Ryan M. Connors Janney Capital Markets 215-665-1359 [email protected]
After issuing guidance on Jan. 24, [American Water Works (AWK)] management found no reason a month later to depart from its range of $2.15-2.25 earnings per share for 2013. Regulated operations will continue to drive earnings, although American's new service line protection offerings in New York City have received positive feedback, with the company noting a 7% response rate.
Tuck-in acquisitions [and] rate cases remain the vehicles for growth in 2013. After 16 acquisitions in 2012 for a total of $44.6 million and the sale of its regulated operations in New Mexico, Arizona, and Ohio for $580 million, American Water has optimized its portfolio to the point where management remarked that its strategy going forward will be to focus more on "adjacent" opportunities rather than completely new ventures.
On the rate-making side, American was awarded 10 cases in 2012 and 2 in 2013 that our model suggests will provide approximately $56 million in incremental revenue in 2013 on top of a $24 million addition from infrastructure charges, enabling the company (in our view) to grow the top line by 3% in 2013 despite average annual usage rate declines of 2%.
[Its] geographic footprint remains compelling; [we] reiterate Buy. Striving to achieve operations in 39 states by the end of 2013, American Water is certainly hedged better than most (if not all) water utilities in terms of exposure to both regulatory systems and adverse weather conditions.
More importantly, however, is that the company's top two operating states, Pennsylvania and New Jersey (contributing over 50% of revenue), represent the highest-ranked and most-improved states in our Janney Regulatory Climate Index, respectively. In an industry where regulatory conditions are king, American's exposure to progressive systems (six of its states have now adopted a distribution system investment charge, or DSIC) position it well for sector out performance.
As management remains focused on operational improvement, we continue to recommend American Water as its shares trade at 18 times forward earnings compared to the industry average of 20 times.
Joel K. Havard J.J.B. Hilliard, W.L. Lyons 502-588-1833 [email protected]
Spencer E. Joyce J.J.B. Hilliard, W.L. Lyons 502-588-8402 [email protected]
American Water Works (AWK) revenues increased 6.4% and 7.9% year over year in Q4 and over the full year, respectively. Over 60% (about $129 million) of the increase in '12 is attributable to rate increases and surcharges; weather (increased volumes) was also a material driver for the year.
