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American Water Arm to Buy Long Hill Township Sewer System

Zacks Equity Research

American Water Works Company AWK announced that its subsidiary, New Jersey American Water has signed an agreement to acquire Long Hill Township’s wastewater systems for $12.7 million. This acquisition will add 2,800 customers to its existing customer base in New Jersey.

Following approval from the New Jersey Board of Public Utilities, the acquisition is expected to close in the summer of 2020.

The company has been providing services to most of the customers of Long Hill Township’s sewer systems. The decision to acquire the sewer system will ensure the continuation of high-quality services, without any immediate increase in sewer rates.

Per the agreement, American Water will invest more than $13 million in the next five years to upgrade the old sewer lines of Long Hill Township. The company is freezing current sewer rates for residents for two years and increasing rates no more than 3% annually for three years after that.

Consolidation is Essential

Consolidation is quite essential for the fragmented water industry, as nearly 50,000 water and 15,000 wastewater operators are providing services in the United States. According to an American Water Works report, more than 2 trillion gallons of treated water is lost per year due to leakage from aging pipes. The report also indicates that by 2020, nearly 44% of the U.S. pipeline infrastructure will be classified as poor, very poor or life elapsed.

The highly fragmented water industry creates operational challenges in meeting increasing water and wastewater service requirement. Hence, water utilities are actively acquiring small water and wastewater service units, and making required investments to upgrade the quality of services.

Investments in Aging Water Industry

Aging water and wastewater pipelines are major headwinds for the fragmented water industry in the United States. Per the U.S. Environmental Protection Agency, more than $744 billion is needed for U.S. water and wastewater infrastructure improvement. Hence, investment in this aging and fragmented water industry is quite essential. American Water recently introduced a 10-year capital spending plan in the range of $20-$22 billion.

In addition to American Water, water utility Aqua America WTR is making regular investments in water and wastewater systems. It is going to invest nearly $550 million in 2019 to strengthen its water and wastewater infrastructure. This will be part of Aqua America’s investment target of more than $1.4 billion in the 2019-2021 period.

Price Performance

Shares of American Water have outperformed the  industry in the past 36 months.

Zacks Rank and Key Picks

Currently, American Water has a Zacks Rank #3 (Hold). A couple of better-ranked water utilities are AquaVenture Holdings Ltd. WAAS and The York Water Company YORW. AquaVenture sports a Zacks Rank #1 (Strong Buy) and The York Water Company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AquaVenture Holdings delivered average positive earnings surprise of 15.6% in the last four quarters. The Zacks Consensus Estimate for 2020 has moved up by 5.2%, in the past 60 days.

The York Water Company delivered average positive earnings surprise of 2.3% in the last four quarters. The Zacks Consensus Estimate for 2020 has moved up 0.9%, in the past 60 days.

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