American Water's Arm To Acquire Steelton Borough Water System

American Water Works Company (NYSE:AWK) announced that its unit, Pennsylvania American Water, has entered into an agreement to acquire the water assets of the Steelton Borough Authority in Dauphin County. This acquisition will cost $22.5 million and add nearly 2,400 metered residential, commercial and large industrial connections.

Pennsylvania American Water, through its existing distribution network, serves nearly 2.4 million people in Pennsylvania. The said acquisition will expand its existing customer base and allow the company to render quality services to new customers at a reasonable cost.

Post completion of the acquisition, Pennsylvania American Water has plans to invest nearly $36 million to improve Steelton’s water system over the next 10 years.

Aging Water Infrastructure Calls for Consolidation

The existing water infrastructure in the United States is aging, and proper maintenance and upgradation of the system will require investment of billions of dollars, which becomes difficult for small water utilities to make arrangement for.

A study from Utah State University showed that overall water main break over the past 6-year period has gone up 27% in the United States and Canada. The primary reasons behind water main failure are the aging water infrastructure and higher failure rates of smaller water utilities compared with larger ones.

Therefore, through the acquisition of small utilities, it becomes easier for large companies to make arrangement for funds to carry out these major overhauls. American Water is one of the most active players, which continues to widen its market reach through acquisitions. Till September 2018, the company added 7,600 new customers through buyouts and 8,900 via organic growth. The pending acquisitions, on completion, are expected to add nearly 56,000 customers to its customer base.

American Water in not the only water utility that is actively pursuing an inorganic growth strategy. We can also notice other active water utilities like Global Water Resources, Inc. (NASDAQ:GWRS) and Aqua America (NYSE:WTR) to pursue acquisitions.

Price Movement

In the past six months, shares of American Water have gained 14.6% compared with the industry's growth of 10.0%.

Zacks Rank and A Key Pick

Currently, American Water has a Zacks Rank #3 (Hold). A better-ranked stock from the same industry is American States Water Company (NYSE:AWR) , having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American States Water surpassed third-quarter earnings estimates by 3.33%. The consensus estimate for 2018 bottom line has moved 0.6% north to $1.73 per share over the past 30 days.

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