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From the Survey: Aqua America
Aqua America (WTR) is a major water and wastewater services company, based in Bryn Mawr, Pennsylvania. Originally called Philadelphia Suburban Corporation, it was founded in 1968 as a holding company for its primary subsidiary, Aqua Pennsylvania Inc. In 2004, the company changed its name to Aqua America. In addition to water and wastewater services, Aqua America has operation and maintenance contracts with municipalities and other parties for sludge hauling, septage and grease services, and backflow prevention services.
The business has been focused on growing primarily via acquisitions since the early 1990s, with its most significant transactions being the purchases of Consumers Water Company (1999), AquaSource (2003), Heater Utilities, Inc. (2004), and finally the New York Water Service Corporation (2007). The acquisition spree has helped spread the company geographically from Pennsylvania to 12 other states, including, Texas, North Carolina, Ohio, Illinois and New York.
However, since the recession, the company has been working on selling off underperforming businesses. For example, in September 2010, it sold its wastewater operation in South Carolina, removing itself from that lukewarm market. More recently, it entered into an agreement to sell its water and wastewater operations in Missouri. The sale is expected to end by the third quarter of this year, barring any unforeseen problems. With the conclusion of the transaction, Aqua America will be pulling out of Missouri for brighter horizons.
While disposing of its “deadweight”, as mentioned, the company has been on the lookout for acquisition opportunities. In July, 2011, it entered into a definitive agreement with American Water Works Company, Inc (American Water), to purchase its Ohio subsidiary, which serves over 50,000 customers in the state. The transaction is expected to close in the first quarter of 2012. Aqua America is also working on rapidly expanding its presence in the booming state of Texas, purchasing approximately 50 water and five wastewater systems thus far. Given its strong balance sheet, and management’s commitment to a growth via acquisitions, we expect to see this trend continue in the future. Since the industry is a slow growing one, acquisitions are often the fastest way to increase the customer base, and thus lift revenues and profits. That said, investors should note that these purchases are dependent on regulatory and shareholder approvals.
Another avenue of revenue growth is rate cases. Aqua America has a good history with regards to rate increases, and is looking at several rate cases in various states at the moment. Details are not fully known at this time, though given the company’s history of beneficial settlements, we expect to see revenue growth from an increase in rates in the future. However, this avenue allows for limited growth, as the rates can only be increased so much. This is one of the reasons the company focuses on acquisition growth as opposed to organic growth, though attention is paid to both.
Income-oriented investors should take a look at this stock. It just increased its dividend by 6% in the second quarter. This is the 21st dividend increase in the company’s 20-year dividend history. Given the company’s strong cash flow position, we do not expect this trend to change course anytime soon. However, we caution investors to keep an eye on the market and the economy, both of which have been quite turbulent, and may hurt the company’s prospects over the near-term.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.