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American Water Unit to Buy Water, Wastewater System for $1M

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American Water Works AWK continues to expand its operation in the United States through acquisitions. The company announced that its unit Pennsylvania American Water has entered into an agreement to acquire a water and wastewater system from Borough of Turbotville in Northumberland County, PA for $1 million. This acquisition is subject to approval from the Pennsylvania Public Utility Commission (PUC) and Pennsylvania Department of Environmental Protection.

This acquisition will increase Pennsylvania American Water’s total customer base in Pennsylvania by 610 customers. If approved, the company will be able to extend its services to the residents of this region. The company currently owns and operates the nearby Milton water system, with nearly 12,700 customers, and McEwensville water and wastewater systems, with a combined 260. The said acquisition in this region will allow the company to enjoy economies of scale and pass on the same to customers.

In May, Pennsylvania American Water entered into an agreement to acquire Exeter Township’s wastewater system for $96 million. The company expects to close the acquisition by the end of first-quarter 2019, subject to regulatory approvals. (Read more: American Water's Unit to Buy Wastewater System for $96M)

Can Consolidation Help Aging Water Infrastructure?

Consolidation is the need of the hour in the fragmented U.S. water utility space. Water utility operation is highly fragmented in the United States and there are a very small number of operators serving only a few hundred customers. Aging water infrastructure needs upgradation and expansion to meet the rising demand from customers.

Small water operators will find it quite difficult to make these additions and upgrades in their existing systems, primarily due to the large amount of investment involved. It is easier for large companies to make arrangement for funds to carry out these major overhauls. Consolidation would therefore drive the necessary infrastructure overhauls that have become imperative for the industry at large.

American Water Works, one of the largest water utilities, continues to widen its market footprint through strategic acquisitions. Till Jun 1, 2018, the company closed eight acquisitions, adding a total of 5,524 new customers. Pending 14 acquisitions as of the same date would increase American Water’s total customer base by 54,354 customers.

Another water utility, Aqua America WTR is also making strategic acquisitions to expand its operation and market reach. Recently, the company announced that it has entered into an agreement to buy the wastewater assets of Village of Manteno, IL. The agreement has been approved by the Illinois Commerce Commission and will add nearly 3,800 wastewater connections to its customer base.

Price Movement

In a year’s time, American Water Works’ shares have returned 12.6%, outperforming the 3.6% growth of the industry it belongs to.

Zacks Rank and Stocks to Consider

Currently, American Water Works has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector are Global Water Resources Inc. GWRS and Atmos Energy Corporation ATO, each carrying a Zacks Rank #2 (Buy). You can see tsee the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Global Water Resources’ long-term EPS is expected to grow 15%. The consensus estimate for 2018 has moved up 21.4% to 17 cents in the past 60 days.

Atmos Energy Corporation’ long-term EPS is anticipated to grow 7.00%. The consensus estimate for 2018 has been revised upward by 0.5% to $3.99 over the past 60 days.

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