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Aqua America (WTR) Earnings Momentum Seen Over Next 3 Years: Brean Capital

 February 07, 2013 02:41 PM

(By Balaseshan) Aqua America Inc. (NYSE: WTR) is expected to show earnings momentum over the next three years reflected by the projected positive tax impacts from its adoption of repair tax accounting methodology, Brean Capital said in a statement.

The company is forgoing use of the Distribution System Improvement Charge (DSIC) for its Pennsylvania operations to adopt repair tax accounting, a methodology used by other utilities, Brean Capital noted.

The brokerage said this will allow the company to lower rates on customers (in Pennsylvania) by 2.82%, while simultaneously using a tax deduction to reduce its effective tax rate.

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"The change will impact 2012 results, with the full year benefit occurring in 4Q12. Going forward, Aqua America will continue to see substantial benefits from this accounting change. Future impacts from the changes should be seen up and down the income statement," said Michael Gaugler, an analyst at Brean Capital.

Given WTR is only utilizing this benefit in Pennsylvania (which represents about half of total revenues), revenue growth should slow, given the DSIC in PA will no longer be utilized, and WTR is incentivized to stay out from a Pennsylvania rate case as long as possible, given the tax benefits could (and probably would) be diminished by regulators, the analyst noted.

Gaugler sees several years of substantial earnings growth for Aqua America. The anticipated benefits from the changes to the company's tax profile, coupled with the water supply opportunity for Marcellus Shale drilling, should lead to better, above industry average year-over-year results.

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Additionally, the analyst expects the company to continue executing on its long term strategy of water system acquisitions, which could add additional earnings. Given the momentum he anticipates in EPS growth, he is lifting his anticipated price-to-earnings multiple to 26 times, a level the shares have traded at in the past during substantial growth periods.

With the shares now trading at 20 times the analyst's 2013 EPS estimate of $1.35, he considers the shares attractively priced, and recommends investors continue to accumulate at current levels.

WTR is trading up 2.15% at $28.50 on Thursday.



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