American Water Works Unit's Proposal For New Rates Ok'd

A business unit of American Water Works Company, Inc. (NYSE:AWK) – Kentucky American Water – has received an approval from the Kentucky Public Service Commission (PSC) for implementing new water and wastewater rates, effective Aug 28, 2016. The proposal was filed this January, and the request has undergone extensive public and regulatory scrutiny.

Impact of Rate Hike

Customers using an average 4,136 gallons of water per month will see utility bills increase by $2.97 or 8.6% to $37.38. The new rates will, however, still be lower than a penny per gallon. The latest rate hike will add $6.5 million to Kentucky American Water’s annual revenues.

Investments since Last Rate Hike

Since the last rate hike request in Dec 2012, Kentucky American Water has invested nearly $79 million in the improvement and upgrade of its existing infrastructure. The company replaced old water mains, upgraded pumps to more efficient models and invested in a water treatment plant in Lexington to replace a 90-year-old structure.

Rate Hike Lower than Expected

The latest rate hike approved by the PSC was slightly lower than half of what the company had requested in its proposal. Even so, we believe that the new rates will allow American Water Works to go ahead with its planned investments in the water system infrastructure. Such investments are absolutely essential for the company to maintain quality and reliable water service for customers.

Regulated water utilities have to depend on the rate hikes to recoup the investments made to improve the quality of services.

In Jun 2016, another water utility SJW Corp.’s (NYSE:SJW) unit, San Jose Water Company, received approval from the California Public Utilities Commission to increase water rates, which will boost its top lineby nearly $25.1 million or 8.6% in 2016.

Overview of the Water Utility Industry

The water utility space has come under the spotlight due to reports from the U.S. Environmental Protection Agency that estimated the requirement of an investment of around $384 billion over the next 20 years to modernize and upgrade the old, soiled and decaying U.S. water and wastewater systems. This translates into immense investment opportunities in the space.

Zacks Rank & Key Picks

American Water Works currently has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the water utility space are Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE:SBS) and Veolia Environnement (PA:VIE) S.A. (OTC:VEOEY) . Both the stocks currently carry a Zacks Rank #2 (Buy).

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