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American Water (AWK) Arm to Buy Assets in Illinois for $43.3M

Zacks Equity Research

American Water Works Company AWK announced that its subsidiary, Illinois American Water has signed an agreement to acquire City of Jerseyville’s water and wastewater systems for $43.25 million. The acquisition will add 8,200 customers to its existing customer base in Illinois.

The company will apply to the Illinois Commerce Commission for approval of this buyout, which is expected to close in late 2020.

American Water’s Expansion in Illinois

The company, through its subsidiary, provides water and wastewater services to 1.3 million people in Illinois. The company makes regular investments to improve the quality of water and wastewater services provided to customers in the state.

In 2019, Illinois American Water acquired the Alton Regional Wastewater System, Village of Godfrey’s wastewater system, and Village of Glasford’s water and wastewater systems. These acquisitions added 30,174 new customer connections to Illinois American Water.

Consolidation in 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. 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. At present, more than 50,000 water systems and 15,000 wastewater systems in the United States are providing water solutions to customers.

The highly fragmented water industry creates operational challenges in meeting increasing water requirement, as it becomes difficult for small water suppliers to replace the aging water and wastewater infrastructure. Consolidation is a solution to this problem as it allows bigger water utilities with strong financial abilities to carry out the much required investments.

American Water is actively acquiring small water and wastewater service units, and making required investments to upgrade the quality of services. The company recently increased regulated infrastructure investment by $800 million for the 2020-2024 capital plan and introduced a 10-year capital spending plan at a range of $20-$22 billion. Till Dec 2, 2019, it closed 20 acquisitions and added 53,100 customer connections.

In addition to American Water, another water utility Aqua America WTR is following the acquisition route to expand operations, and 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 time period. During the five-year period ended Dec 31, 2018, the company had expanded utility operations by completing 64 water and wastewater system acquisitions. The pending acquisition of People Gas will expand and diversify operations of this water utility.  

Price Performance

Shares of American Water have outperformed the industry in the past 24 months.

Zacks Rank and Key Picks

Currently, American Water has a Zacks Rank #3 (Hold). Some 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 2019 and 2020 has moved up 9.9% and 5.2%, respectively, 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 2019 and 2020 has moved up 1.8% and 0.9%, respectively, in the past 60 days.

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