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American Water (AWK) Unit to Acquire Two Systems for $34.3M

Zacks Equity Research

American Water Works Company AWK announced that its subsidiary, Pennsylvania American Water has signed an agreement to acquire wastewater assets of Royersford Borough in Montgomery County for $13 million, and purchase water and wastewater system assets of Valley Township in Chester County for $21.275 million.

The acquisition of wastewater assets of Royersford Borough will add 1,600 wastewater customers, and that of Valley Township assets will add 1,700 and 3,100 water and wastewater customers, respectively. At present, Pennsylvania American Water provides high-quality water and wastewater services to 2.4 million people and the new customers will also enjoy the same. Subject to approval from the commission, these acquisitions will close in 2020 or early 2021.

Pennsylvania American Water has been in an acquisition spree and has already completed quite a few acquisitions in 2019 to further expand operations in the state. Year to date, the company added 10,300 and 2,700 new wastewater and water customers, respectively, to the existing customer base through the inorganic route.

Present State of 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 (“EPA”) estimates, more than $744 billion is needed for U.S. water and wastewater infrastructure improvement. According to an American Water Works Association report, more than 200,000 water lines break per year were registered in the United States, resulting in 7 billion gallons of water leaking out of aging pipes.

At present, more than 53,000 water 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.

American Water is actively acquiring small water and water 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. Moreover, from 2015 to Oct 30, 2019, the company had closed 81 deals and added nearly 126,000 customers to the existing customer base. The pending acquisitions, when closed, will further expand its operations and customer base.

In addition to American Water, another water utility Aqua America 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. 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.

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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