American Water Works (AWK) Continues To Fortify Water Assets

American Water Works (NYSE:AWK) announced that its unit, Illinois American Water, is presently working to refurbish the 75,000-gallon elevated water storage tank in the Village of Ransom. The tank was pressed into operation nearly three decades ago and needed repair. The company acquired the Village of Ransom water system in 2016.

Prior to the acquisition, the water source had high levels of radium and did not meet the Environmental Protection Agency (“EPA”) safe drinking water standard. Since the acquisition of Village of Ransom water system, American Water Works invested $2 million to deliver drinking water that meets EPA safe drinking water standards.

Currently, Illinois American Water will invest $430,000 to make the much needed repair and help extend the life of the elevated water tank. This is part of the company’s plan to invest in the range of $1.9-$2.1 billion for capital expenditures and acquisitions in 2018.

Aging Water Infrastructure — A Challenge

The U.S. water infrastructure is quite old and requires massive investment to upgrade the existing water and wastewater systems. Some of the water mains are nearly a century old and require immediate replacement. Investment of billions of dollars is required for the purpose.

American Water Works anticipates investing $8.0-$8.6 billion from 2018 through 2022, which will help it to improve earnings 7-10% per year in the aforesaid period from a 2016 base. A major chunk of $7.2 billion will be directed to strengthen its regulated businesses.

Another water utility, Aqua America Inc. (NYSE:WTR) after investing $478 million in 2017, aims to make capital investments in excess of $500 million in 2018, which is part of an ambitious investment target of more than $1.4 billion in the 2018-2020 time period.

Consolidation in Water Space — A Solution

Consolidation is the need of the hour in the fragmented U.S. water utility space. The aging infrastructure needs immediate attention, and failure of water mains could result in the disruption of water services and contamination of water supplied in our homes.

Very recently, Sundale Utilities decided to sell its systems to American Water Works’ unit, as it needed substantial capital investments to upgrade and was unbale to do so on its own. (Read more: American Water's Unit to Buy Sundale Utilities for $2M)

American Water Works, being one of the largest operators in the water utility space, continues to make acquisitions, and invest in strengthening its existing organic operation and also the service areas of its acquired units.

Other water utilities are also acquiring and merging to enjoy the synergies, and pass on the benefits to its customers. One such merger in the water utility space worth mentioning is the merger agreement between Connecticut Water Service (NASDAQ:CTWS) and SJW Group (NYSE:SJW) in an all-stock transaction. The combined company will become one of the largest water and wastewater service providers in the United States and serve more than 1.5 million customers in multiple states.

Price Movement

In a year’s time, shares of American Water Works have outperformed its industry. The stock has gained 5.0% compared with the industry’s rally of 3.0%.

Zacks Rank

American Water Works has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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