On upcoming conference calls, traditional first quarter results are likely to be a secondary concern for water utility investors. The focus will instead center on the impact of COVID-19 on capital spending programs, recent changes in customer consumption patterns, and the pipeline of municipal acquisitions. Additionally, management teams are expected to provide an update on regulatory and legislative activity.
Capital spending projections — Amid the COVID-19 public health emergency, investor-owned water utilities have continued infrastructure projects that maintain water and wastewater treatment facilities and distribution networks, operations which are considered part of the U.S. Department of Homeland Security's "critical infrastructure sector." Typically, two-thirds of water utility capital expenditures are projects replacing distribution pipes. Capital spending tied to customer growth would likely be at greatest risk should a prolonged recession develop.
Impact of consumption patterns on 2020 earnings — Much focus has been given on shifting energy needs as stay-at-home orders have been implemented nationwide. Water consumption has tended to be more inelastic and water utilities may not experience the same impact to revenue. At greatest risk for the water sector is revenue tied to commercial and industrial customers that have closed operations and are unable to return. During the last recession, Middlesex Water Co. was negatively impacted by the closure of a large industrial customer in its New Jersey service territory.
Acquisition pipeline — Management teams are expected to provide an update on the largest pending transactions and discussion how the virus pandemic has impacted the acquisition pipeline.
On Nov. 20, 2019, American Water announced an agreement to sell its New York American Water Co. operations for $608 million to Algonquin Power & Utilities Corp. subsidiary Liberty Utilities. The transaction is expected to be completed in the second half of 2020.
On Sept. 17, 2019, Essential Utilities Inc. announced a $276.5 million acquisition of the wastewater assets of Delaware County Regional Water Quality Control Authority. This transaction, which marks the largest privatization of a public water or wastewater system in the state, has also been projected to close in 2020.
American Water Works Co. Inc. recently announced the acquisition of Upper Pottsgrove Township, Pa., for approximately $13.8 million. Township officials cited retiring debt, replenishing unfunded pension liabilities, and providing funding for other township infrastructure needs as reasons for the sale. Concerns regarding the ability to safely operate water and wastewater treatment facilities during a public healthy emergency is likely another reason that municipalities may be more willing to considering the sale of their systems to investor-owned water utilities.
Premium to other utilities remain — Despite recent stock price volatility, water utilities continue to trade at a sizable premium to electric and natural gas utilities. Water utilities trade at price/earnings multiples of 34.0x and 31.4x for 2020 and 2021, respectively. In comparison, electric utilities trade at P/E multiples of 18.2x and 16.6x, the multi-utility group trades at 17.4x and 16.4x, and natural gas utilities trade at 19.4x and 18.6x for the comparable periods.
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