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March 28, 2016 at 08:00 PM
Timothy Winter, CFA
Gabelli & Company
314-238-1314
[email protected]
Aqua America (WTR; Bryn Mawr, Penn.) is the second-largest publicly traded water utility in the U.S., serving about 3 million people in Pennsylvania (55% of earnings), Ohio, North Carolina, Illinois, Texas, New Jersey, Indiana and Virginia.
On Feb. 23, WTR reported 2015 adjusted earnings of $1.26 per share, in-line with guidance of $1.25-$1.27 per share and compared to $1.20 per share in 2014. Higher results were due to customer growth, higher rates and surcharges, and higher usage.
In 2015, the operating efficiency ratio (operations and maintenance, or O&M, as a percent of operating revenues) rose to 36.3% from 34.7% in 2014, partially due to four municipal acquisitions adding 7,900 customers and 12 investor-owned utilities (IOUs) [with] 2,700 customers. Additionally, WTR subsidiaries implemented rate awards totaling $8.6 million.
Earnings growth will continue to be driven by rate base investments, acquisitions, cost controls, infrastructure surcharges and the pipeline-rehabilitation business.
Year to date, WTR has completed four acquisitions for a total of 4,500 customers, and management has renewed its focus on municipal water and wastewater systems serving 2,500-25,000 customers; recent legislation in Illinois, New Jersey and Indiana has encouraged consolidation by allowing the purchase price in rate base or applying uniform rates statewide.
We continue to believe WTR is well positioned to continue its successful acquisition strategy given U.S. water (53,000 systems) and wastewater (16,000 systems) industries are extremely fragmented and municipally dominated (water is 85% municipally owned; wastewater 97%).
Year to date, WTR subsidiaries have implemented rate rewards totaling $4.3 million, including $600,000 in Illinois, $604,000 in North Carolina, $1.4 million in Ohio, $225,000 in Texas, and $1.5 million in Virginia. In New Jersey, WTR has a general rate case pending requesting an annualized revenue increase of $2.5 million.
Given the use of repair tax deductions, Aqua-Pennsylvania has not filed a general rate case or Distribution System Improvement Charges (DSIC), since 2011 and does not expect to need to until 2017 or 2018. WTR expects a roughly 15% rate increase, which includes the DSIC in the 2017-18 request. The use of repairs tax deduction allowed for the seven year stay-out and roughly $10 per month customer benefit.
The 2016-2018 capital investment program totals $1.1 billion, including $350 million in 2016. Roughly 63% of the investment is allocated toward pipe replacement or upgrades in jurisdictions with surcharge eligible infrastructure programs (PA, IL, IN, OH, NJ and NC). The PA PUC which regulates $2.4 billion of WTR’s $3.5 billion rate base allows for a quarterly DSIC.
Given strong cash flow, infrastructure surcharges and cash from asset sales, WTR has minimal external funding needs. As of Dec. 15, 2015, the common equity ratio was 49%, and S&P maintained its A+ credit rating for Aqua Pennsylvania.
WTR is a well-managed, low-risk, high-quality conservative utility with unique growth opportunities. Shares offer a 2.3% current return on the $0.71 per share annual dividend.
