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American Water's (AWK) Unit Files for Settlement of Rates

Zacks Equity Research
American Water's (AWK) unit California American Water is set to further expand its operation in California through the acquisition of assets of Warring Water Service.

American Water Works Company Inc.’s AWK subsidiary, Indiana American Water filed all-party Stipulation & Settlement Agreement regarding its rate request with the Indiana Utility Regulatory Commission (“IURC”). The agreement is subject to approval by the IURC.

Indiana American Water has been consistently investing to provide high-quality and reliable water and/or wastewater services to nearly 1.3 million people in the state. Indiana American Water has invested more than $542 million in its water systems across the state and the said agreement includes a 7.9% overall increase in operating revenues, primarily based on that investment.

New Utility Bills on Approval of Rates

If the rate is approved by the commission without any changes, it will result in an increase in total water utility bills of customers consuming 4,000 gallons of water per month by $2.31 per month. The increases in water rates will be implemented in steps, with the first increase of 1.73% (15 cents per month) this summer and a second hike of 6.07% ($2.26 per month) in mid-2020.

Without a doubt, rate hikes hurt customers. However, the U.S. water and wastewater infrastructure is aging, and requires ample investments for maintaining and upgrading the existing water and wastewater systems. Per an American Water Works Association (“AWWA”) 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, rate hikes at regular intervals will ensure the flow of funds and enable the utilities to continue with their long-term investment plans. American Water has plans to invest within $8-$8.6 billion from 2019 through 2023, which will help improve earnings by 7-10% per year in the aforesaid period from a 2017 base.

Water Space - the Way Ahead

The water and wastewater infrastructure in the United States is aging, and gradually nearing the end of its effective life. At present, more than 53,000 water systems in the United States provide water solutions to customers. The highly fragmented water industry creates operational challenges in meeting the increasing water requirement.

Hence, consolidation in this highly fragmented industry is crucial and of utmost importance. Large water companies are trying to acquire small water utilities and impart high-quality services. Apart from American Water, which is one of the most active players in the water space, water utilities like Global Water Resources, Inc. GWRS and Aqua America WTR have been pursuing acquisitions. Consolidation will help improve the quality of water and wastewater services provided to the company’s expanding customer base.

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