result of implementing this tax accounting change, Aqua Pennsylvania water customers will see their rates reduced by 2.82 percent beginning in January 2013 (through the suspension of its Distribution System Improvement Charge - DSIC) and no rate increases in 2013, even though the company plans to spend more than $200 million on water system improvements in 2013. Aqua Pennsylvania has spent $1.8 billion in needed infrastructure improvements over the last 10 years to provide reliable service to customers.
The company is analyzing the projected impact of the repair tax accounting change on Aqua America’s 2012 and 2013 financial results based on an in-depth study of its capital expenditures that is still in progress using the assistance of a large multi-national accounting firm. The financial impact of the study will be included within the 2012 consolidated financial statements of Aqua America, Inc., which will be audited by PricewaterhouseCoopers, LLC. The study is analyzing the company’s spending to determine the specific units of property that will be deductible under this accounting change. The company currently estimates this action could increase 2012 net income by 15 to 20 percent (all recognized in the fourth quarter). The repair tax deduction is anticipated to continue in 2013 and future years, consisting of a deduction for qualifying annual capital expenditures, currently projected to be at a level in 2013 similar to the level for 2012, and initiation of a 10-year amortization of the deduction for qualifying capital expenditures made prior to 2012 (the catch-up adjustment), which is subject to a number of factors and is still being estimated. This accounting change and its treatment under the Pennsylvania rate order will offset the impact of DSIC suspension, i.e., no Pennsylvania water rate increases in 2013.
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