Aqua America Gains from Acquisitions Despite Regulatory Woes

Aqua America Inc. WTR continues to expand its operations through strategic acquisitions and aims to expand its customer base in 2017 by 1.5–2% from 2016 levels through acquisitions and organic growth. However, the water utilities are subject to certain federal and state environmental laws and regulations, which are getting stricter by the day.

Consolidation is the need of the hour in the fragmented U.S. water utility space. Consolidation would therefore drive the necessary infrastructure overhauls that have become imperative for the industry at large. During the five-year period ending Dec 31, 2016, the company expanded its utility operations by completing 84 acquisitions and other growth ventures.

Year to date, the company expanded its customer base by 0.2% from organic growth and acquisitions. The four pending buyouts, when closed, are expected to increase its customer base by 8,800.

The water utilities have immense opportunity to expand their regulated operations. Aqua America aims to make capital investments of over $450 million in 2017, which is part of an ambitious investment target of over $1.2 billion in the 2017–2019 period.

Aqua America expects rate base to grow 6–7% in 2017. Rate cases completed so far this year will increase Aqua America's 2017 top line by $10.7 million, while the pending rate cases in Virginia and Indiana, if approved, could boost annualized revenues by $12.2 million.

Like Aqua America, another utility, American Water Works Company AWK aims to invest $6.7–$7.3 billion from 2017 through 2021, which will help it improve earnings by 7–10% per year in the aforesaid period from a 2015 base. Another water utility, Connecticut Water Service CTWS aims to invest more than $150 million in the 2017–2019 time frame to strengthen its existing water infrastructure.

The water utilities are subject to certain federal and state environmental laws and regulations. With regulations getting stricter by the day, compliance could lead to significantly higher operating costs for the company.

Price Movement

Year to date, shares of Aqua America have gained 11.9% compared with the Zacks categorized Utility Water Supply industry's gain of 8.3%.

Consolidated Water Co. delivered a positive earnings surprise of 63.64% in the first quarter. Its 2017 earnings estimates moved up 15.5% to 67 cents in the last 60 days.

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