The lawsuit in Camden County Superior Court came a month after an independent audit by the state Comptroller's Office compared Camden's water service to those of developing nations.
The audit claimed that 45 percent of the company's water to the city was lost due to leakage, overflow, meter inaccuracies, and billing errors. The audit valued the loss at $1.7 million a year. United Water disputed many of the findings, putting much of the blame on Camden's antiquated pipes.
After the audit's release, the city demanded a $29 million refund.
Under terms of the settlement, Camden agreed to pay $4 million to the water company. According to a resolution being presented Tuesday to City Council for approval, the city will pay $2.7 million and will receive a waiver for the remaining $1.3 million for concession payments owed by United Water to Camden.
United Water spokeswoman Jane LeCapitaine declined to comment Friday.
The city has about $2.6 million in reserve from its fiscal 2011 budget that it will use to pay the money owed, said city spokesman Robert Corrales.
"This will not affect the current budget," he said.
The 20-year contract with United Water was approved by local and state officials in 1998 amid considerable opposition and two lawsuits, including one by residents. Both suits were dismissed.
Renegotiation and modifications to the existing agreement are also part of the settlement, according to the Council resolution.
Contact staff writer Claudia Vargas
at 856-779-3917, cvargas@philly news.com, or @InqCVargas