Mixed picture for US water utilities in 2006
- From: Vol 8, Issue 1 (January 2007)
- Category: General
- Region: Americas
- Country: United States
- Related Companies: American States Water, American Water, Aqua America, Artesian Resources, Birmingham Utilities, California Water Service Co (Cal Water), Connecticut Water Services, Consolidated Water, Middlesex Water, Pennichuck Water, San Jose Water, Southwest Water Company and York Water
As a guest you can read up to 3 full articles before a subscription is required.
You can read a further 2 articles for free.
The west was the best last year for America’s investor-owned utilities. But the biggest stock, Aqua America, had an off year. The return of American Water will shake things up in 2007.
The shares of publicly-traded US water utilities had a mixed year in 2006, as many investors took their profits from some significant surges in valuations the previous year, bringing about an inevitable correction in many cases.
The West Coast utilities again fared better than their East Coast counterparts, and San José Water was easily the year’s outstanding performer with a capital gain of 62% over the 12 months.
California Water Services and American States Water also registered double-digit percentage increases, while Southwest Water was the only water company in the region to see its market capitalisation decline over 2006.
The picture on the East Coast was much more patchy, as last year’s stellar performer Aqua America (although its operations are not confined to the East Coast) lost 18.8% of its capital value after the spectacular 56% gain it had made in 2005. This fall reflects two missed earnings figures during 2006, which led to profit-taking as the momentum went out of the stock.
A burst of acquisitions at the year end - including the $51 million deal for New York Water Service Corp. - gives more upside for 2007. Overall the company expanded its customer base by 7% in 2006, against its target of 4%.
Aqua’s share price is going to be closely watched in the coming months as it represents the best comparator for American Water, which is due to return to the market this year. It left the market in January 2003 for $8.6 billion in debt and equity when the company had revenues of $1.7 billion. This represented a valuation of 5x revenues. Aqua’s current enterprise value (i.e. debt plus equity) is $4.1 billion or 7.8x revenues. American Water’s 2005 revenues were $2.2 billion. It is likely to be looking for a total value of its debt and equity of between $11 billion and $15 billion on its return to the market. This compares to the current total market capitalisation of the US quoted investor-owned utilities of $6.5 billion. Unless the company goes for a high-leverage structure, there is a
good chance that the size of the sector will double by the end of the year.
Elsewhere on the east coast, Connecticut Water Services saw its share price fall for the second consecutive year, albeit by a smaller margin of 3.9%, compared with the 8% deterioration in 2005. The smaller Birmingham Utilities in the same state ended 2006 down 17% after the state Department of Public Utility Control granted it a smaller tariff increase in November than it had been seeking.
Another loser was Artesian Resources in Delaware, which dropped 1.2% despite reporting increases in both revenue and profits compared with 2005 for the year to 30 September.
However, Middlesex Water in New Jersey reversed almost half of its 2005 decline with an 11% gain on the back of a 12% hike in third-quarter profits and the acquisition of two wastewater systems, while Pennichuck Water in New Hampshire left its shareholders 4.5% better off by the end of the year.
Pennichuck’s shares bounced in late November on reports that the City of Nashua was planning to make an offer for the company to settle the ongoing eminent domain litigation between the two. After a subsequent dip in December in the absence of any confirmation, they had recovered to the same level by the end of the year.
Meanwhile, York Water in Pennsylvania followed up its impressive 40% gain in 2005 with a further 4.6% increase last year, partly on the back of improved figures for the first half of the year, although its third quarter was flat. The company also settled its rate case with the state utility commission in August, securing a deal that allowed it to increase its annual revenues by $2.6 million.
Offshore, Consolidated Water Company in the Cayman Islands, which supplies water from desalination plants across the Caribbean, built on its 42% hike in valuation in 2005 with a further 26.8% increase in 2006. The company raised $40 million from the issue of 1.725 million more ordinary shares in December.