Q3 Earnings Round-Up: American Water Works, Aqua America

Includes: AWK, WTR
by: Roger S. Conrad

Third-quarter earnings came fast and furious for many of the companies I track in my investment advisory service, Utility Forecaster. And despite all the hand-wringing of the past several months about US economic weakness, the news has been almost universally good.

For a majority of the reporters, investors greeted the numbers with enthusiasm. It’s worth noting that utilities and other high-quality, dividend-paying stocks have posted positive fourth-quarter returns 35 times since 1969. The only exceptions were years of extraordinarily bearish market activity, such as 2008. After a robust October, 2011 is on course to be the 36th year of strong returns.

Below, I highlight the reported numbers of two water utilities.

American Water Works (NYSE:AWK) posted a 12 percent boost in third-quarter earnings per share over last year’s bottom line. The keys were a 2.3 percent boost in revenue and a 1.7 percent drop in operating expenses at its regulated water utilities, which offset unseasonably low demand for water in certain jurisdictions.

The efficiency ratio, which measures expenses versus revenue, showed a marked improvement, dropping to 39.6 percent from 40.6 percent a year ago. The company also continued to lay the groundwork for future growth with $621.9 million in capital expenditures for the first nine months of 2011, a 19.1 percent increase over last year.

To cover its investment, it received $4.8 million in rate hikes during the quarter and filed requests in two states, for a total of $103.8 million along with a $37.8 million filing in Illinois. Settlements filed in three additional states will add an additional $39.8 million in revenue when approved later this year. The company anticipates a total of $900 million in capital spending in 2011, even as it continues to make targeted acquisitions.

Market-based operations revenue, which consist of contracts with municipalities and military basis to provide water and wastewater services, were up 14.1 percent over last year’s level. Management affirmed full-year earnings per share guidance of $1.75 to $1.82, for a payout ratio of 50 to 53 percent, more than enough to assure another dividend increase next year.

These results once again affirm the all-weather nature of American’s business, and why this industry enjoys perhaps the lowest operating risk of any.

Aqua America’s (NYSE:WTR) third-quarter earnings from continuing operations--excluding one-time items--surged 12.9 percent from 2010 levels. That enabled the company to boost its dividend a solid 6.5 percent, for the 21st increase in the last 20 years.

Despite abnormally high rainfall in the company’s core Mid-Atlantic region, revenue increased 2 percent. Earnings per share covered the dividend by a 2-to-1 margin after the increase. The keys to the strong performance, as was the case with American Water Works, were acquisitions and successful system investment, coupled with recovery in rates through the regulatory process. Thus far in 2011 Aqua has purchased systems serving 18,000 people and has announced plans to expand its presence in Ohio and Texas by 57,000 customers, with a focus on energy producing areas.

What amount to asset swaps with American added territory in Texas, while allowing the company to exit Maine, Missouri and New York, where it lacked scale. And the company also entered a joint venture with midstream energy infrastructure player Penn Virginia Resource Partners LP(NYSE:PVR) to develop environmentally friendly water supply systems for use in hydraulic fracturing for natural gas and oil development in the Marcellus Shale area.

Aqua is on track to spend $300 million on its regulated utilities in 2011 and has received rate increases in five states worth $20.9 million to pay for it so far, with another $15.2 million filed in three additional states. Six more cases are planned for filing later this year that will lift 2012 results. That’s the same asset-heavy formula that has powered Aqua’s earnings and dividend growth for two decades. And it looks set for more of the same for years to come.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.