American Water's (AWK) Arm Signs Wastewater Assets Deal

·4 min read

American Water Works AWK recently announced that its unit, Pennsylvania American Water, has decided to take on the obligations associated with a contract to purchase all the assets connected to the Towamencin Municipal Authority's wastewater system. The Pennsylvania Public Utilities Commission is going to give the necessary regulatory approval for this buyout, which is expected to be completed by the middle of 2024 by Pennsylvania American Water.

Benefits of the Buyout

Being the leading water and wastewater provider in the Commonwealth, Pennsylvania American Water aims to provide the best long-term solution for water and wastewater utility services. The latest transaction is likely to further strengthen this unit’s position in wastewater utility operations.

Pennsylvania American Water already provides reliable water and wastewater services to approximately 2.4 million people in the Commonwealth. With the Towamencin Municipal Authority serving more than 6,300 wastewater customers, its wastewater system acquisition will add to the unit’s customer base, thereby bolstering its revenue generation prospect.

Reason Behind the Acquisition

Per the American Society of Civil Engineers ("ASCE"), more than 50,000 community water systems and 16,000 community wastewater systems in the United States are currently in service.

Per the ASCE finding, 6 billion gallons of treated water go waste every day in the United States, owing to a delay in essential pipeline repairs and maintenance. Important upgrades and infrastructure repairs get delayed at times, due to a lack of adequate funds and a large number of small operators in the industry.

The acquisition of small units by larger utilities is the need of the hour, as it ensures necessary investments for infrastructure upgrades and delivery of high-quality services to customers. American Water Works is the largest and most geographically diverse publicly traded water and wastewater utility company, which continues to widen its market footprint through strategic acquisitions like the latest one.

Water Utilities Continue to Consolidate

AWK continues to expand operations through acquisitions and organic means. In 2022, AWK added 70,000 customers to its base through 26 closed acquisitions in seven states. AWK’s 21 pending acquisitions (as of Dec 31), when completed, will add another 32,400 customers.

Other water utilities like California Water Service Group CWT, SJW Group SJW and Essential Utilities, Inc. WTRG are also expanding their operations through systematic acquisitions.

In March 2023, California Water’s unit, Washington Water Service, completed the acquisition of Bethel Greenacres Water Association’s water system assets. This acquisition will give the unit access to 200 connections, which will increase its customer count. In November 2022, Washington Water Service acquired Driftwood Valley Association’s water system assets, which is expected to add 62 customers to its database.

The Zacks Consensus Estimate for CWT's 2023 earnings implies a 7.34% increase year over year. Its current dividend yield is 1.84%.

SJW Group completed more than 25 acquisitions in the 2010-2021 period. The company made systematic acquisitions in 2022 to further expand its operations. In January 2023, SJW’s Texas subsidiary entered into an agreement to acquire KT Water Development Ltd. and KT Water Resources L.P., which will add another 550 customers to the company’s existing base.

The Zacks Consensus Estimate for SJW's 2023 earnings implies year-over-year growth of 1.24%. The current dividend yield of the company is 2%.

In 2022, Essential Utilities acquired three water and wastewater systems, which expanded its customer base by 23,000. Recently, the company signed eight purchase agreements to acquire nine additional water and wastewater systems for $380 million. These systems are expected to serve 219,000 retail customers or equivalent dwelling units.

The Zacks Consensus Estimate for WTRG's 2023 earnings implies year-over-year growth of 5.7%. The company’s current dividend yield is 2.73%.

Price Performance

Over the past month, American Water Works’ shares have gained 1% against the industry’s 1.5% decline.

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Zacks Rank

American Water Works currently has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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