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Water: Resourceful Growth

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Tim Winter, CFA
Gabelli & Company
[email protected]

American States Water (AWR) of San Dimas, Calif., is the parent company for Golden States Water Company and American States Utility Services. AWR is a high-quality utility with a strong balance sheet (58% common equity) and high credit ratings (S&P: A+). In 2014, AWR expects to invest $80 million-$90 million on capital expenditures and has authorized a stock repurchase plan of up to 1.25 million shares through June of 2016.

Shares offer a 2.8% current return on the $0.85 per share annual dividend, which represents a 57% payout ratio of our 2014 earnings estimate [and] allows for ample cushion for further dividend growth. We recommend investors hold AWR shares given our belief that the water utilities strong fundamentals are fairly recognized in share price. AWR shares trade at 20.6 times and 18.7 times our 2014 and 2015 earnings estimates compared to peer group multiples of 19.5 times and 17.6 times, respectively.

Our 2014, 2015 and 2016 earnings estimates for Aqua America (WTR) remain $1.20, $1.30, and $1.40 per share, respectively. Earnings growth will continue to be driven by rate increases, acquisitions and cost controls, as well as ongoing repair tax deduction. Management expects customer growth of 1.5-2.0% annually, rate increases in non-Pennsylvania states, infrastructure surcharges and improved results from the Marcellus water wholesale business in 2014 and beyond.

Six (Penn., Ill., Ind., Ohio, N.J., and N.C.) of the eight-state jurisdiction where WTR operates allow infrastructure surcharges, which results in timely returns on investment. Year-to-date 2014, WTR has made seven acquisitions, including the privately held Presidential Service Company (1,500 people), the municipal wastewater system of Penn Township, Penn., (2,300 people and 25 commercial customers) and Summit Lake, N.J.

Ryan M. Connors
Janney Capital Markets
[email protected]

American States Water’s Utilities Services outlook improved for the second half of 2014. Management expects construction activity in the ASUS segment to pick up in the second half, setting the stage for a sequential re-acceleration in sales for the military-base business, although the precise timing remains uncertain. In addition, the company expects to complete multiple price redeterminations in the military business in the near term, potentially resulting in retroactive topline contributions for 2014.

Spencer E. Joyce, CFA
Hilliard Lyons
[email protected]

Aqua America reported Q2’14 EPS from continuing operations of $0.31 vs. $0.30 in Q2’13. Our estimate called for $0.32; consensus was $0.30. A revenue shortfall (likely weather) and Marcellus pipeline losses weighed relative to our forecast, while higher tax credit-eligible spend served as an offset.

Revenue in Q1 grew 0.7%, falling short of our 2.7% expectation, though we were the high estimate on the Street. Topline growth is less important as WTR books repair tax deduction credits, but we nonetheless expect most quarters will be positive year over year.

We are reiterating our long-term Buy rating on WTR and two-year price target of $30.

A few hours prior to releasing Q2 results, WTR announced an 8.6% dividend hike. Based on [a recent] close and the new payout amount, Aqua shares are indicated to yield 2.83%.