3 Things to Watch When Aqua America Reports Q3 Earnings

Aqua America (NYSE: WTR), an industry leader among water utilities, is expected to report its third-quarter earnings on Nov. 1. 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.

Ask and you shall receive

Unlike some of its peers, Aqua America recognizes nearly all of its revenue from operations in regulated markets. In fiscal 2016, for example, the regulated segment accounted for 97.6% of the company's operating revenue; conversely, American Water Works (NYSE: AWK), the largest water utility by market cap, reported that its regulated businesses segment accounted for 86.9% of the company's operating revenue in fiscal 2016. It's critical, consequently, that Aqua America receive approvals for the rate-increase requests that it files.

Through the first six months of 2017, Aqua America has completed rate cases or surcharges in six states, resulting in additional annualized revenue of $11.1 million. Management has two base-rate cases -- in Illinois and Virginia -- remaining in 2017, representing an annualized revenue increase of $14 million. Completing these rate-increase requests is essential to the company's success, because it enables the company to recover investments in the maintenance and upgrading of its assets.

Working its way through the shopping list

Besides rate increases, a key component of Aqua America's growth strategy is the acquisition of water and wastewater utility systems. Having completed acquisitions in Pennsylvania and Indiana, Aqua America added approximately 1,000 customer connections in the first half of the year, representing about 0.5% growth in its customer base.

Currently, the company has three pending acquisitions that it expects to complete by the end of the year. Management estimates spending more than $108 million on these deals, which represent more than 8,000 customers.

It's imperative for the company to complete these acquisitions if it hopes to achieve its goal of 1.5% to 2% total customer growth for fiscal 2017.

During the second quarter, the company reported that it had signed a contract for the acquisition -- expected to close in 2018 -- of a new municipal system. Investors should certainly look for announcements, like the one last quarter, addressing new acquisitions, regardless of when management expects to complete them.

One for the record books

Besides growing its customer base, asset renewal plays an important role in achieving higher profitability, for it enables the company to expand its operating margin. And demonstrating a commitment to maintaining its infrastructure, Aqua America has identified a target of $1.2 billion in capital expenditures for fiscal 2017 through fiscal 2019. Through the first two quarters of fiscal 2017, Aqua America has reported capex of approximately $214 million, according to Morningstar. The company, consequently, remains on track to achieve its more immediate goal of $450 million in capex for fiscal 2017. If successful in meeting this capex guidance, it will represent a company record for annual investment in infrastructure.

According to management's comments from the company's most recent conference call, Aqua America intends to replace approximately 150 miles of water main -- among numerous other projects -- in 2017, including pipes in each of the eight states in which the company operates.

What to expect from Aqua America

In reviewing Aqua America's third-quarter performance, investors should confirm the company's continued allocation of capital toward asset renewal and the completion of rate cases in Illinois and Virginia. I, however, am most curious about the company's progress in pursuing acquisitions. Currently, the company's lack of pending acquisitions in 2018 is concerning. The company ended fiscal 2016, for example, with four acquisitions expected to close the following year. As of now, there is only one acquisition scheduled to close in fiscal 2018. Should the company announce the signing of agreements to acquire new systems, it will represent an auspicious sign that the company is back on track toward executing its growth-through-acquisition strategy.

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Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.