Still Shining

Year to date, Aqua has received rate increases and infrastructure surcharge mechanisms totaling $11 million (annualized) in five states.

The company has plans to file for an additional approximately $7 million during 2013 in Ohio and New Jersey. On August 2, Aqua filed an $8.6 million (+19%) rate increase in North Carolina.

In mid-May, Aqua announced a 9% dividend increase and 5-for-4 stock split. With a 2013 estimated payout ratio of 50% compared to the industry average of 60-70%, there is room for additional above-average annual dividend increases.

Our $35 price target is about 22.6 times our 2015 earnings per share estimate, a premium to peers when fully valued (currently trading at 18.7 times the 2015 earnings per share), reflecting above-average earnings per share growth opportunities and generally more constructive regulatory mechanisms that provide above-average earned return on equity and enhance earnings stability.

Spencer E. Joyce
J.J.B. Hilliard, W.L. Lyons, LLC
502-588-8402
[email protected]

American Water Works (AWK) has in-progress rate cases in five states, which represent $135.4 million in potential additional revenue. Management reaffirmed its 2013 EPS guidance range of $2.15-$2.25. Reflecting the downside to Q2, we are trimming our full-year target to $2.17. Our '14 target edges down by a penny to $2.41, though our outlook remains largely unchanged.

We reiterate our Buy rating but raise our one-year price target by $1 to $47. We continue to derive our target by applying a 20-times multiple to our forward four quarter EPS estimate, which we believe is appropriate given AWK's earnings growth and return-on-equity expansion prospects considered in tandem with industry valuations.

Weather is likely the biggest story in AWK's Q2'13, as cool/wet conditions versus hot/dry conditions in the year-ago period led to year over year declines in revenue, EPS and EBITDA.