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Aqua America (WTR)Stock (Services Industry, Water Utilities Industry)
 Aqua America (NYSE:WTR) is a water and wastewater company that provides water to homes, offices, and industrial customers across 12 state boundaries. [1] Residential customers make up more than half of Aqua America's client base. [2] This group has shown itself to be relatively price inelastic - demand has grown at roughly 2% per year for the past 5 years despite over 90 rate increase over the same time period.[3] Over 90% of the water provided to customers is drawn directly from lakes, reservoirs, and wells in customers' home states.[4] During times of drought, Aqua America sustains signifcant extra costs transporting water to their customers; however, they have been successful passing these costs on to their customers in the form of rate increases.[4] The company has bought 200 other municipal utility companies in the last decade, resulting in steady net income growth of 25% between 2003 and 2007.[5] Operating revenue has increased 39% over a 5-year period, from $367.2 million in 2003 to $602.5 million in 2007.[6]
[edit] Company OverviewAqua America's utility services reach 2.8 million residential customers in Pennsylvania, Ohio, Illinois, Texas, New Jersey, Indiana, Virginia, Florida, North Carolina, Maine, Missouri, New York and South Carolina.[1] Though the company began in Pennsylvania and remains headquartered in Bryn Mawr, over the past 5 years the company has purchased smaller private utilities across the 12 states, gradually extending southward. [1] Such acquisition comprises the bulk of Aqua America's stated business model.[7] Acquisitions of large private companies included the purchases of AquaSource in 2003, Heater and Florida Water Services in 2004, and the New York Water Service Corporation in 2007.[2] The company's largest subsidiary is Aqua Pennsylvania, which has been a part of Aqua America since 1996 and accounts for slightly more than half of 2007 operating revenue and provides water services to 50% of the company's total customer base. Aqua Pennsylvania operates in the greater urban and suburban Philadelphia area.[8] The company's water utility operations draw water from natural and manmade bodies of water like lakes, reservoirs, and wells purchasing less than 10% of water supplies from other suppliers.[4] [edit] Business and Financial Metrics The company reports that its increase in revenue over the past 5 years is a result of higher water and wastewater rates as well as a general increase in customer base. In 2003, Aqua America acquired the smaller AquaSource, which contributed to a 23.8% customer growth rate in that fiscal year.[2] From 2003 to 2007, Aqua America's overall customer base increased at a compound rate of 9.4% per year. [2] Over the past 5 years, Aqua America has shown steady income growth from a net income of $70.8 million in fiscal year 2003 to $95 million in fiscal year 2007, for total income growth of 25% over the past 5 years.[6] During that same time, operating revenue has gone from $367.2 million in 2003 to $602.5 million in 2007, an increase of about 39%.[6] Pennsylvania accounts for 52.2% of operating revenues. The next largest state by operating revenue is Texas, with 7.7%. [8] [edit] Business Segments Residential water services make up the majority of Aqua America's customer base at approximately 61%. [2]Nearly all of these residential customers are metered, allowing Aqua America's subsidiaries to bill according to the amount of water consumed and used.[2] Aqua America is broken down into 14 operating segments, 13 of which are significant enough with regards to income and revenue to be reported. These 13 reportable segments are comprised of the regulated water utility operations in each of the 13 states Aqua America operates in. The 14th segment consists of non-regulated utility operations such as septic tank pumping, sludge hauling, and data processing.[10] [edit] Trends and Forces[edit] Residential demand for water stays relatively steady during rough economic patches.In 2004, Aqua America's subsidiary in Texas filed a request to increase annual water rates over a set number of years to defray depreciation and operating costs in the area. The rate change was implemented in 2004 and has resulted in additional revenues of $1,487,000 as of December 2006. [3] In 2007, subsidiaries received 23 rate increases, resulting in a collective revenue increase of $5,596,000 in that fiscal year. 32 rate increases in 2006 boosted revenue $7,366,000, 23 increases in 2005 led to an increase of $5,142,000 , and 14 increases in 2004 raised revenue by $6,673,000.[3] Despite the monetary effects of these rate changes, Aqua America's customer base grew 1.8% over the last 5 fiscal years (independent of any new customers gained through acquisitions of smaller water companies.)[3] Such revenue change demonstrates demand for water is price inelastic, particularly among residential customers, which means the need for water and wastewater services does not decline or disappear during periods of sluggish economic activity.[11][12] [edit] Unpredictable droughts can affect water supply, which can affect revenue.In 2006, severe droughts in Texas forced Aqua America's local water systems to truck water from elsewhere to meet customer needs.[13] Over the past century, drought like this has become an increasingly common occurrence in much of the continental United States. [14] When such drought occurs, the natural bodies of water Aqua America draws supplies from dwindle. In the summer of 2008, no areas with water systems subsidiary to Aqua America suffered such intense, prolonged drought.[15][16][17] Droughts can affect supply and scarcity of water as a resource and empirically, utilities like Aqua America have raised water prices post-drought to make up for lost revenue.[18] Due to their random nature, droughts are difficult to predict or prepare for. In a drought, managing water resources can prove very difficult for municipalities and water companies alike.[19] [edit] Some new acquisitions suffer environmental compliance issues.Regulations and laws sponsored and enforced through the Environmental Protection Agency, such as the Safe Drinking Water Act and Clean Water Act, require utilities providing commercial and residential water supplies to meet federal standards of cleanliness. Such improvements come at significant cost to Aqua America Inc. as a conglomerate.[20] 37 subsidiary water systems with smaller groundwater facilities have exceeded EPA radionuclide standards, requiring treatment. The company estimates the 2008 cost of environmental compliance will be around $5,000,000.[20] Of the approximately 53,000 municipal water companies in the U.S., over 80% have 3,000 or fewer customers. [21] Aqua America's primary growth strategy is the acquisition of these smaller utility companies, but in the past these acquisitions have brought their own compliance issues with them once consolidated in the Aqua America fold. [20] [edit] CompetitionAqua America's major competitors are other water utility conglomerates, particularly American Water Works Company (AWK) and privately held companies like United Water and Utilities Inc.[22]. The total market cap for the water utility industry is $7 billion. [23] Many small, private companies like United Water comprise part of the market share in the water utility industry. 33.5 million Americans (about 10% of the total population as of July 2008) [24] have their water supplied through private firms.[25]
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