Fluid Performance

We are holding stable our full-year 2013 EPS estimate at $2.24, which is within management’s reaffirmed guidance range of $2.15-$2.25. We are initiating a 2014 EPS estimate of $2.40.

We are reiterating our Buy rating and 12-month $45 price target, which we derive by applying a 20 times multiple to our 2013 EPS estimate. We believe this is appropriate given AWK’s growth prospects, financial position and broader industry valuations.

Aqua America Inc.’s (WTR) fourth quarter revealed few operational surprises, in our view, though a bottom line beat was delivered as the repair tax accounting change affected results for the first time. Operations and maintenance came in a bit above our expectation, though revenue did as well; netting out the noise, earnings before interest and taxes (EBIT) of $54.7 million was in line with our estimate. Our projection for just under $2 million in tax benefit proved to be too conservative, with actual benefit in the quarter of $10.4 million fueling the $0.06 of upside to our Q4 estimate.

Looking back over the totality of 2012, we believe it was an impressive year for the company. WTR divested operations in Maine and New York, while successfully integrating 18 acquisitions, including all of American Water Works’ former Ohio assets. Despite the acquisition activity and the legwork necessary for rolling out the repair tax accounting change, the company held expenses in check, with O&M growth of 5.9%, substantially lagging revenue growth of 10.3%. Also in 2012, the company completed Phases I and II of its initial three-phase joint venture pipeline to supply water to drillers in the Marcellus; despite being a start-up, the project is already having a positive impact on EPS (approximately $0.01).

Ryan M. Connors Janney Capital Markets 215-665-1359 [email protected]

Aqua America posted revenue of $187.4 million (+6% year-over-year) in 4Q2012, above both our estimate of $183.1 million and consensus of $182.4 million. A shift to repair tax accounting in the quarter resulted in EPS of $0.47 as the entire 2012 tax benefit was recognized in the quarter. Excluding this benefit, Aqua recorded EPS of $0.25, beating our estimate of $0.22 but falling below the Street at $0.27.

After a slowdown in 2009 through 2011, Aqua has renewed its focus on customer growth via acquisitions and portfolio restructuring (witnessed in its impending exit of Florida and acquisition of Ohio American properties in 2012), which has enabled it to reach its pre-recession customer growth rate of 1.9% in 2012.

A dividend hike [was] on the agenda at Board of Directors meeting. Aqua once again announced a dividend increase of 6% to $0.175 in December, though in light of the new tax method this puts the dividend payout ratio at 50%. 

Management notes that with Aqua’s target payout ratio normally at 60%, the rate of the quarterly dividend would likely be a source of discussion among the directors in the meeting scheduled to take place in the coming days.