Investors in Aqua America (NYSE: WTR), an industry leader among water utilities, had plenty to celebrate in 2017 -- a year in which shares floated 31% higher. Although the year was a successful one for the company's stock, it's no guarantee that the year was a success for the business.
The company is expected to report its fourth-quarter earnings on Feb. 28. For some investors, wading through a water utility's earnings report can be overwhelming, so let's prepare by focusing on some things we can expect management to address.
Missing the mark
Reporting 1.6% total customer growth for fiscal 2016, management, during its Q4 2016 earnings presentation, expressed confidence that the company would continue expanding its customer base in fiscal 2017, forecasting year-over-year customer growth of 1.5% to 2%. Although the company made progress in attaining this target, completing four acquisitions of water and wastewater utility systems during the first nine months of 2017 and adding approximately 1,000 customers, investors can expect to hear that the company, ultimately, came up short. In late December, management reported delays in completing two acquisitions; consequently, it estimated that customer growth would equal 1% for the year.
Although Aqua America is engaged in market-based operations, it's the regulated business segment that is its bread and butter. In fiscal 2016, for example, the regulated segment accounted for 97.6% of revenue. Investors, therefore, should be keenly focused on management's commentary relating to the two delayed acquisitions, confirming that they are expected to close in the coming months as management had previously suggested.
Striving for a high-water mark
Although Aqua America faced a setback by failing to complete its intended acquisitions for fiscal 2017, expanding the customer base isn't the only means by which the company grows its business. Asset renewal plays an important role in achieving higher profitability, for it enables the company to expand its operating margin. For example, following a recent $52 million investment to increase additional internal capacity at its plants and booster stations in Bristol, Pennsylvania, Aqua America expects to recognize an annual reduction of $17 million per year in purchased water expense. Moving forward, Aqua America has identified a capex target of $1.2 billion for fiscal 2017 through fiscal 2019.
Through the first nine months of 2017, Aqua America reported capital expenditures of $337 million, and since the company had set a capex goal of $450 million for fiscal 2017, investors should expect the company to report capex of approximately $113 million for the fourth quarter. If the company succeeds in achieving its capex guidance, it will represent a company record for annual investment in infrastructure.
Hitting the gas pedal
Since it plays the most prominent role in the company's finances, the operations in regulated markets receive the lion's share of attention. Instead of remaining solely focused on this area when the company reports earnings, though, investors should look for management's commentary regarding its joint venture. Formed in 2012, Aqua America's joint venture with Penn Virginia Resource Partners, L.P. seeks to provide fresh water to natural gas producers drilling in the Marcellus Shale in north-central Pennsylvania. Far from providing a flood of profits, the joint venture only accounted for $402,000 in earnings through the first nine months of fiscal 2017.
On the company's Q3 conference call, however, management seemed optimistic about the joint venture's future. Responding to an analyst's question, Dan Schuller, an executive vice president, stated that the company picked up two customers in the third quarter, and it's "starting to see some activity there, and we're in conversations for more activity in 2018 and then into 2019 [and] so had a nice change there in terms of volumes."
Schuller's commentary is consistent with the financial results of Aqua America's leading competitor, American Water Works, whose Keystone Clearwater Solutions provides water services to natural gas exploration and production companies. According to American Water Works' 10-K, Keystone accounted for a $16 million increase in operating revenue "due to an increase in operations as a result of market recovery in the natural gas industry."
What to expect from Aqua America
When reviewing Aqua America's fourth-quarter performance, investors should confirm that the company is on track to complete the two acquisitions whose closings had been delayed in 2017; moreover, they should look for signs that management is continuing to identify acquisition targets. Achieving its capex target will be another good sign as it indicates the company is ensuring greater future profitability. Lastly, investors should look for color on Aqua America's joint venture. It may not provide a windfall of profits anytime soon, but it could provide a means of mitigating the risk of the company suffering a setback in its regulated business segment.
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