Summary:
We are initiating coverage on water and wastewater service provider Connecticut
Water Service Inc. Its first quarter 2016 earnings per share were lower than the Zacks
Consensus Estimate and flat year over year. However, total revenues increased on a
year-over-year basis due to the implementation of new water rates in Maine. The
company is poised for further growth, thanks to its strategic acquisitions, stable credit
rating, strong balance sheet and earnings from regulated companies. Customer
growth in its service territories is not only raising the demand for water but also
boosting earnings of its regulated companies. Stringent environment regulations,
demand variations with weather patterns, risk of failure of water mains and
contamination of water sources are the primary headwinds for the company.
Reasons To Buy:
- Consolidation is the need of the hour in the fragmented U.S. water utility space. The old water utility infrastructure needs ample investments which are easier for bigger players to make. Consolidation would therefore drive the necessary infrastructure overhauls that have become imperative for the industry at large. Connecticut Water Service like some of its water utility peers has been engaged in strategic acquisitions of smaller water service providers. In the last seven years the company made 40 acquisitions, in sync with its expansion plans. Acquisitions made since 2012 have increased its customer base by 37%. Contributions from organic and inorganic assets have placed the company on a strong financial footing.
- Connecticut Water Service derives nearly 92% of its earnings from its regulated operations. Thanks to consistent investments in its regulated operations, Connecticut Water Service is being able to reliably serve its expanding customer base. The company aims to invest nearly $150 million in the 2016 to 2018 time frame to strengthen its existing water infrastructure. The company has been able to consistently increase its regulated customer base, which has spurred the volume of water used. In 2014, Connecticut Water Service’s customers used 9.4 billion gallons of water, which increased to 9.8 billion gallons at the end of 2015.
- The improvement in net income enables the company to carry out shareholder friendly moves. Including the current hike, the company has increased its dividend rate consecutively in the last 47 years. The annualized dividend rate of the company comes to $1.13 while the current dividend yield is 2.2%, better than the S&P 500 yield of 1.74%.
- Connecticut Water Service operates in a constructive regulatory environment which ensures necessary revisions in water rates. As the company generates the majority of its earnings from regulated operations, a favorable regulatory climate is of immense help. Thanks to its strong financial discipline, the rating agency Standard & Poor’s affirmed its ‘A’ corporate credit rating on the company. The agency also affirmed the company’s ratings outlook as stable. Strong credit rating will help this water utility to arrange funds for its capital projects at a favorable rate.
Risks :
- Water operations are subject to extensive federal and state environmental protection and health and safety laws and regulations. These laws and regulations change frequently and the companies are expected to comply within a stipulated time period, which increase their operating costs. Any failure to comply with regulations might lead to fines and sanctions from regulatory authorities.
- The demand for water fluctuates with weather conditions. Cooler-than-normal summer temperatures might see declining demand for water. In addition, increased water conservation methods adopted by customers will have an adverse impact on its regulated companies and on operating revenues.
- Connecticut Water Service’s regulated companies supply water through an extensive network of mains and stores water in reservoirs and storage tanks located across Connecticut and Maine. Even with adequate safety measures, any failure of its reservoirs, storage tanks, mains or distribution networks could result in losses. This could sometimes affect its financial condition as some losses might not be covered by insurance policies. In addition, contamination of water supplies could adversely impact the reputation of the company and impact its financial conditions. The company will be required to incur additional costs to remove the polluted water from the system and substitute the flow of water to customers from an uncontaminated water source or provide additional treatment.
