American Water's Unit To Buy Wastewater System For $17.5M

American Water Works Company (NYSE:AWK) announced that its subsidiary, Pennsylvania American Water has signed an agreement to acquire wastewater assets of the Borough of Kane Authority in McKean County. This acquisition will add 2,100 customers to its existing portfolio in Pennsylvania. The consideration of the buyout is $17.5 million.

Pennsylvania American Water and the Kane Authority will seek approval from the Pennsylvania Public Utility Commission and other authorities for the acquisition. Subject to necessary approvals, the acquisition is expected to get completed by late 2020.

Pennsylvania American Water provides reliable water and wastewater services to nearly 2.4 million customers in the state. Once the acquisition is complete, the company will ensure extension of high quality and reliable wastewater services to new customers.

Acquisitions Aid the Water Industry

At present, 53,000 water systems in the United States provide water and wastewater solutions to customers. The highly fragmented water industry creates operational challenges in meeting increasing requirement for water and sanitary services, as it becomes difficult for small water suppliers and wastewater service providers to make regular investments for upgrading old and soiled water and wastewater lines.

Fragmentation and the lack of regular repair and maintenance of old pipelines from smaller operators are resulting in the wastage of precious water. An American Water Works Association report indicates more than 200,000 water line breaks per year in the United States, with more than 7 billion gallons of water leaking out of aging pipes.

American Water is one of the most active players in the water space, having completed 74 deals from 2015 to date. As of Jun 31, the water utility added 30,700 customers to the existing customer base. The pending acquisitions as of the same date, on completion, are expected to add nearly 38,200 customers to its customer base.

In addition to American Water, another water utility Aqua America (NYSE:WTR) is following the acquisition route to expand operations. During the five-year period ended Dec 31, 2018, the company had expanded utility operations by completing 64 water and wastewater system acquisitions.

Consolidation is essential for this fragmented industry as it is easy for large companies to upgrade the same without substantially increasing rates, unlike small operators.

Investments From Large Companies

Per the U.S. Environmental Protection Agency, more than $744 billion is needed for U.S. water and wastewater infrastructure improvements. Investments are essential to replace and upgrade the aging water and sewage pipelines. Since government funding is quite low at present, large public limited companies are investing in infrastructure overhauls. Decline in interest rates will help capital-intensive water utilities to source funds at a cheaper rate for capital projects.

American Water, which is active in upgrading and expanding the existing water pipelines, aims to invest within $8-$8.6 billion from 2019 through 2023.

Another water utility, Middlesex Water Company (NASDAQ:MSEX) is also making strategic acquisitions to expand operations. In addition, the company is planning to invest $295 million in the 2019-2021 time period to strengthen operations.

Price Movement

Shares of American Water have outperformed the industry in the past 18 months.

Zacks Rank and Another Key Pick

Currently, American Water has a Zacks Rank #2 (Buy). Another top-ranked stock in the same space is The York Water Company (NASDAQ:YORW) , which currently shares the same rank with American Water. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The York Water Company delivered average positive surprise of 2.28% in the last four quarters. The Zacks Consensus Estimate for 2019 has moved up 1.8% to $1.15 in the past 60 days.

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