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American Water's Unit to Acquire Mount Ephraim Sewer System

Zacks Equity Research

American Water Works Company AWK announced that its unit, New Jersey American Water, has entered into an agreement to acquire the wastewater assets of the Borough of Mount Ephraim, NJ, for nearly $1.4 million. This acquisition will add nearly 1,800 wastewater customers to its existing customer base. Most of these customers get water services from New Jersey American Water.

New Jersey American Water, through its existing distribution network, serves nearly 2.7 million people in New Jersey. The said acquisition will expand its existing customer base and allow the company to render quality services to new customers at a reasonable cost.

Post completion of the acquisition, New Jersey American Water has plans to invest nearly $4 million to improve Mount Ephraim’s wastewater system over the next four years. The company will invest in main replacements, upgrading two pump stations and the mapping of sewer pipe system for ensuring high-quality services for users.

New Jersey American Water is expected to complete the acquisition in the first half of 2019, following the approval from the New Jersey Board of Public Utilities. American Water’s unit will keep the sewer rates unchanged for the customers of Mount Ephraim for two years post acquisition. The company has also decided to increase rates no more than 3% annually for the three years after that.

Consolidation & Investment is Essential

Since the existing water and wastewater infrastructure in the United States is aging, proper maintenance and upgradation of the system will require investment of billions of dollars, which becomes difficult for small water utilities to make arrangement for. Per a new report from Bluefield Research, more than $638 billion will be needed to be invested over the next decade to upgrade the existing water and wastewater assets of the United States.

Therefore, through the acquisition of small utilities, it becomes easier for large companies to make arrangement for funds to carry out these major overhauls. American Water is one of the most active players and continues to widen its market reach through acquisitions. We can also notice other active water utilities like Global Water Resources, Inc. GWRS and Aqua America WTR to pursue acquisitions.

Large water utilities continue to invest in upgrading as well as maintaining their existing water and wastewater infrastructure. The water utilities also undertake initiatives to upgrade the systems of the newly-acquired assets and the quality of services.

American Water aims to invest within $8-$8.6 billion from 2019 through 2023, which will help it to improve earnings by 7-10% per year in the aforesaid period from a 2017 base. Another water utility, Aqua America aims to make capital investment in excess of $1.4 billion over the 2018-2020 time period.

Price Performance

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

Zacks Rank & Another Key Pick

Currently, American Water has a Zacks Rank #2 (Buy). Another top-ranked stock from the same industry is California Water Service Group CWT, holding a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

California Water Service’s long-term earnings (three to five years) growth is pegged at 7%. The Zacks Consensus Estimate for 2019 earnings is $1.42, reflecting year-over-year growth of 16.12%.

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