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American Water Works' (AWK) Unit Wins $519M DOD Contract

Zacks Equity Research

American Water Works AWK announced that its unit, Military Services Group has been awarded a contract for operation and maintenance of water and wastewater systems at the United States Military Academy (“USMA”) at West Point, NY. The duration of the contract, which is valued at $519 million and subject to an annual economic price adjustment, is 50 years.

Indeed, the company’s existing partnership with the Department of Defense (“DOD”), and commitment of providing safe and reliable water and wastewater services to 15 military bases have helped it to win this long-term contract from USMA.

The contract will take the total tally of its military awards to 16. We expect the company to win more defense deals, given its high-quality water and wastewater service capabilities. Recently, American Water Works announced that it has received a long-term contract to provide water and wastewater services at Joint Base San Antonio in Texas. (Read more: American Water's Unit Wins Another Contract From DOD)

Services to Military Bases

American Water Works is not the only player in the water space that provides services to military bases. Among the other existing water utility operators, American States Water Company AWR is quite prominent in providing services to military bases through its subsidiary American States Utility Services.

American Water Works might have to compete with this player to win military deals, as the U.S. government is expected to invite bids for additional bases over the next several years. American States Water Company also has expertise and experience in managing water and wastewater systems on military bases, and is well positioned to compete with American Water Works for new contracts.

Overall Scenario of U.S. Water Industry

The highly fragmented water utility space, and aging water and wastewater infrastructure are the primary concerns of the industry. The U.S. Environmental Protection Agency report estimates that more than $743 billion is needed for U.S. water and wastewater infrastructure improvements. As small operators find it difficult to carry on the costly overhauls, consolidation is one of the ways to ensure regular investments.

Consolidation is essential for this fragmented industry as it is easy for large companies to take up massive upgradation work without substantially increasing the rates, unlike small operators. At present, more than 53,000 water systems in the United States provide water and wastewater solutions to customers. American Water is one of the most active players in the water space, having completed 74 deals from 2015 to date.

Another water utility Aqua America Inc. WTR is also quite active in expanding operations in the United States through acquisitions. During the five-year period ended Dec 31, 2018, the company had expanded utility operations by completing 64 water and wastewater system acquisitions, followed by integration of the same into existing operations. The seven pending acquisitions, on completion, will further increase its customer base by 22,600 in 2019. In addition, Global Water Resources, Inc. GWRS is making systematic acquisitions to expand operations.

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