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American Water's Arm Chalks Out Investment Plans for 2019

Zacks Equity Research

American Water Works Company AWK announced that its unit, Pennsylvania American Water will invest nearly $355 million in new system upgrades in 2019. The planned investment will allow the company to replace and upgrade its aging infrastructure to keep its services reliable and affordable for customers.

Pennsylvania American Water’s 2019 investment is part of American Water’s total capital expenditure for 2019 in the range of $1.7-$1.8 billion. From 2019 through 2023, American Water aims to invest within $8-$8.6 billion, which will help improve earnings by 7-10% per year in the aforesaid period from a 2017 base.

Investment is Essential in Water Space

The water and wastewater infrastructure of the United States is aging, and requires immediate attention. Per American Water by 2020, nearly 44% of the existing U.S. pipe infrastructure can be classified as poor or very poor, with the service life of the pipelines being over. As a result of its crumbling water infrastructure, more than 20% or 2 trillion gallons of treated water is lost in the United States each year.

Massive funding is needed to upgrade the quality of the U.S. water infrastructure. Per an American Water Works Association report, the cost of restoring aging underground water pipelines in the United States will be at least $1 trillion in the next 25 years.

Hence, ongoing investment to replace and upgrade the old water infrastructure will help reduce the loss of precious water. Apart from American Water, water utilities like Aqua America Inc. WTR announced that it is going to invest more than $555 million in 2019 to strengthen its water and wastewater infrastructure. This will be part of the company’s investment target of more than $1.4 billion in the 2019-2021 time period.

Growth Through Consolidation

The U.S. water utility industry is highly fragmented and creates difficulties for small operators to go ahead with costly overhauls of the existing water infrastructure. Currently, more than 50,000 water systems and 15,000 wastewater systems are operating in the United States, with a majority of them serving a few hundred people.

American Water continuously expands operation through acquisitions and expansion of the existing customer base. Over the past few years, the company successfully completed 67 acquisitions in 10 states that added 110,000 new customer connections.

Currently, it has 26 pending acquisition agreements, which, on completion, will expand the existing customer base by 61,500. In Pennsylvania, the company currently has six pending acquisition deals, which, on completion, will allow it to add 2,700 and 9,700 water and wastewater customers, respectively. Pennsylvania American Water’s planned capital expenditure for 2019 will allow the company to extend quality services to customers by joining the existing customer base via acquisitions.

In addition to American Water, water utilities like Global Water Resources, Inc. GWRS and Aqua America are following the acquisition route to expand operations.

Price Movement
 
Shares of American Water have outperformed the industry in a year’s time.



Zacks Rank and A Key Pick

Currently, American Water has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked water utility in the same space is Companhia de saneamento Basico Do Estado De Sao Paulo - Sabesp SBS, sporting a Zacks Rank #1. The company reported average positive earnings surprise of 4.22% in the last four quarters. The Zacks Consensus Estimate for 2019 and 2020 has moved up 9.7% and 9%, respectively, in the past 60 days.

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